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    Implication of Non- deduction of Income Tax TDS

    -CA. Udit Maheshwari

    Background

    The concept of Tax Deducted at Source (TDS) was introduced under Income Tax Act, 1961 by the Finance Ministry with an aim to collect advance Taxes on income paid by one assesse to another assesse at the time of making payment. The main motive behind this concept was to ensure regular revenue to the Central Government and secondly the concept was so developed that it became easy to trace the person who is liable to pay tax on the income earned or deemed to be accrue or arise in India.

    Implementing and monitoring of any new concept in India is not an easy task. Similarly, implementing and monitoring TDS provisions was also a tough task for Govt. So, to in order to ensure timely receipt of TDS from the respective Assessees, two major provisions were added in Income Tax Act, 1961 as follows:

    • Interest Liability for Non-Deduction or Non-payment of TDS on time.
    • Penalty for Non-Deduction or Non-payment of TDS on time.

    Now, the question arise that at what rate interest has be charged and whether there is any legal remedy available with assesse to avoid such interest?

    Interest

    As per Section 201 of Income Tax Act, 1961, if any person who is liable to deduct tax and pay it to Govt, fails to do so then he has to pay simple interest as follows:

    S.no

    Event

    Rate of Interest

    Period

    1

    Fails to deduct TDS

    1% per month or part of month

    From the date when tax was deductible to the date it was actually deducted

    2

    Fails to deposit TDS

    1.5% per month or part of month

    From the date tax was deducted to the date it was actually paid

     

    Note:- Such interest shall be paid before furnishing return of TDS.

     

    Penalty

    When an assessee fails to deduct or deposit TDS, he shall, in addition to the amount of the arrears and the amount of interest payable as mentioned supra, be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears.

     

    Legal Remedy

    One remedy is available to person who is liable to deduct TDS, if the person to whom the payment was to be made has fulfilled the following conditions:

    • Has furnished his return of income as per provisions of Income Tax Act, 1961; and
    • Has taken into account such sum for computing income in such return of income; and 
    • Has paid the tax due on the income declared by him in such return of income; and
    • Person furnishes a certificate to this effect from a Chartered Accountant in Form 26A.

     

    Extract of Form 26A