The Union Budget 2019 has proposed certain amendments in the TDS rates of existing provisions, widened the scope of existing TDS provisions and introduced new TDS provisions which also affect an Individual vide Finance (No. 2) Bill, 2019. The snapshots of all the provisions related to TDS and TDS rates for AY 2020-21 proposed are listed in this article.
Introduction of new TDS provisions:
The Finance (No. 2) Bill, 2019 introduced the following two new sections for deduction of income-tax or TDS.
1. Section 194M - TDS on payment to Contractors and Professionals: An Individual is now under a legal obligation to deduct TDS on payments made to a contractor and professionals if the payment to such a person exceeds Rs. 50 Lakh in a financial year.
For this purpose, a new section 194M is introduced in the Income Tax Act, 1961 vide clause 46 in the Finance (No. 2) Bill, 2019 as follows-
46. After section 194LD of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of September 2019, namely:––
‘194M. (1) Any person, being an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract or by way of fees for professional services during the financial year, shall, at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income -tax thereon:
Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees.
(2) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
Explanation.––For the purposes of this section,––
(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;
(b) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;
(c) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.
The 'Notes on Clauses' states that "Clause 46 of the Bill seeks to insert new sections 194M relating to the payment of certain sums by certain individuals or Hindu undivided family in the Income-tax Act.
The 'Notes on Clauses' states that "Clause 46 of the Bill seeks to insert new sections 194M relating to the payment of certain sums by certain individuals or Hindu undivided family in the Income-tax Act.
Sub-section (1) of the proposed new section 194M seeks to provide for levy of tax deduction at source at the rate of five percent. on any sum, or aggregate of sums, paid by an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) to a resident for carrying out any work (including supply of labour for carrying out any work) or by way of fees for professional services at the time of credit to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
The proviso to the said sub-section provides that no income tax referred to in sub-section (1) shall be deducted, if such sum or aggregate of such sums paid to a resident does not exceed fifty lakh rupees during the financial year.
Sub-section (2) of the proposed new section 194M seeks to provide that the provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
The Explanation to the proposed new section also defines the expressions "contract", "professional services" and "work".
In simple words, it is proposed to insert a new provision making it obligatory for an individual or HUF, who is not subject to tax audit, to deduct tax at source at the rate of five percent, if the annual payment made to a contractor or professional exceeds Rs. 50 lakh. It is also proposed that a person deducting tax under this section shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only. It is also proposed to enable filing of an application for issue of a certificate for nil or lower rate of TDS."
The Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2019 explains section 194M in the following words-
At present, there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession. Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion. To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).
This amendment will take effect from 1st September 2019.
The salient features of section 194M are as follows-
1. This provision is applicable only to an Individual or a HUF. Thus AoP, BoI, a Society, etc. are excluded.
2. This provision shall apply whether or not such an Individual or HUF has any business or not. Payments made for personal use is also covered. Thus it will even apply to a salaried individual.
3. An Individual or HUF who is subject to tax audit can't deduct TDS under this section.
4. This will apply only if the payment is made to a contractor and professional as defined in section 194C or section 194J.
5. The payee must be a resident. This section will not apply if the payee is a non-resident. (Then section 195 applies.)
6. This provision shall apply if the payment to a single contractor or a single professional exceeds Rs. 50 Lakh in a financial year.
7. The rate of TDS is 5%.
8. No TAN is required to be taken by the deductor. The deductor can deposit the TDS with his PAN.
9. This will cover cases where the payment is made to a contractor for carrying out any contractual work or to a professional for rendering any professional services. If the payment is made for any other matter, even to such a contractor or professional, such payments will not be subject to TDS. To illustrate, suppose an Individual has paid Rs.45 lakh to a doctor in a financial year for rendering professional services to him or his family. Since the payment of Rs. 45 Lakh is within the limit of Rs. 50 Lakh, no TDS is required. Suppose, in the same financial year, if the Individual pays Rs. 7 Lakh for purchasing the doctor's car, then also no TDS obligation arises even the payment is made for Rs. 52 Lakh in the financial year. This is because out of Rs. 52 Lakh, only Rs. 45 Lakh was paid for professional services and Rs. 7 Lakh was paid for not for professional services and hence, this payment of Rs. 7 Lakh is out of the purview of section 194M.
