1.1 Rarely would one find a Finance Bill in which some amendments are not proposed in the realm of Tax Deduction at Source. Either some new item requiring TDS on the payments for it gets proposed or the Bill proposes some administrative changes.

1.2 The Finance Bill, 2005 (FB05) has 6 clauses dealing with proposals for amendments of TDS provisions. They are:

2.1 This FB05 proposes to insert definition of "Zero Coupon Bond" (ZCB). It is provided that ZCB means a bond issued on or after 1-6-2005 by any infrastructure capital company or infrastructure capital fund or public sector company. (hereinafter referred to as three entities)

2.2 Clause (x) in sub-section (3) of section 194A w.e.f. 1st June 2005 is inserted to provide that no TDS is to be made on income, which is paid or payable by any of the above three entities in relation to ZCB, thus the provisions of section 194A(1) requiring TDS on interest shall not apply to such ZCB.

3.1 In case of certain transport operators, plying, hiring or leasing goods carriages, profits and gains of business are computed on a presumptive basis u/s. 44AE at the rate of Rs. 3,500 per month for each heavy goods vehicle and Rs. 3,150 p.m. for each vehicle other than heavy goods vehicle.

3.2 Two provisos are proposed to be added after the first proviso to section 194C (3). Said sub-section provides that no deduction shall be made under either of sub-sections (1) and (2) in respect of what is provided thereat.

3.3 Amendment proposes that no deduction of tax is to be made if the transport operator (individual) is a sub-contractor and who plies, hires or leases goods carriages but has not owned more than two goods carriages at any time during the previous year. Condition prescribed is that sub-contractor has to produce a declaration to the deductor in the prescribed form and verified in the prescribed manner and within the time as may be prescribed. The person responsible for paying any sum to the sub-contractor is also required to furnish to the IT authority etc the form as may be prescribed.

4.1 The Finance (No.2) Act, 2004 has amended 3 sections – 199, 203 & 206C (also section 139(9)) in relation to bringing in the new system of TDS certificates w.e.f. 1-4-2005. Certificates are to be dematerialised and the deductee is then not required to obtain forms 16A and furnish the same with the Return of Income. It appears that system is not yet ready for launch on 1-4-2005. The memorandum to the FB05 states:

"The new system of tax accounting under OLTAS is gradually stabilising and is yet to attain full perfection. Secondly, the entries relating to tax deduction need to be flawlessly captured at all the stages beginning from the deposit of tax deducted by the deductor into the bank and from the bank to NSDL. Therefore, it will be some time before the existing requirement of filing TDS certificates as proof of tax deducted at source can be done away with. There will be a need to produce the TDS certificate as proof of the tax deducted at source."

Hence, the new system is presently postponed to 1-4-2006. It may not be out of place to say that what was obvious to everyone was not accepted by the department. Everyone knew that if the system is commenced w.e.f. 1-4-2005, it would create a mess. In my article in the IT Review of July, 2004 in the Special Story on the Finance (No.2) Act, 2004, I wrote after listing the changes made in relation to TDS certificates dematerialisation programe :

"3.5 Above are sweeping changes and the Income Tax (IT) department is moving towards Information Technology (IT) world and towards electronic-world. However, it would have been advisable to move little slowly and keep for at least one year both systems – physical forms and statements to operate concurrently."

4.2 I would say that there is no question of OLTAS attaining full perfection. It is obvious that it is not ready at all, so the department does not even consider concurrent operation but completely postpones the new scheme. We again recommend as above, at least for one year both the schemes should operate concurrently.

4.3 In sections 199, 203 and 206C amendments are proposed to postpone the operation of new system of granting credit for TDS by one year : Now the new system will see the light of the day hopefully from 1st April, 2006 and not 1st April 2005. Similar amendment is made in the explanation (1)(c) to section 139(9) changing date from 1-4-2005 to 1-4-2006.

4.4 The Finance (No.2) Act, 2004 has amended / inserted few more sections in relation to this new system for granting credit of TDS amount. Section 200 is amended and it provides for 4 quarterly returns to be furnished, section 203AA is inserted to provide for furnishing of tax deduction statement to all deductees by the income-tax authority. Surprisingly, no amendments are proposed in these two sections. Probably, intention appears to be to experiment on this new system in the y.e. 31-3-2006 by requiring all deductors to furnish quarterly returns and income-tax authority to furnish tax-deduction statement to all deductees. If that is so, results will not be available by the time FB06 is introduced on 28-2-2006 nor even by 31-3-2006 as the income-tax authority will send such statement only "within the prescribed time after the end of each financial year". No notifications have been issued so far in the context of sections 200(3) and 203AA.

