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Putting TDS provisions for recurring deposits to work

TDS on recurring deposits makes investors either submit the exemption forms if there is no taxable income. In case of TDS on RD, they may have to revisit their tax calculations and accordingly pay tax.

The provisions for the applicability of the tax deduction at source (TDS) for recurring deposits are now into the implementation phase. This means that there is one additional area where the tax payer has to focus their attention. Since there was no tax deduction at source earlier there was no tax implication for any investment made into this area at this initial stage but this will now change. There are several steps that need to be taken so that the individual is in tune with the changed circumstances. Here is a closer look at what needs to be done and the manner in which this can be accomplished.

Change

The change that the union budget 2015 has brought about is that there would be the coverage of recurring deposits in the list of instruments that would be subject to the tax deduction at source. This would mean that if an investor has an income in excess of Rs 10,000 from recurring deposits then this would suffer the same kind of TDS that they would experience when they have fixed deposits. This would mean that at the time of redemption of the investment there would be a lower amount that would come to the investor because the TDS would reduce the amount as compared to earlier when the entire figure would be received by the investor. The main point to remember here is to give the PAN to the bank otherwise the rate of the deduction will be higher.

This does not change the overall nature of taxation for the interest on fixed deposit as these remain taxable which was also the case earlier. So for investors this move will actually ensure that a part of their payment is actually made through the TDS route and hence they would have a reduced liability in terms of payment of advance or self assessment tax.

Form 15G/15H

Investors who do not have any taxable income and hence would not want any tax to be deducted from the amount that they earn on the recurring deposits would have to ensure that they submit the required forms to the bank. This would have to be done immediately otherwise the deduction would start as the income is earned. This is significant as there is a time element for the submission of the forms and the investor should focus attention to this area if they need to ensure that there is no deduction that they actually face. Senior citizens would need to be especially alert because they are most likely to be covered under these kind of conditions.

Annual update

For a long period of time many investors actually did not pay much attention to the recurring deposit investments that they actually made. This was because they thought that there is not much to do in terms of the tax impact. This often led to a situation wherein the income that was earned from the recurring deposits never made it to the income tax returns at the end of the financial year. This is something that needs to be avoided as it shows that some of the income that is actually taxable is not being shown properly.

Now this would need special attention as there is likely to be both income as well as tax deduction that would present. Not claiming the tax deduction would lead to a loss of benefit while the non inclusion of the income would mean that the right picture is not being shows in the tax returns. Interest on recurring deposits is taxable and hence has to be included in the calculations as such. Both these aspects would need the attention of the investors and hence this would have to be the focus area and it would need work at the end of every financial year which in a way is a good thing as it ensures that nothing is missed out.

Source: MoneyControl

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Tax is not to be deducted at a higher rate of 20 percent under Section206AA of the Income-tax Act when the benefit of tax treaty is available

Recently, the Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal) held that there is no scope for the tax deduction at source (TDS) at a higher rate of 20 per cent as per the provisions of Section 206AA of the Income Tax Act, 1961 (the Act) when the benefit of tax treaty is available to a non-resident.

Facts of the case

  • The taxpayer is engaged in the business of Business Process Outsourcing (BPO). The taxpayer made certain payments to a non-resident on account of royalty and/or Fees for Technical Services (FTS). As the benefit of a tax treaty was available to the non-resident, tax was deducted by applying the beneficial rate prescribed under the tax treaty in terms of the provision of Section 90(2) of the Act.
  • The taxpayer filed statements of deduction of tax at source for various quarters of the relevant financial year in respect of payments made to non-resident during the period.
  • The Assessing Officer (AO) after processing TDS statement issued intimation under Section 200A of the Act. The AO raised a tax demand on account of the short deduction of tax and interest was also charged on the same. The tax demand was raised on the ground that the taxpayer has not furnished the PAN of the non-resident deductee/recipient. The AO held that if the taxpayer did not furnish PAN, as per the provisions of Section 206AA of the Act, the TDS should have been deducted at the rate of 20 per cent
  • The Commissioner of Income-tax Act, 1961 [CIT(A)] rejected the objection of the taxpayer regarding the scope of Section 200A for making the adjustment and consequential demand. However, the CIT(A) decided the matter in favour of the taxpayer and held that payment made to the nonresident recipient was eligible for the tax treaty benefit and by applying the beneficial provisions, the rate of tax to be withheld cannot be more than the tax liability provided in the tax treaty.

