TAX DEDUCTION AT SOURCE (TDS )

1. TAX DEDUCTION AT SOURCE (TDS) PROVISIONS & PRACTICE 28th May 2009

2. OBJECTIVES OF TDS • Regular inflow of revenue for Government • Checking of tax evasion • Widening of tax base

3. NATURE OF PAYMENTS

4. PERSONS RESPONSIBLE FOR PAYING-1 ALL persons (Except individuals & HUF in certain cases)

5. PERSON RESPONSIBLE FOR PAYING-2 SMALL TIME BUSINESSMAN/ PROFESSIONAL? W.E.F. 01.06.2002, Individuals and HUFs have to deduct tax at source if turnover exceeds Rs.40 lacs (business), Rs.10 lacs (profession) for payments u/s.194A, 194C, 194H, 194I & 194J.

6. SPECIFIED PAYEE All persons for specific payments except – • a) Quantum of payment/ liability in the financial year is less than the prescribed limit. • b) Certificate issued by A.O. u/s.197 • c) the payee has furnished the declaration in form 15G/15H In case of Non Resident all the payments if the payment is an income under the Income-tax Act read with DTAA.

7. DEDUCTION OF TAX • Tax is to be deducted at the time of credit or at the time of payment whichever is earlier, at the prescribed rate • On salary, Tax is deducted on the amount payable at the average rate computed on the income tax rates in force and estimated income. • For payments other than salary, Tax is deducted at a rate prescribed in the statue. • Tax rated are enhanced by Surcharge and Education Cess wherever applicable.

8. DEPOSIT OF TAX-1 • In case of salary – Within one week from the end of the month in which tax is deducted.

9. DEPOSIT OF TAX-2 • In case of payments other than salary- Within ONE WEEK from the end of the month. • Payments credited or paid on 31st March (last date of Accounting Year), within two months.

10. DEPOSIT OF TAX-3 • Quarterly Payments in Special Cases • 15th June, 15th Sept., 15th Dec., 15th Mar. • Prior approval of JCIT.

11. TAN • The person responsible for deducting tax at source has to apply for TAN in Form No. 49B within one month from the end of the month in which tax is deducted for the first time. • The TAN should be quoted in all challans, TDS Certificates, Quarterly Returns, statements and correspondence.

12. SALARIES - Section 192 • Under this head tax to be deducted on the payments made by the employer to employees under an contract/ agreement wherein employer and employee relationship is established

13. Salariescontd... • Tax is to be deducted at the time of payment of salaries • Deduction of income tax from the amount payable is based on average rate of Income-tax. • Average rate of Income-tax is computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee for that financial year. • From new employees joined during the year, a copy of Form 16 issued by previous employer or a certificate on Form 12B, giving salary income and tax deducted, has to be obtained. • Tax is to be deducted on the aggregate of salary i.e.salary from previous employer plus salary from existing employer after giving the credit for tax deducted by the previous employer.

14. Salariescontd... • The computation of estimated income is based upon: • Estimated salary to be given to the employee in the financial year • Salary received by him from previous employer- if the employee has not submitted the form 16/ form 12B then it has to be presumed that the same rate of salary which present employer is paying is paid by the previous employer. • Allowing the deductions for the investments/ payments made by him which are allowable under chapter VIA (except donation) & section 10, initially on the basis of declaration and at the end of the year on the basis of proofs. • Allowing the set off of the loss (interest payment only) under “Income from House Property” if used by the employee under self occupied only, on the basis of a Statement from the lender. • Tax so deducted should be deposited by the 7 days of succeeding month.

15. Salariescontd... • Tax Rates in force presently: IncomeRate upto Rs. 1,50,000 Nil Next Rs.1,50,000 10 % Next Rs.2,00,000 20 % Balance 30 % Surcharge 10% of tax payable if taxable income exceeds Rs. 10 lacs Edu. & H. Edu. Cess 3% on Tax+ Surcharge

16. Salariescontd... • Deduction under Chapter VIA : • Under Section 80C Investments in NSC, NSS, LIC Premium, ULIP, PF, PPF, Tuition Fee etc. including repayment of housing loan Maximum limit - Rs. 1,00,000 In case of LIC, premium should not exceed 20% of sum assured. Tuition fee is maximum up to 2 child

17. Salariescontd... • Deduction under Chapter VIA Continued Under Section 80D Medical Insurance Premium for Self, Spouse, dependent Children up to Maximum of Rs. 15,000/-. Additional deduction of Rs. 15,000/- if premium is paid for policy of Parents and if parents are Senior Citizen, than deduction limit is Rs. 20,000/-. Payment should not be made in cash. • Deduction u/s 80DD Expenditure for Medical treatment of dependent person with disability – Rs. 50,000/- subject to condition that certificate in form 10-IA as specified in rule 11A along with copy of certificate issued by Medical Authority to furnished. Deduction is Rs. 75,000/- if there is several disability.

