1 MODULE 2 – INTRODUCTION TO TAXATION PART II - TAX DEDUCTION AT SOURCE – AN ENTREPRENEUR’S MANUAL In the course of its activities, a business is likely to pay various entities – employees, brokers, agents, contractors, lawyers, professionals, etc. As per the Income Tax Act, certain amount of tax must be deducted by the business if payments exceeding a minimum amount to any of these participants. This is known as Tax Deduction at Source (TDS). In this chapter, we have discussed provisions for five categories of payments that are most commonly made: i) salaries, ii) rent, iii) payments to contractors, iv) commissions and v) payments to professionals. For an entrepreneur, the following questions relating to TDS liability are relevant:  Is there any registration required to be able to deduct TDS?  In which circumstances must TDS be deducted and paid to the government? By when must the TDS be paid?  Which forms that must be filed in connection with TDS? What are the timelines for filing such forms? Which authority must the forms be filed with?  What documents must be provided to employees in respect of TDS deduction? 1.

Steps to obtain a Tax Deduction Account Number

In order to deduct TDS, a business must apply for a Tax Deduction Account Number (TAN) to the National Securities Depository Limited (NSDL), the authorized agency for allotting TAN. TAN can be only obtained once the business has acquired a Permanent Account Number (PAN). Form 49B must be filled for obtaining a TAN. It takes a maximum of around 10 days to obtain a TAN number. The steps which must be followed to obtain a TAN are described below: 1.

Visit the NSDL website on the following link: https://tin.tin.nsdl.com/tan/form49B.html

2.

Select the appropriate business vehicle category (i.e. firm, LLP or company, as applicable)

3.

Find the Assessing Officer Code for your area using the portal and fill Form 49B online

4.

Pay the fees (either by credit card or through a Demand Draft)

5.

Print the acknowledgement from the NSDL website and send it to NSDL (within 15 days from the date of the online application) at the following address: National Securities Depository Limited 3rd floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune – 411045

After obtaining a TAN number, a business is eligible to deduct TDS under Indian income tax law. The table below illustrates the key TDS provisions highlighted above:

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2 2.

Snapshot of relevant TDS provisions under the Income Tax Act

Section No. S. No.

Type of payment

Threshold

Rate of TDS

192

The employee’s annual salary must be expected to cross the minimum threshold for personal income tax (currently INR 200,000).

Average rate of income tax payable by employee

194-C

If a single payment exceeds INR 30,000 or if aggregate of amounts in a financial year exceeds INR 75,000

194-I

Where the rent paid/credited is in excess of Rs. 1,80,000 per annum

194-H

Where the payment exceeds Rs. 5000 in a financial year

Form No.

Time for filing

(Income Tax Act)

1.

Salaries

2.

Payments to contractors

3.

Rent payments (e.g. in respect of office space taken on lease)

4.

Commission payments, i.e. amounts paid for services provided in the course of buying or selling of goods/ assets (other than securities) Note: Payments for professional services, brokerage and insurance commission are excluded from this

Form 24

30th June for previous financial year

Form 26

30th June for the previous financial year

10% on the total amount (excluding surcharge)

Form 26

30th June for the previous financial year

Tax is to be deducted at 10 per cent (excluding surcharge)

Form 26

30th June for the previous financial year

2% on the total amount (excluding surcharge).

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3 provision.

5.

Payment of fees for professional or technical services1

194-J

Where the aggregate payment is in excess of Rs 20,000

Tax is to be deducted at 10 per cent (excluding surcharge).

Form 26

30th June for the previous financial year

Notes: 1)

2) 3)

TDS provisions generally do not apply when payment is made by an individual or an HUF. Therefore, proprietorships or family run businesses (which are not structured as partnerships, LLPs or companies) will not be required to comply with these provisions unless total turn-over or receipts exceed the limits specified for tax audit under Income Tax Act. For individual or family run businesses, the turnover threshold (for the year 2012-2013) is INR 60 lakhs and for professionals (e.g. lawyers, Chartered Accountants, etc.) the threshold is INR 15 lakhs. Income above these thresholds requires a tax audit under the Income Tax Act (as of the financial year 2012-2013) The above forms must be filed with the Director General of Income Tax (Systems). Rent includes payment under a lease, and payments for additional furniture or fittings.

1

Professional services refers to legal, accountancy, medical, engineering, architecture, interior decoration or any other profession notified by the Central Board of Direct Taxes under Section 194-J.

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4 3.

Understanding filings and compliance requirements in relation to TDS i.

Annual form filings by to tax authorities – as per table above.

ii.

Periodic form filings to tax authorities - In addition to annual filings, quarterly statements2 must also be filed with the DGIT (Systems) (or a person authorised by him). These filings must be in Form 24Q (for salary payments under Section 192), or Form 26Q in all other cases. Timelines for submission of quarterly statements are given below: Quarter ending in June

Due date 15th July of the financial year

September

15th October of the financial year

December

15th January of the financial year

March

15th May of the financial year

Note: Quarterly filing relating to payments to non-residents (other than salaries) must be filed in Form No. 27Q (within 14 days after the end of the quarter). iii.

Acknowledgement from tax authorities to the payee - The Director-General of Income-tax (Systems) (or an agency authorised by it) furnishes a statement in Form 26 AS to the person from whose income tax was deducted by 31st July, following the financial year when tax was deducted.

iv.

TDS certificates from payer - Every person deducting tax must provide a certificate to the person on whose account the tax is being deducted (TDS Certificate).3 The TDS certificate contains particulars such as the TAN of the payer, PAN of the recipient, details pertaining to the challan furnished by the bank (in case of payment through bank), and a receipt number of the quarterly statement of TDS. The formats and time of furnishing TDS certificate are provided below: Category of payment

TDS on salaries (Section 192) TDS in all other cases

v.

Format for TDS Certificate Form 16 Form 16A

Time for furnishing certificate May 31 after the financial year when the deduction was made. Within 15 days from the due date for furnishing the quarterly statement of TDS

Time for payment of TDS to Government: All TDS amounts deducted by an office of the Government must be paid to the Central Government i) by April 30 (where the income or amount is credited or paid in March), or ii) within the seventh day next month (following the month when deduction is made).

2

See Section 200(3) of the Income Tax Act and Rule 31A of the Income Tax Rules.

3

Section 203 of the Income Tax Act.

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5 The Assessing Officer can permit payment (for salaries, commission and brokerage) on a quarterly basis with the prior approval of the Joint Commissioner. In that event, payments can be made by the 7 th of the first month of the next quarter. That can simplify the payment process for some businesses. For example, TDS deducted on 10th April, 13th May and 15th June can all be paid together by the 7th of July that year, instead of paying thrice on 7th May, 7th June and 7th July respectively. Payments made in the last quarter can be paid to the government by the 30th of April. (For a more detailed understanding of TDS procedures, please see Sections 190 to 206 AA of the Income Tax Act, and Rules 31, 31A, 37 of the Income Tax Rules.)

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