A variety of mechanisms are used to collect taxes by the Government of India through the Income-tax Act, 1961. One of the processes is tax deducted and collected at source. This method is used in many countries including the United States of America, where the person giving income requires deducting of income tax at source (TDS) from the income of the receiver of the income.
Tax Deducted at Source (TDS) is one of the modes of collecting Income-tax from the assessee in India.
This is governed under Indian Income Tax Act, 1961, by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue managed by Indian Revenue Service (IRS), Ministry of Finance, Government of India.
To avoid cases of tax evasion, the Income-Tax Act has made provisions whereby the person responsible for making payment of income covered by the scheme is responsible to deduct tax at source and deposit the same to the Government’s treasury within the stipulated time.
The recipient of income — though the person gets only the net amount (after deduction of tax at source) — is liable to tax on the gross amount and the amount deducted at source is adjusted against his final tax liability. The details of the scheme of tax deduction and collection at source are briefly discussed below. To conclude one can say that the scheme of TDS is only payment of tax on adhoc basis by the payer of income on behalf of recipient.
The advantages of provision of TDS are:
e. instead of recipient paying tax on the income at the year end, tax is deducted by payer as and when payment is made to the payee.
The obligation of a deductor start with obtaining a TAN in accordance with the provisions of section 203A read with rule 114A of the Income-Tax Rules, 1962. Although, in the rule 114A, the requirement of obtaining TAN arises only after first incidence of deduction of tax at source but it is advisable that no sooner an entity come into existence, it should apply for TAN in prescribed Form 49B. In case of proprietorship concern too, if it is likely that in near future its turnover / receipts may exceed the limits prescribed u/s. 44AB, the TAN number should be obtained at earlier stage. No harm is caused in obtaining TAN even if T.D.S. is not likely to be made in near future. The requirement of filing the T.D.S. return arises only if some T.D.S. is made during the relevant quarter and not otherwise.
In case, a business entity is having different branches or offices in the country, separate TAN may be obtained for each branch/office from where payment is to be made. In case of very big organizations like Banks, Insurance Companies etc. obtaining separate TAN and filing separate quarterly returns may become inevitable.
Separate TAN is required for separate PAN. If a partnership firm is dissolved and its entire business is taken over by one of the partners, than the partner taking over the business would be required to obtain separate TAN if he is not already having one. The similar would be the situation when a proprietorship firm is converted into a partnership firm.
Application for TAN:
Requirements for Application for TAN:
• Physical application: application should be filled in black ink; physical copy of application can be submitted at any of the TIN facilitation centre.
• Online application: where application is submitted online, duly signed printed copy of the acknowledgement generated online is required to be submitted to NSDL within 15 days from the date of online application. The printed acknowledgement is required to be submitted at National Securities Depository Limited, 3rd floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune–411045. Envelope is required to be super scribed as ‘APPLICATION FOR TAN – Acknowledgment Number’ eg. ‘APPLICATION TAN – 88301020000260’
• Other: application should be complete in all respect, including details of AO (TDS / TCS). Address of the applicant has to be Indian address only. In case application is signed using a left hand thumb impression, it should be attested by a Magistrate or a Notary Public or a Gazette Officer, under official seal and stamp. On submission of the application, acknowledgment containing a 14 digit unique number is issued. Application can be tracked online or through mobile using unique number.
TAN to be quoted in all:
Penalty u/s 272BB of Rs 10,000 may be levied in case of each default of:
Now, after the insertion of provisions of section 206AA by the Finance Act, 2009, w.e.f. April 1, 2010, the T.D.S. is required to be made at a higher rate i.e. of 20% if the deductee fails to furnish his PAN to the deductor. In respect of payment made to transporters, immunity from T.D.S. u/s. 194C is available only if the PAN is provided by the contractor to the payer.
In view of such provisions, it is advisable that every business organization should obtain PAN of every person , with whom any transaction of payments liable for TDS is either made or intended to be made, at the very initial stage itself. Every business organization should maintain master data of such PAN. Such PAN details should be invariably noted in the master details, in computerized form, of every party. In the case of manual accounts, manual PAN register may be maintained.
It is also suggested that if possible, a deductor should also obtain a copy of the PAN of the payee specially in a circumstance when the payee belongs to an unstructured business class such as in case of a truck operator, labour contractor etc.
It is because under the provisions of sub -section (6) of section 206AA of the Act, if the PAN provided by the deductee to the deductor is invalid or it does not belong to the deductee, it shall be deemed that the deductee has not furnished his PAN to the deductor and accordingly, the deductor shall be liable to make T.D.S. at a higher rate as prescribed under sub -section (1) of section 206AA of the Act. Under section 194C(6), the requirement of obtaining the PAN from the goods carriage operators is met the moment the deductee provides his PAN to the deductor and therefore, even if such PAN is found invalid subsequently, no adverse action can be taken against the deductor. Still, it is advisable that in such cases too, the deductor should take reasonable care to ensure that the correct PAN is provided by the payee.
Although, there is no direct facility through whom a deductor can verify veracity of the PAN details provided by a deductee but it can be verified indirectly. For such purpose, the deductor would have to go on the official website of the Income – Tax Department and then to click the ‘Pay Online’ and should fill-up the details of PAN provided by the deductee and the name of the deductee. If both the details mismatch to each other a message will get lashed and the correct name of the person to whom PAN actually belongs would appear. In such manner, one can verify PAN details of the deductee. This exercise should be made especially in the case of contract payments.
An examination of the PAN number of the deductee, would also facilitate the deductor to know the status of a deductee which is required for determining the applicable rate of T.D.S. As we know that in respect of certain pay ments such as payment u/s. 194C, the rate of tax depends upon the status of the deductee. T.D.S. is required to be made @ 1% where the payee is an individual or a HUF and 2% for all other payees. The status of the payee can be determined by going to the fourth character of ten digit alpha -numeric PAN number. If, it is ‘P’, the status of the payee is that of individual, if it is ‘H’, the status of payee is HUF, if it is ‘F’, the status of payee is firm and if it is ‘C’, the status of payee is company.
Mandatory application of PAN when and by whom?
1. Before 31st May of the relevant Assessment Year where
• Total income of assessee or representative assessee exceeds maximum amount not chargeable to tax (refer rates of tax to check maximum amount not chargeable to tax)
2. Before end of Accounting Year
• Where total sales, turnover or gross receipts of business or profession exceed or likely to exceed Rs. 500,000 during any previous year
• Charitable / religious trust
3. Before exporting or importing
• Exporter or importer who is required to obtain Import Export Code
4. Before making application for registration under respective tax laws
• Central Excise applicant
• Service Tax applicant
• Central Sales Tax or respective State / Union territory sales tax applicant
5. Assessing Officer is to allot PAN suo motu having regard to the nature of prescribed transactions to allot a PAN. Till now no such transactions prescribed.
6. Assessing Officer to allot PAN on receipt of voluntary application from the person not falling under any of the above category
Persons exempted from obtaining PAN
PAN should be quoted on all: