A recent circular issued by the Central Board of Direct Taxes (CBDT), Circular No. 2/[ F. No. 385/25/2010-IT(B)] (new Circular) dated 27 April 2011, outlined the procedure for refund of excess payment of tax deducted at source (TDS) from payments to residents.
The new Circular is applicable for refunds pertaining to the period up to 31 March 2010. The procedure for refunds for the period from 1 April 2010 is governed by a specific provision in the Indian Tax Laws (ITL) dealing with centralized processing of quarterly TDS statements. The refund for the period after 1 April 2010 will be granted based on data furnished in the statements, subject to rectification of apparent inconsistencies, without the requirement of a separate claim for refund.
The new Circular supersedes the existing CBDT Circular No. 285 dated 21 October 1980 (old Circular) which covered refund of excess TDS in respect of limited categories of payment from which withholding was made. The new Circular now covers all categories of payments to residents.
Under the old Circular, no specific time limit was provided for claiming the refund of excess TDS by the deductor. Under the new Circular, claim for refund of excess TDS needs to be made within a period of two years from the end of the financial year in which the tax was deductible at source. This effectively means that the claim for refund can be made only for financial year (FY) 2009-10 on or before 31 March 2012. The claims for refund for FY 2008-09 and earlier years may need to be made independent of the new Circular.
Prior to 1 April 2010, there were no specific provisions in the ITL dealing with the procedure for refund of excess payment of TDS. The procedure was governed by the old Circular which permitted refund of excess TDS, subject to necessary administrative safeguards. The old Circular, however, provided for refund of withholding only from limited categories of payments like salaries, interest, contract payments, etc. Basically, the old Circular covered withholding provisions which subsisted on the ITL in 1980.
After the old Circular, new provisions on withholding on additional categories of payments (like fees for professional or technical services, commission or brokerage, rent, etc.) to residents were introduced in the ITL. Representations were, therefore, made to the CBDT to include the new categories of payments within the scope of the refund procedure.
Considering the representations, the CBDT has issued the new Circular in supersession of the old Circular to cover refund of excess TDS in respect of withholding under all categories of payments to residents.
Key features of the procedure for refund under the new Circular
The excess payment to be refunded will be the difference between:
-The actual payment made by the deductor to the credit of the Central Government and
-The tax deductible at source (The old Circular referred to the tax deducted at source or that deductible, whichever is more.)
If excess payment is discovered by the deductor during the relevant financial year, the present system of filing quarterly statements of TDS permits the adjustment of such excess in the next quarter of the same financial year.
If the excess payment is discovered beyond the relevant financial year, the claim for refund needs to be made to the Tax Authority. Presently, no form is prescribed for putting up such a claim. In the circumstances, the claim needs to be put up by a simple letter application with necessary supporting documents.
Furthermore, no claim of refund can be made after two years from the end of the financial year in which tax was deductible at source. The old Circular did not provide any specific time limit for putting up such a claim.
Administrative safeguards to be exercised by the Tax Authority
The old Circular provided for grant of refund after adjusting existing tax liability, if any, of the deductor, which is retained in the new Circular.
To prevent duplicated claim of credit of TDS by deductee and refund by deductor, the new Circular provides for the following additional administrative safeguards to be exercised by the Tax Authority:
The applicant deductor is required to establish before the Tax Authority that:
– The excess payment is a case of genuine error and that the error had occurred inadvertently.
-The TDS certificate for the refund amount requested has not been issued to the deductee(s).
-The credit for the excess amount has not been claimed by the deductee(s) in the return of income or the deductee(s) undertakes not to claim such credit.
Prior administrative approval of the higher Tax Authority needs to be obtained depending upon the quantum of refund as follows:
Quantum of refund
Approving Higher Tax Authority
From INR 0.1m to 1m
Additional Commissioner of Income Tax
Above INR 1m
Commissioner of Income Tax (TDS)
Effective period of the refund procedure under the new Circular
The procedure outlined in the new Circular is applicable for claim of refunds for the period up to 31 March 2010.
Having regard to the requirement of making application within the two year time limit, this effectively means that the claim for refund can be made only for FY 2009-10 on or before 31 March 2012. The claims for refund for FY 2008-09 and earlier years may need to be made independent of the new Circular.
The procedure for refunds for the period from 1 April 2010 is governed by a specific provision in the ITL (Section 200A) which provides for centralized processing of quarterly TDS statements under a scheme to be made by the CBDT. The refund of excess payment of TDS under this procedure will be granted based on data furnished in the statements, subject to rectification of apparent inconsistencies, without the requirement of a separate claim for refund.
Some points which deductors need to consider
The deductors will need to consider the following points with reference to the new Circular:
The new Circular is applicable for refund of excess TDS from payments to residents. In case of non residents, the procedure is outlined in a separate Circular No. 7/2007 dated 23 October 2007. Even here, the refunds for the period from 1 April 2010 will be governed by the centralized processing procedure.
The new Circular covers refund of excess TDS alone and does not refer to tax collected at source (TCS).
The claim for refund can be made by the deductor if he has paid TDS in excess of tax correctly deductible and has not issued TDS certificate(s) to the deductee(s) for such excess. Illustratively, if TDS paid is INR100 and tax correctly deductible is INR10, then refund can be claimed for excess TDS of INR90 if TDS certificate is issued for INR10. If TDS certificate is issued to the deductee for INR100, then the deductor cannot claim refund under this new Circular.
Foreword– The long awaited new Circular provides clarity on the procedure for refund of excess TDS and removes ambiguity in respect of refund of TDS from categories of withholding which were not covered in the old Circular. Having regard to the two year time limit, deductors may need to expedite the process for claiming refund of excess TDS.
Failure to deduct or remit TDS/TCS (fully or partially)
Interest: Interest at the rates in force (12% p.a.) from the date on which tax was deductible /collectible to the date of payment to Government Account is chargeable. The Finance Act 2010 amended interest rate wef 01.07.2010 and created a separate class of default in respect of tax deducted but not paid to levy interest at a higher rate of 1.5% per month, i.e. 18% p.a. as against 1.0% p.m., i.e. 12% p.a., applicable in case the tax is deducted late after the due date. The rationale behind this amendment is that the tax once deducted belongs to the government and the person withholding the same needs to be penalized by charging higher rate of interest Penalty equal to the tax that was failed to be deducted/collected or remitted is leviable.
In case of failure to remit the tax deducted/collected, rigorous imprisonment ranging from 3 months to 7 years and fine can be levied
Disallowance of Expense for non deposit of TDS -Section 40(a)(ia)
Failure to apply for TAN in time or Failure to quote allotted TAN or Wrong quoting of TAN: Penalty of Rs.10,000 is leviable u/s.272BB(for each failure)
Failure to issue TDS/TCS certificate in time or Failure to submit form 15H/15G in time or Failure to furnish statement of perquisites in time or Failure to file Quarterly Statements in time: For each type of failure, penalty of Rs.100/-per day for the period of default is leviable. Maximum penalty for each failure can be up to the amount of TDS/TCS.
The extant rules provide an option to persons withholding tax (deductors) to issue TDS certificate with digital signature only for TDS from salary income (in Form 16). Non-salary TDS certificates in Form 16A are required to be issued in hard copy format with authentication by manual signature. The Circular now extends the option of digital signature to Form 16A also. The deductors exercising this option need to download Form 16A from the Tax Information Network (TIN) website.
The new facility is available for issue of Form 16A for financial year (FY) 2010-11 onwards. The Circular states that companies and deductors carrying on banking business will need to mandatorily issue Form 16A downloaded from the TIN website from FY 2011-12.
The deductor is required to issue TDS certificate to the deductee, specifying particulars like permanent account numbers (PAN) of deductor and deductee, tax deduction account number of deductor, nature and amount of payment, amount of TDS, date of payment of TDS to the credit of the Government etc. (collectively “TDS data”).
