INCOME TAX REVIEW

1. Compliance with the obligation to deduct tax at source1, under the Income-tax Act, 1961 ("the Act"), requires information about:

   • the law;

   • thorough understanding of the law;

   • meticulous compliance with the procedures; and

   • administration thereof.

   The objective of this Special Issue is to impart "Information" in relation to the law governing the obligation.

   A humble attempt is made to provide as much Information as possible about the obligation and its various facts under suitable Topics, to aid the task.
    

2. Concept and its aim

   Basically, it is nothing but a mode of recovery of tax.

   The basic aim, over a period, has been enlarged and it is also used as a tool to widen the "Tax net" by adding a number of payments in the list of payments obliging the deduction. Thus, certain income earners are caught in the Tax net, through the payers of such income.

   Presently, this mode of recovery is used for:

   • Collection of tax;

   • Revenue generation by tapping source rule;

   • Collection of information about the payees; and

   • Enlarging the tax base.
      

3. The law, its Scheme and Source of Law

   The law and its scheme, in relation to the obligation, can be classified as follows:

   1. Authorisation for the mode of collection

   2. Attaching the obligation to certain types of payments and to the payers.

   3. Mechanism for the deduction and payment

   4. Procedural regulations, and Finally

   5. Deterrents for ensuring compliance.

   The scheme is broadly explained in this Chapter and is detailed in the subsequent Chapters under suitable topics.
    

4. Authorising and Other Consequential Provisions

   1. Section 4
      The charging provision provides for the mode and manner of the liability for the payment of tax on income.

      Sub section(2) provides that the tax can be:

      • Deducted at source; or

      • Paid in advance.

      as per the provisions of the Act.
       

   2. Section 190
      The provision is a part of Chapter XVII of the Act, namely, Collection and Recovery of tax.

      It provides that irrespective of the regular assessment, the tax on income shall be payable by deduction or collection of tax at source or by advance payment, as per the provisions of the said Chapter.

      Further, such payment or deduction or collection, irrespective of the assessment, shall not affect the charge of tax on income.
       

   3. Section 191
      The provision deals with an alternate mode of payment in case of recipients of income. It provides that where tax is not deducted at source from the payments so liable, the assessee shall pay the tax directly.
       

   4. Provisions – Generally
      The basic provisions are contained in:

      • Chapter XVII-B of the Act [Sections 192 to 206B]

      • The Finance Act of each year [provides for the rate for deduction of tax at source]

      • Part VI of the Income tax Rules, 1962 ("the Rules") [Rules 226 to 37B]

      • Various Forms prescribed under the Rules [Forms 12B to 27A]

      • Notifications, if any, issued under the applicable provisions of Chapter XVII and/or the Act

      • Circulars issued by the Central Board of Direct Taxes, from time to time.

      Apart from the above, in case of non-residents, the provisions of applicable Double Taxation Avoidance Treaty ("DTAA") entered into by India may also be relevant.
       

5. Brief details of the Scheme

   1. Sections
      Provide for:

      • Persons who are obliged to deduct tax at source

      • Payments from which the tax should be deducted

      • Exceptions, if any

      • Payment of tax

      • Authorise prescription of various procedures, forms, etc

      • Credit for the tax

      • Deterrents in the form of interest, penalty, prosecution etc

   2. Rules
      Lay down procedure relating to:

      • Deduction of tax

      • Payment of tax

      • Filing of returns etc.

      • Furnishing of declarations

      • Credit of tax deducted at source in certain circumstances, and the Rules also prescribe forms

   3. Circulars / Notifications

      1. Notifications
         Basically, they deal with the exceptions. In cases of the notified persons or payments, etc. the obligation does not arise. The Notifications also deal with the other matters as required by the provisions.

      2. Circulars
         The Circulars are very important and need to be noted, since they seek to clarify the position, as understood by the authorities.
         The Circulars throw light on the circumstances in which the tax is required to be deducted or not to be deducted.

