CHANGES IN TDS RATES & THRESHOLD LIMITS RECOMMENDED

With nearly 65% of the personal income-tax collection in India being raised through tax deducted at source (TDS), the onerous task of which has been cast on tax deductors, the TDS provisions need to be made more tax friendly and not as ‘tedious’ as they have remained over the years.

It is a matter of record that a number of annual threshold limits in respect of TDS have just not come to be revised over the years. With the liability of TDS being attracted on such tiny annual limits of Rs.2,500 in respect of payment of interest on securities and on interest on NSS accounts, Rs.5,000 for payment of interest on private deposits and commission or brokerage and Rs.10,000 for payment of bank interest, one can just imagine the enormous work that goes into compliance of these provisions. Considering the importance of the long overdue revision of these puny limits, the Committee has recommended suitable hikes in such threshold limits.

The Committee has also felt the dire need for rationalization of TDS rates, more particularly on account of the lowering down of the average tax rates in case of majority taxpayers in the Individual and HUF categories, keeping in view the restructuring of the Income-tax rates over the past decade. To illustrate, in FY 2004-05, taxable income of Rs.5,00,000 in the case of an Individual or HUF attracted income-tax of Rs.1,24,000 at an average rate of tax of 24.8%. In FY 2015-16, the same taxable income of Rs.5,00,000 attracts income-tax of only Rs.23,000 (after rebate u/s. 87A), with the average tax rate working out to just 4.6%.

Today, the average tax rate of 10% gets attracted only on taxable incomes beyond Rs.7,00,000. As a result, majority of the taxpayers, more particularly those having mainly interest incomes, are required to claim sizable income-tax refunds. The Income-tax Department is also required to collect taxes in a very large number of such cases, merely to refund a substantial chunk of such collection, alongwith interest thereon.

Considering the fact that more than 80% of the taxpayers in the Individual or HUF categories come under the bracket of an average tax rate of less than 5%, the Committee is of the firm view that the TDS rates in case of interest and commission in the case of these two categories needs to be rationalized and accordingly its is recommended that the TDS rates for them be reduced from the existing 10% to 5%. This important change should go a long way to avoid a lot of unproductive work and waste of time and money.

Under the existing provisions, Individuals and HUFs have been exempted from the responsibility of tax deduction at source, unless their total sales, gross receipts or turnover from the business or profession carried on by them exceed the monetary limits specified under section 44AB. With a view to facilitate ease of business for small partnership firms (other than limited liability partnerships), who are also not equipped to discharge the complex formalities of tax deduction, the Committee recommends that they may also be included within the scope of this exemption.

The Committee places on record that a view was expressed by one of the members that any reduction in the rates of TDS may effect the cash flows of the government and caution needs to be exercised before any recommendation is made to that effect.

With a view to simplify the provisions in regard to interest, commission and lottery winnings etc., it has been proposed to consolidate the relevant provisions in this regard and consequentially delete certain related sections, including certain other sections, which are now obsolete and not in force.

The recommendations are summarized in the table given below:

12.2 RECOMMENDATIONS

(A) Section 193 relating to "Interest on securities". should be deleted w.e.f. 1.6.2016 since it is being merged with new section 194A recommended to be introduced w.e.f. 1.6.2016

(B) Interest including Interest on securities.

(Newly drafted Section effective from 1.6.2016)

194A. (1) Any person, not being an individual or a Hindu undivided family or a firm (other than a limited liability partnership), who is responsible for paying to a resident any income by way of interest, including interest on securities, shall, at the time of credit of such income 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, deduct income-tax thereon at the rate of:

(i) five per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) ten per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family.

Provided that an individual or a Hindu undivided family or a firm (other than a limited liability partnership), whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB1 during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.

[Explanation.—For the purposes of this section, where any income by way of interest, including interest on securities, as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]

(2) The provisions of sub-section (1) shall not apply—

(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed fifteen thousand rupees.