10. The aggregate of the sum paid during a financial year to a single contractor or a single professional must exceed Rs. 50 Lakh to attract the provisions of this section. For example, if an Individual pays Rs. 25 Lakh to a professional for certain professional services in September 2019. since at this time the payment is less than Rs. 50 Lakh, no TDS is required under this section. Now again in February 2020, he makes a payment of Rs. 30 Lakhs to the same professional for professional services. In February, the aggregate payment exceeds Rs. 50 Lakh. Therefore, the individual shall deduct TDS @ 5% on Rs 55 Lakh in February 2020. The TDS amount comes to Rs. 2.75 Lakh. Therefore, the individual shall pay Rs. 27.25 Lakh to the professional in February after deduction of TDS.
11. This provision shall come into effect from 1st September 2019. thus if any payment is made for any contractual work or professional services on or after 1st September 2019 then the Individual or HUF is required to deduct TDS therefrom. If the payment is made up to 31st August 2019 even for more than Rs. 50 Lakh, no tax is required to be deducted from such payments.
Comments: An Individual or HUF is now additionally burdened with deduction of tax in case of payments for contractual work or professional services. The deduction also carries the obligation to deposit the TDS into the government account and to issue TDS certificates. However, one favour is made that such an individual or HUF is granted immunity from obtaining TAN. An individual or a HUF is already under a legal obligation to deduct TDS for payment of rent in excess of Rs. 50,000 per month under section 194IB. This provision will only put additional burden on the back of an Individual or HUF.
2. Section 194N - TDS on Cash Withdrawals: Now cash withdrawals from a bank account will attract TDS. Before the budget, it was speculated that the government may reintroduce Banking Cash Transaction Tax or BCTT in the Budget 2019. However, instead of levying a separate tax, the government imposed deduction of income tax on cash withdrawals.
For this purpose, a new section 194N is introduced in the Income Tax Act, 1961 vide clause 46 in the Finance (No. 2) Bill, 2019 as follows-
46. 194N. Every person, being,–
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
(ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office,
who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:
Provided that nothing contained in this sub-section shall apply to any payment made to,–
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007;
(v) such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.’
The 'Notes on Clauses' states that the proposed new section 194N provides that a banking company or a co-operative society engaged in carrying on the business of banking or a post office, which is responsible for paying any sum or aggregate of sums, in excess of one crore rupees in cash during the previous year to any person (referred to as the recipient in the section) from an account maintained by the recipient with such banking company or co-operative society or post office shall, at the time of payment of such amount, deduct an amount equal to two per cent of sum exceeding one crore rupees as income-tax.
The proviso to the said section provides that the provisions of the proposed new section shall not apply to any payment made to the Government, any banking company, co-operative society engaged in carrying on the business of banking, post office, business correspondent of a banking company or co-operative society, engaged in carrying the business of banking, any white label automated teller machine operator of a banking company or co-operative society engaged in carrying the business of banking, or such other persons or class of persons, which the Central Government may, specify by notification in consultation with the Reserve Bank of India.
These amendments will take effect from 1st September 2019.
The Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2019 explains the rationale for introducing the section 194N in the following words-
In order to further discourage cash transactions and move towards less-cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.
The salient features of section 194N are listed below-
1. This section shall apply in case of cash withdrawal from a bank account including a cooperative bank and from an account held with the Post Office.
2. It is not clear whether the limit of Rs. 1 crore shall apply branch-wise or bank-wise. However, in case of a core banking compliant bank, it appears that it is applicable on the bank-wise basis.
3. It shall apply if the aggregate amount of cash withdrawal in a financial year exceeds Rs. 1 crore from a bank account etc. If the cash withdrawal amount in a year exceeds Rs. 1 crore then TDS will apply on the excess amount of cash withdrawal over Rs. 1 crore and not on the entire amount of cash withdrawal.
4. It is applicable to all the account holders be it individual, HUF, company, etc. except government, banks, white label ATM operators, etc. who withdraws cash in excess of Rs. 1 crore in a year.