The form, periodicity and format for issue of such TDS certificates as per extant rules are as under:
TDS from salary income
Annual (by 31 May following relevant financial year)
Quarterly (30 July, 30 October, 30 January & 30 May)
The extant rules do not provide for an option to issue Form 16A with digital signature. The CBDT received representations to permit issue of such certificates with digital signatures since issuance with manual signatures is very time-consuming, especially for deductors who are required to issue a large number of TDS certificates.
The Tax Authority has set up TIN, hosted by the National Securities Depository Limited, as a repository of important tax-related information. TIN receives, on behalf of the Tax Authority, all TDS returns and other information for digitization into a central database. TIN receives online information on collection of taxes from the banks through the Online Tax Accounting System (OLTAS), which also flows into the central database.
TIN matches TDS returns from the deductors with the collection details received from the banks (through OLTAS). On the basis of this matched data, a deductee-wise electronic ledger account is prepared with the details of tax credits. This ledger (called Form 26AS) is made available to the deductees so that they can verify whether the deductors have deposited the tax in a timely manner.
The issue of Form 16A by deductors to the deductees is a distinct and independent process. Deductors issue Form 16A based on TDS data as per the deductors record. Ideally, there should be no mismatch between the TDS data displayed in Form 26AS and Form 16A. However, the Tax Authority has found that in some cases there is mismatch mainly on account of wrong data entry by deductor or non-filing of TDS returns by the deductor. The new facility introduced in this Circular is intended to overcome the challenge of such mismatch.
New facility to download TDS certificate in Form 16A from TIN
The Tax Authority will introduce a new facility in TIN to enable deductors to download Form 16A from TIN website (TIN-generated Form 16A) based on the TDS data reported in quarterly TDS returns filed by them. This certificate will bear a unique TDS certificate number.
Since both TIN-generated Form 16A and Form 26AS will be generated on the basis of same data, the likelihood of mismatch between the two will be eliminated.
The Director General of Income-tax (Systems) shall specify the procedure, formats and standards for the purpose of TIN-generated Form 16A and shall be responsible for its day-to-day administration.
Having regard to the new facility, the CBDT has modified the procedural requirements for issue of Form 16A.
Issue of Form 16A for FY 2010-11
The deductor has an option to issue TDS certificate in Form 16A either based on his own data or through TIN-generated Form 16A. Form 16A issued on the basis of own data can be authenticated by manual signature only. In respect of TIN-generated Form 16A, the deductor has a further option to authenticate it either manually or with digital signature.
The due date for issue of Form 16A for the first three quarters of FY 2010-11 have already expired. The facility of issue of TIN-generated Form 16A can, therefore, be availed of only for the last quarter of FY 2010-11(See Note-1 Below).
Issue of Form 16A for FY 2011-12
Mandatory issue of TIN-generated Form 16A for certain deductors
The Circular states that the following deductors shall be required to issue TIN-generated Form 16A:
Company, including banking company, to whom Banking Regulation Act, 1949 (BRA) applies
Any bank or banking institution referred to in Section 51 of BRA.
Co-operative society carrying on banking business.
It needs to be noted that these deductors need to issue TIN-generated Form 16A not only for TDS from interest but for all non-salary TDS.
Other deductors have an option to issue Form 16A either based on their own data or through TIN-generated Form 16A with a further option, with regard to TIN-generated Form 16A, to authenticate either manually or with digital signature.
Issue of TDS certificates with manual signatures in Form 16A is a huge administrative exercise, especially for large corporates, in view of wide scope of non-salary TDS. The Circular provides welcome relief to deductors to reduce the administrative burden by opting for TIN-generated Form 16A with digital signatures.
Before exercising the option, the deductors would need to evaluate whether TIN-generated Form 16A correctly captures the TDS data. There may be certain practical challenges while availing of the new facility. For example, the TIN website may not capture TDS data of deductees for whom PAN is not available. Also, currently there is no clarity on whether the deductor can exercise the option selectively for some deductees. The validity of mandate of issuing TIN-generated Form 16A for companies and deductors carrying on banking business from FY 2011-12, without amendment in statutory rules, may also be legally debatable.
The applicability of the facility for belated issue of Form 16A for first three quarters of FY 2010-11 is ambiguous.