With this article, we kick-start our series on “Taxation Basics for Startups”. In this article we talk in detail about basics of “Tax Deducted at Source” (TDS) provisions, its compliances and the attached penal provisions.
TDS drives its origin from the concept that the entire economics revolves around one principal – “Somebody’s income is somebody’s payment”.
You may be smart enough to conceal income, but how about concealing expenditure which can go down to decrease your tax liability, hence the idea of taxing expenditure or payments, as it turns out to be somebody’s income.
The expense bearer deducts tax out of the expense, deposits to the credit of Government while claiming the expense as deduction, while the income earner, after receiving the net of tax amount, claims credit for the same while filing his tax returns.
Some common payments on which TDS needs to be deducted
- When you make payment to your employees as Salaries (Section 192)
- Payment of Interest on Securities (Section 193) OR other than securities (Section 194A)
- When you make payment to Contractor and Sub – Contractor (Section 194C)
- Payment for Commission or Brokerage (Section 194H)
- While Paying for Rent (194I)
- Fees for Professional or Technical or Services or Compete Fees (Section 194J)
When to deduct tax at source and when to deposit to the credit of government?
TDS is required to be deducted at the time of payment or at the time of credit to the books of accounts, whichever is earlier. The same needs to be deposited to the credit of government before the 7th day of the next month, however for the month of March it can be deposited before 30th April.
Requirement to file TDS Returns
TDS returns are to be filed for each quarter, the four returns for a financial year, with no requirement to file annual returns. The due dates for the same as under:
|Quarter Ending||Due date for Government Deductor||Due Date for Form No. 24Q, 26Q, 27Q, 27EQ|
|30th June||31st July of the financial year||15th July of the financial year|
|30th September||31st October of the financial year||15th October of the financial year|
|31st December||31st January of the financial year||15th January of the financial year|
|31st March||15th May of the financial year following the financial year in which deduction is made||15th May of the financial year following the financial year in which deduction is made”|
Form No. 24Q – Payment of Salary u/s 192, Form No. 27Q – Payment other than salary to a non resident not being a company or a foreign company or resident but not ordinarily resident, Form No. 26Q – Payment other than salary to a resident i.e., all deductee which are not covered under 24Q and 27Q (u/s 193 to 196D), Form No. 27EQ – Statement of collection of tax
Penal Provisions for non -compliance with TDS provisions
The penal provisions attached to TDS are so stringent that, its non-compliance can be enough reason to shut down the startups/ business, before it actually gets going.
Disallowance of expenditure under section 40(a) (ia) of Income Tax Act, 1961 (Act) : More fatal than any interest or penalty provisions, non-deductibility of tax at source on certain expenses will not allow you to claim such expenses in computing your business income.
Further, the existing provisions of section 40(a)(ia) of Income-tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, and others. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, some relaxation has been provided, in case the deduction of tax is made during the last month of the previous year, no disallowance is made if the tax is deposited on or before the due date of filing of return.
In addition to above, there are other penal provisions, relating to interest and penalty. We have summarized those in a tabular format below:
|a) For failure to deduct tax at source||Interest chargeable @1% p.m. or part of the month from the date on which it was deductible to the date of on which tax is deducted [Sec 201]||Maximum penalty of 100% on amount of TDS [Sec 221]|
|b) For failure to pay the tax after deduction||Interest chargeable @1.5% p.m. or part of the month from the date on which it was deducted till the date of payment [Sec 201]||Maximum penalty of 100% on amount of TDS [Sec 221]|
|c) Default in filing of returns||Not Applicable||Rs 100/day of default(not exceeding the amount of TDS) [Sec 272A(2)]|
To Conclude – Businesses/ Startups should take extra care to make sure they are in compliance with the provisions of the TDS as the non-compliance would make the expenses themselves non-admissible expenses, causing undue taxation exposure for the businesses.
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