5. The rate of TDS is 2%.
6. The purpose of cash withdrawal, whether for business or personal, is irrelevant.
Comments: The objective of introducing the TDS provision on cash withdrawals is to discourage large amount of cash withdrawal from bank accounts and push the country towards a digital economy. Since the limit of cash withdrawal is kept at a large level of Rs. 1 crore it will hardly effect any genuine account holders. However, after the presentation of Budget 2019, it is reported in news media that large tea estate companies are demanding to exclude them from this provision. To mitigate the genuine hardships to any person, the provision empowers the government to exclude those persons from the applicability of the provisions of this section.
Amendment in Existing Provisions:
1. 194DA- TDS on payment from insurance proceeds-
Under section 194DA of the Act, a person is obliged to deduct tax at source, if it pays any sum to a resident under a life insurance policy, which is not exempt under section 10(10D). The present requirement is to deduct tax at the rate of 1 per cent of such sum at the time of payment.
Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assessee who otherwise has to pay tax on net income (i.e after deducting the amount of insurance premium paid by him from the total sum received).
From the point of views of tax administration as well, it is preferable to deduct tax on net income so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The person who is paying a sum to a resident under a life insurance policy is aware of the amount of insurance premium paid by the assessee.
Hence, it is proposed to provide for tax deduction at source at the rate of 5 per cent on the income component of the sum paid by the person.
This amendment shall be effective from 1st September 2019.
For this purpose, section 194DA is amended in the Finance (No. 2) Bill, 2019 in the following manner-
44. In section 194DA of the Income Tax Act, for the words “one per cent”, the words “five per cent on the amount of income comprised therein” shall be substituted with effect from the 1st day of September, 2019.
The 'Notes on Clauses' states that "Clause 44 of the Bill seeks to amend section 194DA of the Income-tax Act relating to payment in respect of life insurance policy.
The said section provides for levy of tax deduction at source at the rate of 1 percent. on the sum payable by way of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under clause (10D) of section 10.
It is proposed to amend the said section so as to provide that the levy of tax deduction at source shall be on the income comprised in the sum payable by way of redemption of a life insurance policy, including the sum allocated by way of bonus on such life insurance policy, excluding the amount exempted under the said clause (10D) of section 10 at the increased rate of 5 percent."
The salient features of section 194DA after the amendment are as follows-
1. This section applies to deduction of income tax from payments made by an insurer to the insured under a life insurance policy including the bonus amount. Thus, TDS is applicable only to payments under a life insurance policy.
2. If the insured is a resident then tax will be deducted under this section.
3. Tax will be deducted only if the payment under the life insurance policy is not exempt and chargeable to tax under the Income Tax Act, 1961. Payments under a life insurance policy are wholly exempt if the payment is made on the death of the insured. If the payment is made on the maturity of the policy or on surrender of the policy, then such payment will be chargeable to tax only if the premium amount does not exceed the specified percentage of sum assured.
4. Tax will be deducted at the time of payment to the insured.
5. Threshold limit of Rs. 1,00,000 is provided in the provision. Tax will be deducted if the payment exceeds the threshold limit in a financial year.
6. Presently, tax is deducted on the gross amount of the payment made under the policy. No deduction is allowed for premium payment. Now the provision is amended and tax will be deducted only on the amount of income included in the payment. The insurance company or insurer will determine the amount of income after reducing the amount of premium paid from the gross amount of payment under the policy.
7. The rate of TDS has been increased from 1% (on gross payment amount) to 5% (on the amount of income only). Effectively, the amount of TDS on the payment will get reduced.
Comments: The amendment is a big relief to common taxpayers. The increase in TDS rate will actually reduce the amount of TDS due to the fact that the income component is very minimal in such life insurance policies. This also provides clarity on the subject matter on the amount of income involved in the payment under a life insurance policy which is not exempt. Before the amendment, different views were there as to how much constitutes income from such payments.
2. Section 194LC - No TDS on interest from Rupee Denominated Bonds (RDB) to non-resident- Section 10 amended.
Section 194LC provides for deduction of TDS on any income paid as interest to a non-resident by an Indian company. It includes interest payable in respect of monies borrowed from a source outside India by way of issue of rupee-denominated bond. This interest income has now been made exempt from income tax under section 10 and consequently, no TDS shall apply on such interest income. Section 10 of the Income Tax Act relates to incomes not included in total income.