18. Salariescontd... • Deduction u/s 80E Interest paid on account of pursuing higher education for self, spouse and children up to eight assessment years starting from the year from which interest is paid by the employee. • Deduction u/s 80G Only donations made to Prime Minister/ Chief Minister Relief. Donation or similar notified donations are allowed. For the other donations deduction is to be claimed by the employees in his income-tax return. Employer can not allow for the purpose of deduction of tax at source from salary payment .

19. Salariescontd... • CBDT is issuing a circular every year prescribing the method of tax deduction at source. The same may be referred for clarification. • PAN should be obtained from every employee whose income is subject to TDS. • To safeguard the company from any short deduction/non deduction, a declaration has to be taken from employee in advance. *****

20. Interest on Securities - Section 193 • Tax is to be deducted at the time of payment of interest on securities [viz. Debentures issued by the company] or credit to the account of the payee (whichever is earlier) • @ 10% in case of individuals/HUFs and 20% in case of companies [plus surcharge @ 10% on tax wherever applicable plus education cess on tax & surcharge] • Exceptions - if interest payable to an individual on debenture in a year is less than Rs. 2,500/- and interest is paid by an account payee cheque - If an individual furnishes a declaration in Form No. 15G or 15H (if deductee is senior citizen)

21. Interest on Securities - contd... In other cases, the payee furnishes a certificate issued by his Assessing officer either for nil TDS or TDS at a lower rate • A copy of Form No. 15G/15H is to be submitted to Chief Commissioner or Commissioner of Income-tax on or before seven days of the next month following the month in which the said declaration is received. • Tax is to be deposited with the Central Govt. by 7th of next month. • In case of year end provisions, tax may be deposited within two months from the close of accounting/financial year.

22. Other Interest - Section 194A • Tax is to be deducted at the time of payment of interest or credit to the account of the payee (whichever is earlier) • @ 10% in case of individuals/HUFs and 20% in case of companies [plus surcharge @ 10% on tax wherever applicable plus education cess on tax & surcharge] • Exceptions - if interest payable in a year is less than Rs. 5,000/- - If an individual furnishes a declaration in Form No. 15G/15H - In other cases, the payee furnishes a certificate issued by his Assessing officer either for nil TDS or TDS at a lower rate

23. Other Interest - contd... Exceptions contd... • In case interest payable to - - a banking company - any co-operative society engaged in the business of banking - any financial corporation established under a Central/State or Provincial Act - LIC / UTI - any company or co-operative society engaged in the business of insurance - other notified institutions,association or body

24. Other Interest - contd... Exceptions contd… • In case of interest payable by - - a firm to its partner - a co-operative society to its members or to other co- operative society - interest on notified deposit scheme framed by Central Govt. - banks on deposits [other than time deposits] - by agricultural credit society, primary credit society, co- op. land mortgage bank, co-op. land dev. bank on deposits - by Central Government

25. Other Interest - contd... • A copy of Form No. 15G/15H is to be submitted to Chief Commissioner or Commissioner of Income-tax on or before seven days of the next month following the month in which the said declaration is received. • Tax is to be deposited with the Central Govt. by 7th of next month • In case of year end provisions, tax may be deposited within two months from the close of accounting/financial year i.e. by 31st May.

26. Other Interest - contd... Some legal decision on TDS on interest 1Where loan is taken by the director/employee but the entries are routed through Company, the company is liable to deduct at source {Century Building Industries Pvt. Ltd (SC) (293 ITR 194)} 2. Where at the time of making the provisions the payee of interest is not known the provision of section 194A will not attract {IDBI (ITAT, Mumbai) (107 ITD 45)}

27. Payment to Contractors - Sec 194C • Tax is to be deducted at the time of payment to be made for work contracts or credit to the account of the payee (whichever is earlier) • Income Tax is to be deducted at source @ 1% on Advertising contracts and @2% on any other contracts on the amount paid/credited. In the case of sub-contracts, the main contractor should deduct tax at source @1% on the amount paid/credited to the subcontractor. • Exceptions The value of each contract is less than Rs. 20,000/- and the total contracts/ payments to the contractor in a year is less than Rs. 50,000/-.