Provided that in respect of the income credited or paid in respect of—

(a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or
(b) time deposits with a co-operative society engaged in carrying on the business of banking;
(c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

The aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be :

Provided further that the amount referred to in the first proviso shall be computed with reference to the income credited or paid by the banking company or the co-operative society or the public company, as the case may be, where such banking company or the co-operative society or the public company has adopted core banking solutions;

(ii) to such income credited or paid to—

(a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank), or
(b) any financial corporation established by or under a Central, State or Provincial Act, or
(c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or
(d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or
(e) any company or co-operative society carrying on the business of insurance, or
(f) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette;

(iii) to such income credited or paid by a firm to a partner of the firm;

(iv) to such income credited or paid by a co-operative society (other than a co-operative bank) to a member thereof or to such income credited or paid by a co-operative society to any other co-operative society;

explanation.—For the purposes of this clause, "co-operative bank" shall have the same meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);

(v) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette;

(vi) to such income credited or paid in respect of deposits (other than time deposits) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

(vii) to such income credited or paid in respect of,—

(a) deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank;
(b) deposits (other than time deposits) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a), engaged in carrying on the business of banking;

(viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income-tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Super Profits Tax Act, 1963 (14 of 1963), or the Companies (Profits) Surtax Act, 1964 (7 of 1964), or the Interest-tax Act, 1974 (45 of 1974);

(ix) to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal;

(x) to such income paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees;

(xi) to such income which is paid or payable by an infrastructure capital company or infrastructure capital fund or a public sector company or scheduled bank in relation to a zero coupon bond issued on or after the 1st day of June, 2005 by such company or fund or public sector company or scheduled bank;

(xii) to any income by way of interest referred to in clause (23FC) of section 10.

(xiii) any interest payable on such debentures, issued by any institution or authority, or any public sector company, or any co-operative society (including a co-operative land mortgage bank or a co-operative land development bank), as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(xiv) any interest payable on any security of the Central Government or a State Government:

Provided that nothing contained in this clause shall apply to the interest exceeding rupees fifteen thousand payable on 8% Savings (Taxable) Bonds, 2003 during the financial year;

(xv) any interest payable to an individual or a Hindu undivided family, who is resident in India, on any debenture issued by a company in which the public are substantially interested, if—

(a) the amount of interest or, as the case may be, the aggregate amount of such interest paid or likely to be paid on such debenture during the financial year by the company to such individual or Hindu undivided family does not exceed fifteen thousand rupees; and
(b) such interest is paid by the company by an account payee cheque;

(xvi) any interest payable to the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any securities owned by it or in which it has full beneficial interest; or

(xvii) any interest payable to the General Insurance Corporation of India (hereafter in this clause referred to as the Corporation) or to any of the four companies (hereafter in this clause referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any securities owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest; or

(xviii) any interest payable to any other insurer in respect of any securities owned by it or in which it has full beneficial interest;

(xix) any interest payable on any security issued by a company, where such security is in dematerialised form and is listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the rules made thereunder.

Explanation 1.—For the purposes of this section, "time deposits" means deposits including recurring deposits repayable on the expiry of fixed periods.

(3) The person responsible for making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

(C) Winnings from lottery or crossword puzzle or from horse race. (Newly drafted Section effective from 1.6.2016)

194B. (1) The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game or other game of any sort or from gambling or betting of any form or nature whatsoever, as referred to under section 115BB, an amount exceeding fifteen thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rate of thirty per cent:

Provided that in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.

(2) Any person, being a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course, who is responsible for paying to any person any income by way of winnings from any horse race, as referred to under section 115BB, an amount exceeding fifteen thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rate of thirty per cent.

(D) Section 194BB relating to "Winnings from horse race" is recommended to be deleted w.e.f. 1.6.2016 because it has been recommended that these provisions be merged in section 194B

(E) Payments to contractors.

(Newly drafted Section effective from 1.6.2016)

194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor 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, deduct an amount equal to—

i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or
(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) The person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section, where such sum or, as the case may be, the aggregate of such sums credited or paid or likely to be credited or paid during the financial year, to the account of, or to the contractor, exceeds one hundred thousand rupees.