In order to incentivize the fund raising by India Inc. from abroad in RDB, the Budget 2019 announced that to contain the current account deficit and augment the foreign exchange inflow, the Government had issued a press release on 17th September, 2018 exempting interest income of non-resident from RDB issued by a company or a business trust, outside India, during the period 17th September, 2018 to 31st March, 2019. It is proposed to incorporate this tax incentive in the Income-tax Act.
For this purpose, an amendment is made in section 10 of the Income Tax Act, 1961 vide clause 6 of the Finance (No. 2) bill, 2019 in the following words-
6. In section 10 of the Income-tax Act,––
(I) after clause (4B), the following clause shall be inserted, namely:–
“(4C) any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in clause (ia) of sub-section (2) of section 194LC, during the period beginning from the 17th day of September, 2018 and ending on the 31st day of March, 2019;”
The Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2019 explains the rationale for exempting the interest income of a non-resident arising from borrowings by way of issue of Rupee Denominated Bonds referred to under section 194LC in the following words-
The existing provisions of section 194LC of the Act provide that the interest income payable to a non-resident by a specified company on borrowings made by it in foreign currency from sources outside India under a loan agreement or by way of issue of any long-term bond including long-term infrastructure bond, or rupee denominated bond shall be eligible for TDS at a concessional rate of five per cent.
In order to incentivise low cost foreign borrowings through Off-shore Rupee Denominated Bond, the press release dated 17th September, 2018, inter alia, announced that interest payable by an Indian company or a business trust to a non-resident, including a foreign company, in respect of rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019 shall be exempt from tax. Consequently, no tax was required to be deducted on the payment of interest in respect of the said bond. The exemption announced through the said press release is proposed to be incorporated in the law by amending section 10 of the Act so as to provide exemption to income payable by way of interest to a non-resident by the specified company in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in section 194LC, during the period begining from the 17th day of September, 2018 and ending on the 31st day of March, 2019.
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.
Comments: The move is aimed to facilitate India Inc. for raising fund from abroad in RDBs which will strengthen the economy of the country.
3. Section 195 - Online application for lower or nil TDS certificate-
This is a procedural amendment incorporated in the Income Tax Act for online filing of an application for obtaining lower or nil TDS certificate from payments made to non-residents.
For this purpose, an amendment is made in section 195 vide clause 47 of the Finance No. 2) Bill, 2019 in the following manner-
47. In section 195 of the Income-tax Act, with effect from the 1st day of November, 2019,––
(a) in sub-section (2), for the words “to the Assessing Officer to determine, by general or special order”, the words “in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed” shall be substituted;
(b) in sub-section (7), for the words “to the Assessing Officer to determine, by general or special order”, the words “in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed” shall be substituted.
Comments: Online filing of application seeking determination of tax to be deducted at source on payment to non-residents Under sub-section (2) of section 195 of the Act, if a person who is responsible for paying any sum to a non-resident which is chargeable to tax under the Act (other than salary) considers that the whole of such sum would not be income chargeable in the case of the recipient, he can make an application to the Assessing Officer to determine the appropriate proportion of such sum chargeable. This provision is used by a person making payment to a non-resident to obtain certificate/order from the Assessing Officer for lower or nil withholding tax. However, the process is currently manual. In order to use technology to streamline the process, which will not only reduce the time for processing of such applications, but shall also help tax administration in monitoring such payments, it is proposed to amend the provisions of this section to allow for prescribing the form and manner of application to the Assessing Officer and also for the manner of determination of appropriate portion of sum chargeable to tax by the Assessing Officer.
A similar amendment is also proposed to be made in sub-section (7) of section 195 which are applicable to specified class of persons or cases. It is proposed to amend the said sub-section so as to empower the Board to prescribe the form and manner of making such application and the manner of determining the appropriate proportion of such sum chargeable to tax.
These amendments will take effect from 1st November, 2019.
4. Section 206A - Scope of the statement of financial transactions (SFT) widened -
Clause 50 of the Finance (No. 2) Bill, 2019 substitutes the section 206A relating to furnishing of quarterly return in respect of payment of interest to residents without deduction of tax with the following provisions-
50. For section 206A of the Income-tax Act, the following section shall be substituted with effect from the 1st day of September, 2019, namely:–
“206A.(1) Any banking company or co-operative society or public company referred to in the proviso to clause (i) of sub-section (3) of section 194A responsible for paying to a resident any income not exceeding forty thousand rupees, where the payer is a banking company or a co-operative society, and five thousand rupees in any other case by way of interest (other than interest on securities), shall prepare such statement in such form, containing such particulars, for such period, verified in such manner and within such time, as may be prescribed, and deliver or cause to be delivered the said statement to the prescribed income-tax authority or to the person authorised by such authority.