28. Payment to Contractors - contd... • Contractor furnishes lower/ Nil rate certificate issued by his Assessing officer • Provisions of Section 194C are applicable only where the contract is either a “contract for carrying out any work” or a “contract for supply of labour for works contract”. Hence, these provisions are not applicable for payments made under the contract of sale of goods.

29. Payment to Contractors - contd... Contract u/s 194C includes: • Work contracts, service contract, transport contracts, catering contracts • Contract for couriers for carrying documents, letters etc. • Contracts for supply of labour for carrying out any work • Maintenance contracts including supply of spares • Contracts for supply of printed material as per prescribed specifications. • Transport contracts- each GR is a separate contract unless until a specific contract is executed.

30. Payment to Contractors - contd... • Advertising contracts include : • Advertisement contracts with • advertising agencies • Print & electronic media. • Advertisement in Souvenir, magazines etc. • Contract for display of hoardings, banners etc. • Tax is to be deposited with the Central Govt. by 7th of next month • In case of year end provisioning, the time limit for depositing the tax is two months from the close of accounting year.

31. Payment to Contractors - contd... Issues clarified by CBDT vide circular no-715 & others and by various court • Income-tax is to be deducted on the amount of payment/credit and not on the income part of the amount. • The Income-tax has to be deducted on payment or booking of expenses which ever is earlier. • The purchase of Air ticket from Airlines or travel agents are out of purview of section 194C • Hiring of chartered aircraft for carriage of passengers or goods falls under the purview of section 194C..

32. Payment to Contractors - contd... • Advertising contracts- Only contracts of client with advertising agency are covered, Contracts of advertising agencies with media (includes both print and electronic media) are out of purview. • Adjustment of advance payment- No tax has to be deducted at the time of adjustment against the bills if the tax has been deducted at the time of payment. • Consolidated bill for advertising and artwork from advertising agencies – Income-tax is to be deducted @ 1% from the gross bill. • The contract for putting up a hoarding is an advertising contract.

33. Payment to Contractors - contd... • Contract for providing the space for hoarding is covered under section 194I not 194C. • Contract for sponsorship for debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organizers, are advertisement contracts under section 194C will apply. • Contract from Clearing and Forwarding agents are covered under section 194C. • Serving food in a restaurant in the normal course of business of the restaurant is not covered under section 194C.

34. Payment to Contractors - contd... • Contracts with recruitment agencies are covered under section 194J not in section 194C. • Contract for supply of article or thing as per prescribed specifications are contract for sale. (Reebok India Co 306 ITR 124). • Contract for supply along with fabrication, erection, installation, maintenance are covered by Section 194C. However if the service used is covered under technical services then Section 194J is applicable. • Section 194C is applicable on the total amount of bill which includes reimbursement of expenses also. [Circular No.715 dt.8-8-1995].

35. Payment to Contractors - contd... • Section 194C not applicable with respect to bill which pertains to reimbursement of expenses • Contract for storage in cold storages/ ware houses where customer is not having any right to use any demarcated space/place or the machinery of the cold storage are not covered under section 194-I. However, on the basis of contractual arrangement between the customers and cold storage owners section 194-C are applicable [Circular No.1/2008 dt.10-1-2008].

36. Commission & Brokerage - Sec. 194H • Tax @ 10% plus surcharge plus Education cess: • Sec 194H covers the services not being the professional services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing not being securities. • Tax is to be deducted at the time of payment or credit, whichever is earlier. • Commission to C&F Agents are covered u/s 194H.

37. Commission & Brokerage - contd... • Exceptions - Total payment in a year does not exceed Rs. 2,500/- - Certificate issued by Assessing officer for nil/ lower deduction of Income-tax. • Tax is to be deposited with the Central Govt. by 7th of next month • For making the provisions at close of accounting year, the time limit for depositing the tax is two months from the close of accounting year. • Section 194H is applicable only where contract is having Principal-Agent relationship.