Tribunal’s ruling

Applicability of higher TDS under Section 206AA of the Act  

  • The Tribunal held that there was no dispute that the benefit of the tax treaty was available to the nonresident recipient. Therefore, the tax liability of the recipient could not be more than the rate prescribed by the tax treaty or the Act, whichever is lower.
  • Reliance was placed on the Pune Tribunal’s decision in the case of Serum Institute of India Limited1 wherein the Tribunal observed that Section 206AA of the Act does not override the provisions of Section 90(2) of the Act. The taxpayer had rightly applied the rate of tax as per the tax treaty and not as per Section 206AA of the Act since the provision of the tax treaty was more beneficial.
  • The Tribunal observed that the similar view has been taken by the co-ordinate bench in the case of Bosch Ltd.
  • The Tribunal relied on the decision of Karnataka High Court in the case of Bharti Airtel Ltd.3 where it was held that the Act is to be read as an integral code. To deduct tax while making payment to a nonresident, the amount paid must be ascertainable as income chargeable to tax in the hands of the nonresident. TDS is a vicarious liability, and it presupposes the existence of primary liability and hence the TDS provisions need to be read in conformity with the charging provisions i.e. Section 4, 5 and 9 of the Act.
  • The Tribunal held that provisions of TDS had to be read along with the machinery provisions of computing the tax liability on the sum in questions.
  • Following the aforesaid decisions, the Tribunal held that there was no error in the CIT(A)’s order where it was held that there is no scope for deduction of tax at the rate of 20 per cent as provided under the provisions of Section 206AA of the Act when the benefit of tax treaty is available.

Adjustment under Section 200A of the Act

  • While making the adjustment under Section 200A of the Act the AO had ignored the provisions of the tax treaty.
  • The payment in question was made to the nonresident, and the provisions of tax treaty were applicable. Thus, the issue of applying the rate of tax at 20 per cent and ignoring the provisions of tax treaty is a debatable issue and does not fall into the category of any arithmetical error or incorrect claim apparent from any information in the statement, as per the provisions of Section 200A(1) of the Act.
  • On reference to Explanation to Section 200A(1) of the Act it is clear that in respect of deduction of tax at source where such rate is not in accordance with provisions of the Act, it can be considered as an incorrect claim apparent from the statement. However, in the present case it was not a simple case of deduction of tax at source by applying the rate only as per the provisions of the Act, when the benefit of tax treaty was available to the recipient of the amount.
  • Therefore, the question of applying the rate of 20 percent as provided under Section 206AA of the Act is an issue which requires a long drawn reasoning and finding. Hence, it was held that applying the rate of 20 per cent without considering the provisions of the tax treaty and consequent adjustment while framing the intimation under Section 200A is beyond the scope of the said provision.
  • Thus, the AO had travelled beyond the jurisdiction of making the adjustment as per the provisions of Section 200A of the Act. Accordingly, the issue was decided in favour of the taxpayer.
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Closure of defaults in Quarterly TDS Statements from Financial Year 2007-08 onwards

CPC(TDS) reminder communication to banks regarding closure of defaults in Quarterly TDS Statements from Financial Year 2007-08 onwards.

The issued communication has been given below:

The Principal Officer
Name: XXXXXXX
TAN: XXXXXXXXXXXX

Please refer to the earlier CPC(TDS) Communication regarding defaults in TDS Statements for different TAN’s associated with your PAN. The Centralized Processing Centre (TDS) has observed from its records that there are Defaults in Quarterly TDS Statements submitted by different TANs associated with your PAN.

The details of the TANs and outstanding Defaults against them as per Financial Year have been provided as annexed with this letter. Form Type and Quarter wise details of the above are also available to you to be viewed online on the web-portal TRACES (www.tdscpc.gov.in) under “Aggregated TAN compliance Report”.

