The fundamental reason to design Tax Deducted at Source (TDS) was to overcome the challenge of tax evasion. Tax evasion is pervasive and takes place across all societies, social classes, professions, economic systems, and industries. The extent to which tax evasion takes place depends on the economic and tax structures, income types and social attitudes.
Thus, the tax authorities extended the scope of TDS to avoid tax evasion and to collect tax quickly and smoothly from the taxpayers. The aim of TDS is to increase revenue collection and minimize the cost of collection.
For instance, it is easier for a single employer to deduct TDS on employees’ salary rather than tax administration collecting tax from each individual separately. This specifically applies to wage and salary income. Hence, such an income is chargeable to TDS in many countries across the world.
So, let’s understand what is TDS, its features and the procedure to register for TDS given this in the backdrop.
What is TDS?
TDS is a type of direct tax deducted by a person making payments. Thus, an individual or a company making a payment is required to deduct Tax at Source as per the Income Tax Act. Provided such payment is more than the threshold limit set by the tax authorities.
So, a certain percentage of payment is deducted by a person at the time of crediting the payment of a specific nature to another person under TDS. Further, the amount deducted is transferred to the government account.
TDS deducted by the person making a payment is done at TDS rates stipulated by the tax department. The person making the payment after charging TDS is called the deductor. And the company and the person receiving such payment is called the deductee.
The deductor is responsible for deducting TDS before crediting the payment and depositing the same with the government. TDS is deducted regardless of the mode of payment, that is, cash, cheque or credit. Further, TDS is linked to the PAN of the person receiving the payment.
Thus, TDS is in line with the “pay as you earn” scheme better known as withholding tax in many countries such as the USA. It advocates dividing the responsibility of collecting tax between the person deducting such a tax and tax administration. Furthermore, it leaves the government with a regular flow of cash.
Features of TDS
TDS is modest both in terms of different incomes that come under its purview and the share of tax collected at the time of payment in India. However, more than 80% of the tax is collected in the form of TDS in countries like USA and Canada.
Thus, following are some of the features of Tax Deducted at Source:
- It is the responsibility of person making payment to deduct or collect tax at source.
- These specific set of people responsible for deducting tax at source are required to have a tax deduction account number.
- The time for payment of TDS to the government is stipulated by the tax authorities.
- The tax deductor is responsible for issuing the Certificate of TDS to the taxpayers in prescribed form and within the specified time period.
- The deductors responsible for deducting TDS are required to file quarterly statements of TDS return.
- TDS is collected or deducted at specified rates as prescribed by the tax authorities.
- Tax authorities specify the conditions under which less or no tax would be deducted.
- Statements of TDS are required to be submitted on prescribed forms and within specified time period.
- Penalty or consequences of non-payment or non-compliance too are stipulated by the tax authorities.
Major Responsibilities of Deductor
The deductor is required to do the following things in order to collect TDS from the person making payment:
- The deductor is required to obtain a Tax Deduction Account Number. This is a 10 digit unique identification, alpha numeric number that is mandatory to collect TDS from the taxpayer. For instance, ABCD12345E is a hypothetical Tax Deduction Account Number. The deductor is required to quote this number in all the income tax matters concerning TDS.
- Deductor is required to obtain the PAN of the deductee, that is the person who is receiving the payment.
- He or she is required to deduct tax at correct rate in accordance with the rates specified by the tax authorities.
- TDS deducted by the deductor must be deposited in designated banks within specified time period. This time period is as follows:
- TDS needs to be deposited on the same day in case tax is collected by government or any other person on behalf of the government.
- However, tax should be deposited on or before seventh of the following month in cases where TDS is collected by or on behalf of any other person. But, for the month of March, TDS should be deposited by April 30th.
- The deductor must use Challan No. 281 for depositing TDS amount.
TDS On Different Types of Payments
Following are the heads different types of payments on which TDS is deducted.
- Salary (Section 192)
- Payment of accumulated balance in Employer’s Provident Fund due to an employee. (Section 192A)
- Interest on securities (Section 193)
- Dividend (Section 194)
- Winning from horse races (Section 194BB)
- Payment of interest other than interest on securities (Section 194A)
- Winning from lottery or crossword puzzle (Section 194B)
- Payment or credit to a resident contractor or sub-contractor (Section 194C)
- Insurance commission (Section 194D)
- Payment in respect of Life Insurance Policy (Section 194DA)
- Commission on sale of lottery tickets (Section 194G)
- Payment to non-resident sportsmen and sports associations (Section 194E)
- Commission or brokerage (Section 194H)
- Payment in respect of deposit under National Saving Scheme 1987 (194EE)
- Rent payments on P&M, land, building, furniture, fitting (Section 194I)
- Payment on account of repurchase of units of MF or UTI (194F)
- Transfer of immovable property (Section 194IA)
- Payment/Credit of rent by individual/HUF not covered under Section 44AB in immediate preceding financial year (Section 194IB)
- Other sums (Section 195)
- Payment under joint development agreement (194IC)
- Fees for professional and technical services (Section 194J)
- Payment of compensation on acquisition of certain immovable property (Section 194LA)
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Here is an infographic that explains the concept behind Tax Deducted at Source and the persons who are required to deduct TDS.