The Finance Minister Mrs. Nirmala Sitharaman presented the first Budget of NDA 2.0 on 5th July, 2019. Every year, the scope of TDS is being enlarged with the objective of collecting more tax through TDS and also to check tax evasion. It may be pointed out that in our country collection of Income Tax through TDS is about 55%, whereas in U.S.A., collection through withholding tax (as it is called there) is as much as 90%. The scope of TDS has also been proposed to be widened. TDS provisions are analysed here in the light of proposed amendments.
Widening the scope of Tax Deduction at Source (TDS) :
TDS on Receipt of money from Insurance company on net income basis under section 194DA: As per existing section 194DA, a person is obliged to deduct tax at source, if it pay any sum to a resident under a Life Insurance Policy, which is not exempt under section 10(10D). The present provisions requires to deduct tax at the rate of 1 per cent of such sum at the time of payment, There was a demand that the TDS should be on income component only (that is after deducting the amount of insurance premiums paid by the insured person from the total sum received from Insurance company). The TDS on the entire amount being paid by Insurance company is unfair. It has been proposed to provide tax deduction at source at the rate of 5 per cent on income component of the sum paid by the Insurance Company. It is a welcome measure. It has been accepted by the Finance Minister that from the point of view of tax administration as well it is preferable to deduct tax on net income so that the income as per TDS Statement of the deductor can be matched automatically with the Return of Income filed by the assessee. It may however be noted that as per proposal the rate of TDS has been increased from 1 per cent to 5 per cent as it will be on net income and not on gross amount paid by the Insurance Company. However, there will be no TDS in case the amount received from Insurance Company is exempt under section 10(10D).
The amendment is a welcome move. The TDS on entire receipt, [which is not otherwise exempt under section 10(10D)] from Life Insurance policy was unreasonable and the proposed amendment is quite rational step. In such cases, only income component will be taxed therefore it will be convenient to tally such amount with the amount TDS under section 194DA.
Scope of TDS at the time of purchase of immovable property under Section 194-IA : It relates to payment on transfer of certain immovable property other than agricultural land and provides for levy of TDS at the rate of one per cent. on the amount of consideration paid or credited for transfer of such property. The term ‘consideration for immovable property’ is presently not defined for the purposes of this section. It is noted that in the transaction involving purchase of immovable property, there are other types of payments made besides the sales consideration and the buyer is contractually bound to make such payments to the builder/seller, either under the same agreement or under a different agreement. Some of such payments are those for rights to amenities like club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee etc. Accordingly, it has been proposed to amend the Explanation to said section and provide that the term “consideration for immovable property” shall include all charges of the nature of club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property. This amendment will take effect from 1st September, 2019.
The Government has made effort in encompassing all related payments made for purchase of an immovable property by amending the term ‘consideration for immovable property’. The tax consultants and taxpayers need to pay adequate attention for the purpose of TDS under section 194-IA.
Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals under new sec 194M : At present there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession. Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion. To plug this loophole, it has been proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of 5 per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds ₹ 50 lakh in a year. However, in order to reduce the compliance burden, it has been proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN). This amendment will take effect from 1st September, 2019.
The threshold fixed for deduction of tax at source at ₹ 50 Lakhs in a year is quite high and it should not cause any inconvenience to medium class taxpayers.
TDS on cash withdrawal to discourage cash transactions under new section 194N : In order to discourage cash transactions and move towards less cash economy, it has been proposed to insert a new section 194N to provide for levy of TDS at the rate of 2 per cent on cash payments in excess of ₹ one crore in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient. It has been proposed to exempt payment made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision. It has also been proposed to empower the Central Government to exempt other recipients, through a Notification in the official Gazette in consultation with the Reserve Bank of India. This amendment will take effect from 1st September, 2019.
The new provision of section 194N is for levy of TDS at the rate of 2 per cent on cash payments in excess of ₹ one crore in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient. The threshold is quite high and should not cause adverse effect or unreasonable inconvenience to such persons. The provision is to discourage taxpayers from entering into cash transactions. However some industries like tea gardens may suffer as their labour are generally not having an account in Bank and therefore they insist on cash payment. The Government need to provide banking facility in such villages and hills for proper implementation of the objective of less cash economy.
Amendment of section 195 :
It provides for Online filing of application seeking determination of tax to be deducted at source on payment to non-residents under section 195(2) of the Act, if a person who is responsible for paying any sum to a non-resident which is chargeable to tax under the Act (other than salary) considers that the whole of such sum would not be income chargeable in the case of the recipient, he can make an application to the Assessing Officer to determine the appropriate proportion of such sum chargeable. This provision is used by a person making payment to a non-resident to obtain certificate/order from the Assessing Officer for lower or nil withholding-tax. However, the process is currently manual. In order to use technology to streamline the process, which will not only reduce the time for processing of such applications, but shall also help tax administration in monitoring such payments, it has been proposed to amend the provisions of section 195 to allow for prescribing the form and manner of application to the Assessing Officer and also for the manner of determination of appropriate portion of sum chargeable to tax by the Assessing Officer.
Similar amendment has also been proposed to be made in sub-section (7) of section 195 which are applicable to specified class of persons or cases.
These amendments will take effect from 1st November, 2019.