(5) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

explanation.—For the purposes of this section,— (i) "specified person" shall mean,—

(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act; or
(d) any company; or
(e) any co-operative society; or
(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
(h) any trust; or
(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
(j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
(k) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals or firm (other than a limited liability partnership), if such person,—

(A) does not fall under any of the preceding sub-clauses; and
(B) is liable to audit of accounts under clause (a) or clause (b) of section 44AB1 during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;

(ii) "goods carriage" shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;

(iii) "contract" shall include sub-contract; (iv) "work" shall include—

(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(d) catering;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

(F) Commission or brokerage.

(New section recommended to be effective from 1.6.2016)

194H. Any person, not being an individual or a Hindu undivided family or firm (other than limited liability partnership), who is responsible for paying, to a resident, any income by way of commission (including insurance commission and commission on sale of lottery tickets) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of:

(i) five per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) ten per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family.

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed fifteen thousand rupees:

Provided further that an individual or a Hindu undivided family or firm (other than limited liability partnership), whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB1 during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section:

provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.

Explanation.—For the purposes of this section,—

(i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;

(ii) the expression "professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;

(iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ;

(iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(v) the expression “insurance commission” means any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance).

(G) Section 194G relating to "Commission, etc., on the sale of lottery tickets" is recommended to be deleted w.e.f. 1.6.2016 because it has been recommended that these provisions be merged in section 194H

(H) Section 194D relating to "Insurance commission" is recommended to be deleted w.e.f. 1.6.2016 because it has been recommended that these provisions be merged in section 194H

(I) Payments in respect of deposits under National Savings Scheme, etc.

Recommended to be amended w.e.f. 1.6.2016

194EE. The person responsible for paying to any person any amount referred to in clause (a) of sub-section (2) of section 80CCA shall, at the time of payment thereof, deduct income-tax thereon at the rate of five per cent :

Provided that no deduction shall be made under this section where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than fifteen thousand rupees :

Provided further that nothing contained in this section shall apply to the payment of the said amount to the heirs of the assessee.

(J) Section 194F relating to "Payments on account of repurchase of units by Mutual Fund or Unit Trust of India" is recommended to be deleted w.e.f. 1.6.2016 as it is no longer relevant.

(K) Rent

Recommended to be amended w.e.f. 1.6.2016

194-I. Any person, not being an individual or a Hindu undivided family or a firm (other than a limited liability partnership), who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

(a) two per cent for the use of any machinery or plant or equipment; and

(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:

Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed two hundred and forty thousand rupees :

provided further that an individual or a Hindu undivided family or a firm (other than a limited liability partnership), whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section.

Explanation.—For the purposes of this section,—

(i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—

(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,
whether or not any or all of the above are owned by the payee;

(ii) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(L) Fees for professional or technical services. Recommended to be amended w.e.f. 1.6.2016

194J. (1) Any person, not being an individual or a Hindu undivided family or a firm (other than limited liability partnership), who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or
(b) fees for technical services, or
(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or
(c) royalty, or
(d) any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum 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, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

(A) from any sums as aforesaid credited or paid before the 1st day of July, 1995; or

(B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed fifty thousand rupees:

Provided further that an individual or a Hindu undivided family a firm (other than limited liability partnership) , whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB1 during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

explanation.—For the purposes of this section,—

(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

(b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(ba) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(c) where any sum referred to in sub-section (1) is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

(M) Section 194K relating to "Income in respect of units" is recommended to be deleted w.e.f. 1.6.2016 as it is no longer relevant.

(N) Section 194L relating to "Payment of compensation on acquisition of capital asset" is recommended to be deleted w.e.f. 1.6.2016 as it is no longer relevant.

(O) Payment of compensation on acquisition of certain immovable property.

Recommended to be amended w.e.f. 1.6.2016

194LA. Any person responsible for paying to a resident any sum, being in the nature of compensation or the enhanced compensation or the consideration or the enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any immovable property (other than agricultural land), shall, 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 ten per cent of such sum as income-tax thereon:

provided that no deduction shall be made under this section where the amount of such payment or, as the case may be, the aggregate amount of such payments to a resident during the financial year does not exceed five hundred thousand rupees.

Explanation.—For the purposes of this section,—

(i) "agricultural land" means agricultural land in India including land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2;

(ii) "immovable property" means any land (other than agricultural land) or any building or part of a building.