Budget 2014: Amendments proposed in connection with Tax Deducted at Source (TDS)

Set out below are the amendments proposed in the Finance Bill in connection with TDS:

1. Disallowance for non-deduction or non-payment of TDS:

 a) The existing provisions of section 40(a)(i) of the I-T Act provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the IT Act.

The I-T Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to the residents. Under section 40(a)(ia) of the I-T Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified or filing of return of income under section 139(1) of the I-T Act. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.

In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed to amend section 40(a)(i) of the I-T Act to provide that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.

 b) It is proposed to amend section 40(a)(ia) of the I-T Act to provide that in case of non-deduction or non-payment of TDS on payments made to tax residents , the disallowance will be restricted to 30% of the amount of the expenditure claimed. Currently, 100% of such amount is disallowed.

 c) Currently, the non-deduction or non-payment of TDS on payments made to residents results in disallowance only with respect to certain specified categories of payments (viz. interest, commission, brokerage, rent, royalty, fee for technical services or fee for professional services). It is proposed to amend section 40(a)(ia) of the I-T Act to increase the scope of disallowance to every category of payment made to a resident on which tax is required to be deducted at source under Chapter XVII-B of the I-T Act.

2. Correction/ Rectification of TDS Quarterly Statements:

Currently, a deductor is allowed to file correction statement for rectification/updation of the information furnished in the original quarterly statement as per the Centralized Processing of Statements of Tax Deducted at Source Scheme, 2013. However, there is no express provision in the I-T Act for enabling a deductor to file correction statement. To bring clarity in the law, Finance Bill proposes to amend section 200 of the I-T Act to expressly provide that the deductor can deliver a correction statement in the prescribed form. Consequently, it is also proposed to amend section 200A (1) of the I-T Act for enabling processing of correction statement filed. This amendment is proposed take effect from October 1, 2014.

3. Time limit for deeming a person assessee in default:

Currently, section 201(3)(i) of the I-T Act provides a time limit for passing of an order for holding a person to be an assesse in default for non deduction or non payment of TDS. Such time limit is two years from the end of the financial year in which the quarterly TDS statement was filed. It is proposed to delete such provision because there is norationale for not treating the deductor as assessee in default after two years only on the basis that the deductor has filed TDS statement as TDS defaults are generally in respect of the transaction not reported in the TDS statement.

Additionally, section 201(3)(ii) of the I-T Act is proposed to be amended to increase the time limit for passing an order deeming a person to be an assessee on default for non payment and non deduction of TDS on payment made to residents to 7 years from 6 years. This is to align section 201(3)(ii) of the I-T Act with section 148 of IT Act (which relates to time limit for reassessment proceedings).

These amendments are proposed to take effect from October 1, 2014.

4. Penalty under Section 271H:

Section 271H of the I-T Act is proposed to be amended to provide that penalty there under will be levied by the assessing officer. This amendment is proposed take effect from October 1, 2014.