      The Circulars, particularly in case of Salary, do illustrate the mode and manner of computing the income or payment, for quantifying the amount of tax to be deducted.

   4. Finance Act.
      From year to year, it lays down the applicable rate of tax, at which, the tax should be deducted.
      Generally, the provisions can be found in Parts II & III of the First Schedule to the Finance Act.

   5. Forms
      These are prescribed under the rules for compliance with various procedural requirements, like, declarations, returns, etc.

   6. Scheme for TDS e-returns
      Basically, the Scheme provides for various technical and other procedural requirements in relation to the Returns, which the payers have to file.

      Deduction from
      Two types of payment attract the deduction:

      • Payments/Distribution, which includes income chargeable to tax. To illustrate, payment to Contractors or Commission payment.

      • Income – actual / estimated, which is liable to tax. To illustrate, Winnings from lottery, salary, which constitute income chargeable to tax.

      The broad particulars of the Payments / income attracting the deduction are given in Chart I, attached to this Article.
       

   7. No Deduction
      The provisions do identify circumstances in which the deduction may not be made. They are:

      • Specific cases to illustrate, payments to Government or Reserve Bank of India or certain types of Securities, etc.

      • Threshold limit payments below certain amount may not attract the deduction. To illustrate, Rent below Rs.1,20,000/-.

      • No Deduction/lower deduction certificates if a payee is not likely to suffer tax, he may apply to the Authorities for issue of certificates for no deduction of tax or the deduction of tax at a lower rate.

      • Declarations the law provides for furnishing of declarations by the payees for no deduction, e.g. Senior Citizens.

      • Deduction by the deduction is required by Payers (or person responsible for making the deduction/payment), which may depend on the nature of income/payment.

      • When the deduction is required upon:
        Credit (including the credit of the nature specified in Explanation below various provisions); and/or Payment, whichever is earlier.

      • • Payments the law does stipulate:

        1. Time limit within which the payment should be made.

        2. Person responsible for making payment(defined)

        3. Mode and Manner of payment
            

   8. Procedural compliance
      Broadly, the requirements are:

      • Obtain Tax Deduction Account Number ("TAN")

      • Filing of Declarations received with the Authorities.

      • Filing of TDS Returns.

      • Issue of Certificates to the Payees.

      • Obtaining relevant Details (say, in case of salaried employees)
         

6. Rates
   The tax is not to be deducted at the rate(s) at which the income is chargeable to tax.

   Having regard to the nature of income as well as the status of the payee, the law prescribes for different rate(s) for different types of income and/or the payee.

   • The concept is defined and discussed in an Article.

   • Scheme of the Act is to provide for the Rates.

   • In Sections; and/or

   • Finance Act.
     The above rate is without surcharge. In the circumstances specified in the Finance Act, in computing the amount of tax to be deducted, the surcharge, if applicable, will have to be considered.

   • In case of non-residents, the provision of a DTAA may have to be considered for determining the applicable rate.
      

7. Credit
   The recipient of the payment or income is entitled to the credit, in the circumstances, mode and manner specified, in the year in which the income is offered for tax.
    

8. Deterrents
   For non-compliance with the obligation, a payer may be liable to:

   • Interest (on delayed payment); and/or

   • Penalty(for various defaults); and/or

   • Prosecution (for various defaults); and/or

   • Disallowance of payment as expenditure u/s.40(a).

   Thus, for performing this "thank less" job, for and on behalf of the Government, or as a part of duty of the citizen paying taxes, in the end, what one receives from the administrative is various show cause notices demanding tax and/or interest and/or penalty and/or prosecution.
    

9. TCS
   Certain transactions by their very nature would result in yielding income as the transaction progresses. However, the scope of escapement of tax on the resultant income is high. Therefore, the provisions of tax collection at source were enacted to facilitate the collection of tax at the very inception of the transaction. These provisions have been dealt with in a separate article.