Introduction
Tax is one of the major sources of revenue for the government of India, which is primarily utilized for meeting various obligations it has towards the people like education, infrastructure, defence and so on.
Income tax turns out to be the most significant of direct taxes. Direct tax means tax that is paid directly to the government by the person on whom it is imposed. The first quarter of FY 12-13 (Apr-Jun) witnessed a direct tax collection of around Rs.84000 Cr, which translates to a 47% rise from last quarter.
The Income Tax Act, 1961 is the charging statute of income tax in India.
Tax deduction at Source
One way of collecting income tax is by deducting tax at source. This concept was introduced in 2004. It is founded on the principle “Pay as you Earn”. In other words, when you receive payment, the tax element is deducted and directly routed to the government and what you receive is the net amount.
Some important terms:
1. Deductor: The person who is liable to deduct tax at source.
2. Deductee: The person from whom the tax is being deducted or accrued for deduction.
3. TDS returns: Once tax is deducted and paid, deductor files quarterly statements containing details of deductee and payments, known as TDS returns.
4. TDS Certificates: After filing quarterly statements, deductor issues TDS Certificates to the deductee showing details of amounts paid and tax deducted in Form 16 ( Salary) or Form 16A (all others).
Some advantages of TDS are as follows:
1. Tax gets automatically paid to the government when the payment is received/ accrued.
2. Once the amounts are paid and return filed, the department gets information about the deductor and deductee and the taxes remitted.
3. TDS provides a steady flow of revenue to the government. Government need not wait till the year end to receive taxes.
4. TDS takes care of time value of money.
Select provisions of the Income Tax Act regarding TDS are briefly explained as under:
1. Section 192 – Salary: Any employer shall deduct tax at source if salary paid in the year after considering exemptions under Section 10 and chapter VI-A deductions(except certain donations u/s 80G) exceeds the basic exemption limit.
2. Section 194A – Interest other than interest on securities: Any person other than a bank shall deduct tax at source at 10% if interest other than interest on securities exceeds Rs.5000. Banks shall do so if interest exceeds Rs.10000 in the year.
3. Section 194B – Winning from lottery/crossword puzzles
Section 194BB – Winning from horse races
Tax shall be deducted at source @ 30% if winnings exceed Rs.10000 for lottery/crossword puzzles and Rs.5000 in case of horse races.
4. Section 194C - Tax shall be deducted at source if:
a. Single sum paid/credited to a resident contractor exceeds Rs.30000
b. Aggregate of sums paid/credited to a resident contractor exceeds Rs.75000 during the year.
If the payee is an Individual/HUF (to whom Section 44AB was applicable in the preceding year), tax shall be deducted @ 1%. Others shall deduct tax @ 2%.
5. Section 194D – Insurance Commission: If payment is made by way of commission or otherwise in order to solicit insurance business exceeding Rs.20000, tax shall be deducted at the rate of 20%.
6. Section 194I – Rent : If payment of rent including payment under lease, sublease or tenancy made/credited to a resident exceeds Rs.180000 during the year, TDS is applicable as follows:
a. Rent for plant and machinery @ 2%
b. Rent for land and building @ 10%
7. Section 194J – Fees for professional/ technical services/royalty/non-compete fees: Any person making payment for the above exceeding Rs.30000 in a year shall deduct tax at source at 10%.
Other points to be noted:
1. Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available.
2. 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 on furnishing of his Permanent Account Number, to the person paying or crediting such sum.
3. Education Cess is not deductible/ collectible at source in case of resident Individual/HUF/Firm/AOP/BOI/Domestic Company in respect of payment of income other than salary.
4. Education Cess @ 2% plus secondary & Higher Education Cess @ 1% is deductible at source in case of non-residents and foreign company.
Thus TDS is a systematic way of collecting taxes by the government that has its own advantages and benefits. It is never a tedious issue to comprehend and practice but an organised methodology adopted by the government to finance itself and discharge the duties it has towards its people.
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