(2) The Board may require any person, other than a person mentioned in sub-section (1), responsible for paying to a resident any income liable for deduction of tax at source under Chapter XVII, to prepare such statement in such form, containing such particulars, for such period, verified in such manner and within such time, as may be prescribed, and deliver or cause to be delivered the said statement to the income-tax authority or the authorised person referred to in sub-section (1).
(3) The person responsible for paying to a resident any income referred to in sub-section (1) or sub-section (2) may also deliver to the income-tax authority referred to in sub-section (1), a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under the said sub-sections in such form and verified in such manner, as may be prescribed.”
Comments: In order to obtain more information to enable pre-filling of returns of income, it is proposed to widen the scope of furnishing of statement of financial transactions (SFT) by mandating furnishing of statement by the prescribed persons other than those who are currently furnishing the same. It is also proposed to remove the current threshold of Rs. 50,000 for application of the provisions requiring furnishing of information, in order to ensure pre-filling of smaller amounts of transactions also. Further, for ensuring the accuracy of the information furnished, a suitable amendment to the relevant penalty provisions is also proposed.
Section 206A of the Act relates to furnishing of statement in respect of payment of certain income by way of interest to residents where no tax has been deducted at source.
At present, the section provides for filing of such statements on a floppy, diskette, magnetic tape, CD-ROM, or any other computer readable media. To enable online filing of such statements, it is proposed to substitute this section so as to provide for filing of statement (where tax has not been deducted on payment of interest to residents) in prescribed form in the prescribed manner.
It is also proposed to provide for correction of such statements for rectification of any mistake or to add, delete or update the information furnished.
It is also proposed to make a consequential amendment arising out of amendment carried out by Finance Act, 2019 whereby threshold for TDS on payment of interest by a banking company or cooperative society or public company was raised to Rs. 40,000.
These amendments will take effect from 1st September, 2019.
5. Section 201 and Section 40 - Relaxing the provisions of sections 201 and 40 of the Act in case of payments to non-residents
Section 201 of the Act provides that where any person, including the principal officer of a company or an employer (hereinafter called ‘the deductor’), who is required to deduct tax at source on any sum in accordance with the provisions of the Act, does not deduct or does not pay such tax or fails to pay such tax after making the deduction, then such person shall be deemed to be an assessee in default in respect of such tax.
The first proviso to sub-section (1) of section 201 specifies that the deductor shall not be deemed to be an assessee in default if he fails to deduct tax on a payment made to a resident, if such resident has furnished his return of income under section 139, disclosed such payment for computing his income in his return of income, paid the tax due on the income declared by him in his return of income and furnished an accountant’s certificate to this effect.
This relief in section 201 is available to the deductor, only in respect of payments made to a resident. In case of similar failure on payments made to a non-resident, such relief is not available to the deductor.
To remove this anomaly, it is proposed to amend the proviso to sub-section (1) of section 201 to extend the benefit of this proviso to a deductor, even in respect of failure to deduct tax on payment to non-resident.
Consequent to this amendment, it is also proposed to amend the proviso to sub-section (1A) of section 201 to provide for levy of interest till the date of filing of return by the non-resident payee (as is the case at present with resident payee).
These amendments will take effect from 1st September, 2019.
For the same reason, it is also proposed to amend clause (a) of section 40 to provide that where an assessee fails to deduct tax in accordance with the provisions of Chapter XVII-B on any sum paid to a non-resident, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of the return of income by the payee referred to in that proviso. Thus, there will be no disallowance under section 40 in respect of such payments.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
For this purpose, amendments are being made in section 201 and section 40 vide clause 49 and 10 respectively of the Finance (No. 2) Bill, 2019 which are as follows-
49. In section 201 of the Income-tax Act, with effect from the 1st day of September, 2019,––
(a) in sub-section (1), in the first proviso, for the word “resident” wherever it occurs, the word “payee” shall be substituted;
(b) in sub-section (1A), in the proviso, for the word “resident” wherever it occurs, the word “payee” shall be substituted;
(c) in sub-section (3), after the words “credit is given”, the words, brackets and figures “or two years from the end of the financial year in which the correction statement is delivered under the proviso to sub-section (3) of section 200, whichever is later” shall be inserted.
