Non-compliance with TDS payments relating to non-residents – Respite in the budget?
Tax withholding obligations under the Income Tax Act are stringent. A person (deductor/payer) who is liable to make payment of specified nature to any other person (deductee/Payee) is mandated to withhold tax at source (TDS) and remit the same into the account of the Central Government in a timely manner.
The deductee or payee from whose income such taxes have been deducted at source, is entitled to the credit of such taxes on the basis of the TDS certificate issued by the deductor and as reflected in his Form 26AS.
Non-compliance with the tax withholding provisions attracts interests and penalty, and such payers are considered as assessees in default. However the provisions vary depending on whether the payee (or the recipient) is a resident or a non-resident.
Consequence of failure to deduct the taxes - an overview
As per Section 201(1) of the Income Tax Act 1961 (the Act), where any person who fails to meet the tax withholding obligations as required, i.e.:
- who is required to deduct any sum in accordance with the provisions relating to the tax withholding of this Act;
- does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, be liable to pay interest and penalties as specified under the Act. The rate of interest would be 1 percent per month where it is a situation of non-deduction, and 1.5 percent per month, where the taxes are withheld but not remitted.
Such persons will also be considered to be an assessee in default in respect of such tax, interest and penalties under section 221 of the Act.
However a respite is provided to person liable to deduct the tax where the payee has furnished his return of income under section 139 and has taken into account such sum for computing the income and the due taxes are paid on such income. A certificate from an accountant as prescribed is required to be furnished. Under such circumstances, the payer will not be considered to be an assessee in default. Till recently, this benefit was available only in situations where the payee was a resident. Effective 1 September 2019, this is applicable even where the payee is a non-resident.
Hence, if a non-resident payee files his return of income under section 139 after paying the taxes, even in such cases the person making the payment will not be considered as assessee in default.
This change is a welcome move as practically the person making the payment of the sum may not be able to establish whether the payee is a resident or not, to apply the erstwhile provisions.
However, a similar benefit has not been extended to the time limit prescribed under Section 201(3) of the Act. Under this section, the payer of the sum would not be considered as assessee in default for non-deduction from a person resident in India after completion/expiry of 7 years from the end of the financial year in which payment is made or credit is given, or 2 years from the end of financial year in which the final tax withholding returns are delivered, whichever is later.
It is important to note that the above time limit prescribed is currently applicable to a tax deductor if the payee is a resident. In situations where the payment is made to a non-resident and the payer of the sum has failed to deduct taxes at source, there is no time limit specified and hence such persons will continued to be considered as assessees in default provided the non-resident payee has not filed the return of income by paying adequate taxes.
Clearly, there is a need to align the provisions and there is an expectation from the upcoming Budget 2020 to extend the provisions even to a situation where the payee is a non-resident to bring in parity with that of resident payees/deductees.
Information for the editor for reference purposes only
Saraswathi Kasturirangan is Partner, Deloitte India and Prashanth G is Manager with Deloitte Haskins and Sells LLP.