38. Commission & Brokerage - contd... Issues clarified by CBDT and by various court • Adjustment of commission/ brokerage from remittance made by the agent/consignee to the principal are covered u/s 194H Hence the principal/consignor is required to remit TDS to the credit of the central government within the prescribed time either by grossing up or by collecting from the agent. • Distributor incentive, early payment discount and bond expenses does not constitute commission. (Foster India Pvt. Ltd Vs. ITO (2008) (117 TTJ 346 Pune)

39. Rent - Section 194-I • Payment or booking Rent is subject to deduction of tax U/s 194I. • Rent includes and payment under any lease, sub-lease, tenancy or any other agreement or arrangement for use of any land or building (including factory building) together with furniture, fittings and land appurtenant thereto whether or not such building is owned by the payee. • The rates for deductions are • 10% for the use of machinery or plant or equipment • 15% in case of payment to individuals/HUF/Firm • 20% in case of companies [plus surcharge plus EC]

40. Rent - contd... • Exceptions - the aggregate rent in a year to a party does not exceed Rs. 1,20,000/- - The payee furnishes a certificate issued by his Assessing officer for lower rate of tax. • In case of joint owners, limit of Rs. 1,20,000/- will apply to each of the co-owners subject to share is definite in lease agreement and separate cheques are being issued to them. • Tax is to be deposited with the Central Govt. by 7th of next month

41. Rent - contd... Issues clarified by CBDT and by various court • Deducted of income-tax is from the actual payment. No consideration of notional income with respect to interest free deposit given to the landlord. • Income-tax is to be deducted from advance rent/ deposit which is adjustable against future rent. However there is no need to deduct the tax from the deposit which is refundable. • Non-refundable deposits are also subject to TDS

42. Rent - contd... • Warehousing charges are subject to TDS under section 194-I • Payment to hotels for rooms hired • for the earmarked rooms for a specified rate and specified period- construed as accommodation made available on regular basis and subject to TDS. • Room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement are also subject to TDS.

43. Rent - contd... • Payment to hotels for rooms hired where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. There is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. Hence, mere rate contracts would not attract TDS under section 194-I. • Where municipal taxes, ground rent etc. are borne by the tenant, no tax will be deducted on such sum since the basis for tax deduction at source under section 194-I is “income by way of rent”. National Panasonic India (P) Ltd. v CIT(TDS) [2005] 3 SOT 16 (Delhi).

44. Rent - contd... • Circular no-4/2008 dated 28.04.2008 clarifies that service tax paid by tenant does not partake the nature of “Income” of the landlord and therefore not subject to TDS. The clarification of non deduction of Income-tax on payment of service tax portion is applicable only on rent. For other payments CBDT has issued an instruction no- F.No-275/1/2006-IT(B) dated 21/7/2006, wherein it was clarified that TDS to be deducted on Service tax portion also in view of circular no-715.

45. Fee for Professional or Technical Services - Section 194-J • Income-tax deduction rate is 10% [plus surcharge plus EC] from the payment of fees for Professional or managerial or consultancy or Technical services. • Tax is to be deducted at the time of payment of fee or credit to the account of the payee, whichever is earlier. • “Professional Services” include:- • services rendered by a person in the course of carrying on the profession of Legal, medical, engineering, architectural, accountancy, technical consultancy, advertising interior decoration or such other profession as notified u/s 44AA. • Technical services means the technical servies as in explanation 2 to clause (vii) of sub section (1) of sec 9.

46. Fee for Professional or Technical Services - contd… • Explanation[2] states that “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]

47. Fee for Professional or Technical Services - contd… • Following payments are also be covered :- • Payments to share registrar • Payments to recruitment agency • payments to hospital for rendering medical services • The tax is to be deducted from gross amount of the bill if it includes reimbursement for actual expenses also. • On a separate bill for reimbursement of actual expenses incurred, no tax is to be deducted

48. Fee for Professional or Technical Services - contd… • Exceptions • Aggregate fee in a year to a party does not exceed Rs. 20,000/- • Payee furnishes a certificate issued by Assessing officer either for nil TDS or TDS at a lower rate • Tax is to be deposited with the Central Govt. by 7th of next month • In case of year end provisioning, the time limit for depositing the tax is two months from the close of accounting year

49. Payments to Non Residents - Section 195 • Income-tax at source is deductible from payment of : - Interest - Royalty - Fees for technical, managerial consultancy etc. - any other payment • Tax is to be deducted at the prescribed rates or the rates specified in Double Taxation Avoidance Agreements with the respective countries whichever is lower. • For remittance of payment a NOC is to be obtained from the Assessing Officer.

50. Payment to Non-residents - contd… • Tax is to be deducted at the time of payment or credit to the account of the payee (whichever is earlier). • Tax is to be deposited with the Central Govt. by 7th of next month • In case of year end provisioning, the time limit for depositing the tax is two months from the close of accounting year.