10. In section 40 of the Income-tax Act, in clause (a), with effect from the 1st day of April, 2020,––
(a) in sub-clause (i), after the proviso, the following proviso shall be inserted, namely:––
“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso;”;
(b) in sub-clause (ia), in the second proviso, the word “resident” shall be omitted.
The 'Notes on Clauses' states that "Clause 49 of the Bill seeks to amend section 201 of the Income Tax Act relating to consequences of failure to deduct or pay.
The first proviso to sub-section (1) of the said section provides that any person, including the principal officer of a company specified therein, who fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVIIB on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished a return of his income, has taken into account such sum for computing income in such return of income, has paid the tax due on the income declared by him in such return of income and furnishes a certificate to this effect from an accountant in the prescribed form.
It is proposed to amend the said first proviso so as to substitute the word "resident" with the words "payee".
It is further proposed to make a similar amendment in the proviso to sub-section (1A) of the said section.
Sub-section (3) of the said section provides that no order deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a payment made to a resident shall be made after the expiry of seven years from the end of the financial year in which payment is made or credit is given.
It is proposed to amend the said sub-section to specify that in respect of a correction statement delivered by the assessee under the proviso to sub-section (3) of section 200, no order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a resident, at any time after the expiry of seven years from the end of the financial year in which payment is made or credit is given, or two years from the end of the financial year in which such correction statement is delivered under the proviso to sub-section (3) of section 200, whichever is later.
These amendments will take effect from 1st September, 2019.
Clause 10 of the Bill seeks to amend section 40 of the Income Tax Act relating to amounts not deductible.
Sub-clause (i) of clause (a) of the said section provides that where, in case of any assessee, tax is to be deducted at source under Chapter XVII-B on payment of any amount in the nature of interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under the Income-tax Act, which is payable outside India, or in India to a non-resident, not being a company or to a foreign company, and where such tax has not been deducted or, after deduction, has not been paid on or before the due date for filing the return of income, the amount of such sum shall not be allowed as a deduction.
The proviso to the said sub-clause specifies that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
It is proposed to insert a second proviso to the said sub-clause so as to provide that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of the said sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the first proviso to sub-section (1) of section 201.
It is further proposed to make a similar consequential amendment in the second proviso to sub-clause (ia) of clause (a) of section 40 to omit the word "resident".
These amendments will take effect from 1st April, 2020, and will, accordingly, apply to the assessment year 2020-2021 and subsequent assessment years."
6. Lower or Nil TDS certificate for Section 194M allowed:
Section 197 relates to the issue of a certificate for deduction of tax at a lower or Nil rate by the Assessing Officer. This certificate is required to be obtained by the payee (to whom the payment is made) and provides the same to the deductor (who pays the income). The certificate authorizes the deductor to deduct TDS at a rate lower than the rate specified or at a nil rate, that is no tax is required to be deducted. Since section 194M is a new section inserted by Finance (No. 2) Bill, 2019 and the government intends to provide the benefit of lower of Nil TDS to the payee whose payment will otherwise suffer TDS under section 194M, section 197 is also amended to include the section 194M.
For this purpose, an amendment is made in the Income Tax Act, 1961 vide clause 48 in the Finance (No. 2) Bill, 2019 in the following manner-
48. In section 197 of the Income-tax Act, in sub-section (1), for the figures and letters “194LBC”, the figures and letters “194LBC, 194M” shall be substituted with effect from the 1st day of September, 2019.
The 'Notes on Clauses' states that "Clause 48 of the Bill seeks to amend section 197 of the Income-tax Act relating to certificate for deduction at lower rate.
It is proposed to amend sub-section (1) of the said section so as to provide that the sums on which tax deduction at source has been deducted under section 194M shall also be eligible for certificate for deduction at lower rate. This amendment is consequential in nature for the insertion of proposed new section 194M."
This amendment will take effect from 1st September, 2019."
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