Amendment of section 201 :
Relaxation of the provisions of sections 201 and 40 of the Act in case of payments to non-residents: Section 201 of the Act provides that where any person, including the principal officer of a company or an employer (hereinafter called ‘the deductor’), who is required to deduct tax at source on any sum in accordance with the provisions of the Act, does not deduct or does not pay such tax or fails to pay such tax after making the deduction, then such person shall be deemed to be an assessee in default in respect of such tax. The first proviso to sub-section (1) of section 201 specifies that the deductor shall not be deemed to be an assessee in default if he fails to deduct tax on a payment made to a resident, if such resident has furnished his return of income under section 139, disclosed such payment for computing his income in his return of income, paid the tax due on the income declared by him in his return of income and furnished an accountant’s certificate to this effect. This relief in section 201 is available to the deductor, only in respect of payments made to a resident. In case of similar failure on payments made to a non-resident, such relief is not available to the deductor. To remove this anomaly, it has been proposed to amend the proviso to sub- section (1) of section 201 to extend the benefit of this proviso to a deductor, even in respect of failure to deduct tax on payment to non-resident.
Consequent to this amendment, it has also been proposed to amend the proviso to sub-section (1A) of section 201 to provide for levy of interest till the date of filing of return by the non-resident payee (as is the case at present with resident payee).
These amendments will take effect from 1st September, 2019.
Amendment of section 206A : Electronic filing of statement of transactions on which tax has not been deducted: Section 206A of the Act relates to furnishing of statement in respect of payment of certain income by way of interest to residents where no tax has been deducted at source. At present, the section provides for filing of such statements on a floppy, diskette, magnetic tape, CD-ROM, or any other computer readable media. To enable online filing of such statements, it has been proposed to substitute this section so as to provide for filing of statement (where tax has not been deducted on payment of interest to residents) in prescribed form in the prescribed manner.
It has also been proposed in section 206A(3) to provide for correction of such statements for rectification of any mistake or to add, delete or update the information furnished.
It has also been proposed to make a consequential amendment arising out of amendment carried out by Finance Act, 2019 whereby threshold for TDS on payment of interest by a banking company or cooperative society or public company was raised to ₹ 40,000. It may be mentioned that threshold for furnishing of Statement of TDS on interest in any other case is ₹ 5000 as prescribed under sec 206A(1).
These amendments will take effect from 1st September, 2019.
Rates for Tax Deduction at Source post amendments in new Budget
Section and Nature of Payment
TDS Rate for Individual/ HUF (Indian Resident)
Average rates as applicable
Payment of accumulated balance due to an employee
Interest on Securities
Interest other than “Interest on securities”
Interest by way of winning from lotteries, crossword puzzles, games etc.
Income by way of winning from horse race
Payment to contractor/ subcontractor
- payment to Individual or HUF
- payment to any other person (other than Individual or HUF)
– If recipient is a resident other than a company
– If recipient is a domestic company
Payment in respect of life insurance policy which is not exempt under section 10(10D)
Payment in respect of life insurance policy which is not exempt under section 10(10D). Only on the amount of Income comprised therein w.e.f. 1st September 2019
Payment to non-resident sports association
Payment in respect of deposits under National Savings Scheme
Payment on account of repurchase of unit by Mutual Fund or Unit Trust of India
Commission etc. on sale of lottery
Commission or Brokerage
Rent on plant and machinery
Rent on land, building, houses, offices, flats, residential apartments, furniture and fittings
– Plant and machinery
10% in case of payment by companies in excess of ₹ 240,000 per annum
– Land or building or furniture or fittings
5% – From 1st June 2017, in case of payment by individuals, HUF and in excess of ₹ 50,000 per per month
Payment or Credit of consideration to a resident transferor for transfer of any immovable property other than Rural Agricultural Land if the consideration is ₹ 50 Lakhs or more “consideration for immovable property” shall include all charges of the nature of club membership fee, car parking fee, electricity and water facility fees, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property. This amendment will take effect from 1st September, 2019.
Payment or Credit of Rent by Individual or HUF if not subject to tax audit under sec. 44AB in the immediately preceding financial year
Payment under Joint Development Agreement to a Resident Individual or HUF, who transfers land or building
Sum paid by way of fees for Professional Services or Royalty or Remuneration to a Director
- if payee is engaged only in the business of operation of Call Centre
- any other payment or credit
Payment of compensation on acquisition of certain immovable property
Payment of interest on infrastructure debt fund
Section- 194LBA (1)
Payment of the nature referred to in sec. 10(23FC), 10(23FC)(a),
10(23FCA) by Business trust to resident unit holder
Section- 194LBA (2)
Business trust shall deduct tax while distributing any interest received by it from SPV to its unit holders
Section- 194LBA (3)
Business trust shall deduct tax while distributing any income received by it from renting or leasing out any real estate asset owned directly by it to its unit holders
Payment in respect of Units of Investment fund paying an income to a unit holder specified under sec. 115UB
Section- 194LBC (1)
Payment in respect of investment made in securitization trust Specified in clause (d) of the explanation occurring after sec. 115TCA
– If recipient is individual or HUF
– If recipient is any other person
Section- 194 LC
Payment of interest by an Indian Company in respect of money borrowed in foreign currency under a loan agreement or by way of issue of long-term bonds
Payment of interest on rupee denominated bond of an Indian Company or Government securities to a Foreign Institutional Investor or Qualified Foreign Investor including long term infrastructure bonds
On the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J, if such sum, or aggregate of such sums, exceeds ₹ 50 lakh in a year w.e.f. 1st September, 2019
On cash payments in excess of ₹ one crore in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient w.e.f. 1st September, 2019
Above TDS rates are applicable when the deductee has provided its PAN number to the deductor.
In case PAN of deductee is not updated, the deductor must deduct TDS at the normal rate or 20 per cent whichever is higher. Further under section 94A(5) if payment or credit is made or given to a deductee who is located in a notified jurisdictional area, tax is deductible at the rate given in the table or at the rate of 30 per cent, whichever is higher.
Narayan Jain is a tax advocate and Co- Chairman of Direct Taxes Representation Committee of AIFTP. He is Hony Co- ordinating Editor of Taxman.