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Tax Deducted at Source (TDS)
Every business, whether a startup or an existing company, is certain to incur some expenses or to make payments to its parties irrespective of its size and scale. Thus TDS provisions apply to all types and size of businesses. It applies in the same or similar way to a proprietor (Covered under Tax Audit u/s 44AB), firm, LLP or a company registered under the companies, Act. 2013. The payment of expense by a person is an Income in the hands of the recipient. Thus the payor is under a liability to deduct the tax at applicable rates while making payment to the party. For small payments, the provision of TDS does not apply until it crosses a threshold limit as prescribed. It must be noted that the TDS is applicable only on the specified payment and after it reaches the threshold limit. The most common types of expenses on which TDS is applicable is provided hereunder.
Key Points of TDS Deduction & Payment
Payment of TDS Deducted
The tax deducted at source (TDS) while making payment to parties for qualified expenses must be deposited before 7th of next month. For example, the TDS deducted in November 2020 is payable on or before 7th December 2020. The challan number for making TDS deposit is 281. while making TDS Payment care must be exercised while selecting the appropriate section/nature of the payment/Assessment Year etc.
The Consequence of Non-Compliance
The non-compliance of TDS provisions is a grave offence and is punishable under section 271 (C) of the Income Tax Act 1961, wherein the minimum penalty is 10,000 which can go up to Rs. 1,00,000/-. Further section 276B applies to all such cases where a willful default is established, in all those cases the punishment is 3 Years rigorous imprisonment which can go up to seven years.
Interest on Non Payment of TDS
The TDS deducted by a person need to be deposited within 7th day of the next month. Any failure or delay in depositing the TDS is punishable under section 271 C or/and Section 276 B. The defaulter is further liable to pay interest on delayed payment at the rate of 1.5% per month or part thereof. There is no provision in law where the interest can be waived; hence the assessee should be very careful.
Filing of TDS Return
After making the payment of TDS to the income tax, the taxpayer is required to file a quarterly return where the TDS deposited is mapped against the PAN of the person from which TDS was deducted. The TDS Return is filed within 30th of the month succeeding the quarter. For example, the first quarter ends on 30th June, hence the TDS Return must be submitted before 30th July.
Interest on Non-Deduction of TDS
When a person while making payment for which he ought to have deducted TDS fails in deducting TDS or deducts an amount less than the required amount. In all such cases, the deductor is liable to pay an interest @ 1% per month or part of the month, till the date on which TDS is deducted. Hence, a business person must be prudent while making payment to parties and ensure that TDS is deducted.
Other Consequences of Default on TDS
The expenses on which TDS was required to be deducted shall be disallowed as an expense under section 40(a) while computing the total taxable income. To understand it quickly let’s take an example of business where the income is 12 lakhs and the expense is also 12 lakhs then effectively there shall be zero income tax, However, if the TDS is not deducted then the tax shall be INR 3,60,000 plus cess and interest applicable (30% of 12 lakhs)
Important Note:
TDS deducted in a month is required to be paid before the 7th day of next month. While making TDS mention correct section in the challan number 281. For TDS payment use a separate challan while making payment for a specific type (section). Interest on Late Payment is- 1.5% per month or part thereof, The penalty on Late filing of TDS Return is Rs. 200 per day, however, it is limited to the TDS amount.