Please note that:

  • Order u/s 201 Intimation u/s 200A of the Income Tax Act, 1961 intimating the outstanding demand for different years has already been sent by Income Tax Department on Registered email address and by post, at the address, as mentioned in the relevant TDS Statement to the relevant deductors (TANs).
  • This information is being provided to you for further necessary action for closure of Short Payment Defaults at the earliest by moving deductee rows/ matching/tagging of Unmatched challans or by payment/ tagging in case of Insufficient challans.
  • This would be helpful for you in complying with the provisions of section 40(a)(ia) of Income Tax Act, 1961 and to ensure that correct information is disclosed in paragraph 21b(ii) of Tax Audit Report(Form 3CD) u/s 44AB of the Income Tax Act.

Actions to be taken by the TAN holders associated with you:

  • Download “Aggregate TDS Compliance Report” from our portal TRACES for the details of Short Payment defaults against each TAN associated with your PAN.
  • Quarter-wise Justification Reports can be downloaded by the referenced TANs from our portal TRACES for the details of Short Payment defaults.
  • Please use Challan ITNS 281 for payment of TDS in case of Insufficient Challans.
  • Online Correction facility provided by TRACES should be used for closing the above defaults by suitably moving deductee rows/ matching/ tagging of challans.

For any assistance, you can write to Corporate_connect@tdscpc.gov.in or call on +91 120 4816103.

CPC (TDS) is committed to provide best possible services to you. 

Kailash V Gautam
Assistant Commissioner of Incomer Tax
Centralized Processing Cell- TDS

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Avail the Benefit of Intermediate Default Communications and Avoid Intimations from CPC (TDS)

Dear Deductor,

As you may be aware by now that the Centralized Processing Cell (TDS) is informing you of PAN and Challan Errors, through an Intermediate Communication, during processing of Original Quarterly TDS Statements, before Defaults are finally computed and Intimations are generated.

On receipt of the above communication, you are encouraged to take corrective action within 7 days of receipt of such communication. With this, you will be able to avoid PAN Errors and Intimations from CPC (TDS) on account of Short Payment and Short Deduction Defaults in the relevant TDS Statement.

Central point of the process:

  • Identify errors in PANs or Challans in preliminary check, owing to inadvertent Data Entry errors
  • Facilitate their corrections before CPC (TDS) computes defaults in TDS statements
  • You are notified of the Defaults through the Intermediate Default communication by way of the following:
    • e-mail at the Registered e-mail address at TRACES
    • SMS at Registered Mobile Number with TRACES
    • Message will be delivered to the Deductor’s Inbox in TRACES
  • The above correction needs to be carried out by using Online Correction feature at TRACES after 24 hours of the receipt of the Intermediate Communication and must be availed within 7 days of receipt of such communication.

What are the advantages:

  • You would have information of PAN and Challan Errors, before the Original Statement is completely processed for Defaults and Intimations are generated.
  • Correction to above errors using Online Correction can be submitted before final processing of statements and you will be able to avoid Short Payment and Short Deduction Defaults.
  • Saves your Administrative Costs, as above action will facilitate avoidance of multiple Correction Statement filing later, after the defaults are identified CPC (TDS) and Intimations have been sent.
  • Help your Deductees to get Correct Tax Credit in their 26AS statements, at the earliest opportunity.
  • Save Paper, Save Environment! The life of One crucial tree can be saved by avoiding use of 8,000 sheets of paper. Avoidance of Intimations from CPC (TDS) resulting into savings in respect of paper, printing and postage costs. This also supports the “Green Initiatives” of CPC (TDS).

What actions to be taken:

  • Please use the Intelligence, Simplicity and Convenience of Online Correction facility at TRACES to correct errors notified through the communication.
  • Online Correction facility provides ease of convenience and can be availed on anytime anywhere basis by Logging into TRACES. Online Correction is a quick and easy way for closure of Defaults in TDS Statements and correcting PAN/ Challan Errors.
  • All relevant information at the portal is pre-populated along with flags for incorrect entries, which assists in avoidance of further Data Entry errors by the user

You are also encouraged to avail full benefits of Online Corrections and you can access the e-tutorial at TRACES.

CPC (TDS) is committed to provide best possible services to you. 

CPC (TDS) TEAM

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