Anyway, since the infrastructure required for the new system to function is not ready, the plan to dematerialise the TDS certificates is postponed by one year. Let us hope, that the next Finance Bill does not contain same amendments for one further year.

4.5 In conclusion of my article on T.D.S and T.C.S. covering amendments made in the Finance (No. 2) Act, 2004 what I wrote I repeat here:

"The provisions dealing with the subjects of tax deducted and/or collected at source are no doubt tedious but they are also very sensitive and, if one can so say, are also delicate."

Three amendments (in sections 199, 203 & 206C) analysed above on one hand will increase responsibilities of the deductors and hopefully, eventually reduce the same considerably (no doubt double responsibility in the year ended 31-3-2006). Let us hope that change over to the new system of TDS / TCS accounting grants full credit to all deductees for TDS & TCS and ensures more comfort.

5.1 The last proposal for the amendment to be dealt with is the insertion of new section 206A.

5.2 In his budget speech, Finance Minister proposed two anti tax-evasion measures, one being Bank Cash transaction tax and other being, what is proposed in the new section 206A.

5.3 Section 194A deals with TDS on ‘other interest’ including interest on time deposits with banking companies. TDS is to be made only when such interest during the year exceeds Rs. 5,000 per each branch of the banking company. Hence, any interest upto Rs. 5,000 escapes the eyes of the income-tax department.

5.4 Now, sub-section (1) of proposed new section 206A provides as under:

"206A.(1) Any banking company or co-operative society or public company referred to in the proviso to clause (i) of sub-section (3) of section 194A responsible for paying to a resident any income not exceeding five thousand rupees by way of interest (other than interest on securities), shall prepare quarterly returns for the period ending on the 30th June, the 30th September, the 31st December and the 31st March in each financial year and deliver or cause to be delivered to the prescribed income-tax authority or the person authorised by such authority the quarterly returns as aforesaid, in the prescribed form, verified in such manner and within such time as may be prescribed, on a floppy , diskette, magnetic, cartridge tape, CDROM or any other computer readable media."

5.5 Before, I deal with the above provision I may point out that reference to "public company" in above as referred to in section 194A is :

"Public company, which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36."

5.6 Voluminous information, which above referred three categories of persons will have to capture and furnish to the income-tax authority is mind-boggling. I understand that time deposits in the banking system alone are Rs.14,34,609 crores besides what are in the other two; i.e., co-operative societies and relevant public companies. What percentage of these time deposits are in such sums and for such period that interest during the year is up to Rs.5,000 only is anyone’s guess. It is a known fact that to avoid rigours of TDS many persons make deposits in small amounts with different banks and different branches. They will now be tracked and will "leave trail" to be located. If time deposits are of "white" money and interest is being accounted they have nothing to worry except to undergo trouble of answering enquiries from the income-tax authority but if time-deposits are of "black" money and/or interest is not being accounted, they may get caught.

While objective may be good, records that will pour with tax-authorities will be unmanageable. Imagine if 20% of time deposits out of Rs.14,34,609 crores; i.e., nearly Rs. 2,86,000 crores are held in small deposits for short period, number of deposits would be staggering, may be yielding interest of approximately 17 thousand crores, each transaction of less than Rs.5,001 during the year. How each bank will prepare and furnish such data is beyond imagination. Chances are many time-deposits will fly away from the banking system and new avenues of storing black money and/or earning black money would be discovered.

5.7 Though in section 194A, limit of interest of Rs.5,000 is linked with branch of a banking company etc. section 206A requires each banking company etc paying interest not exceeding Rs. 5,000. As the section is drafted, it will become mismatched with the provisions of Section 194A. Assuming bank is able to prepare such a consolidated list covering interest paid by all branches (which as such appears to be extremely difficult, if not impossible), many names may end with interest of more than Rs. 5000 and their names may escape from the list to be forwarded to the income-tax authority and they would also not get listed under form 26 required to be furnished in relation to TDS on interest because per branch interest is less than Rs.5,001.

5.8.1 Sub section (2) of proposed section 206A provides that the Central Government may require any person, other than a person mentioned in sub-section (1) to prepare quarterly returns for payments for items covered under TDS sections; e.g., Salaries, Contractors’ payments, Commission, Rent, Professional fees etc. on which no tax is deducted at source and that too to be submitted in some computer readable media.

5.8.2 The way sub-section (2) is drafted, three entities mentioned in sub-section (1) cannot be asked to furnish information of payment of non-tax-deductible amounts for items other than interest.

5.9 Look forward for plethora of information being gathered. Good luck to the Finance Minister’s ideas to unearth black money.