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Lower Deduction Certificates under Indian Tax Law : Commentary on Clause 395(1) of Income Tax Bill, 2025 Vs. Section 197 of Income-tax Act, 1961
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....of taxes and reduce evasion. The significance of these provisions lies in their impact on cash flow, compliance burden, and certainty for taxpayers-especially those whose effective tax liability is lower than the default rates prescribed for TDS/TCS. This commentary provides a detailed analysis of Clause 395(1), examining its objectives, the legislative intent, its detailed provisions, and the practical and legal implications for stakeholders. It also presents a thorough comparative analysis with Section 197, tracing the evolution of the law, highlighting similarities, differences, and the policy rationale underlying the changes proposed in the 2025 Bill. Objective and Purpose The primary objective of Clause 395(1) is to provide relief t....
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....s by payers to non-residents, and the issuance of TDS/TCS certificates. For the purposes of this commentary, the focus is primarily on sub-clause (1), with references to other sub-clauses where relevant for context and comparison. 2. Breakdown of Clause 395(1) * Eligibility and Application (395(1)(a)): The payee (recipient of income) may apply to the Assessing Officer for deduction of tax at a lower rate. The provision is "subject to the rules made under this Act," indicating that detailed procedures, forms, and conditions will be prescribed in subordinate legislation. This ensures administrative flexibility and responsiveness to changing circumstances. * Assessment and Issuance of Certificate (395(1)(b)): The Assessing Officer, up....
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.... of AO: The provision does not elaborate on the specific criteria or documentation required for the AO's satisfaction. While this is likely to be detailed in the rules, past jurisprudence u/s 197 has established that the AO must consider past assessments, estimated income, and tax liability, among other factors. * Validity Period: The clause refers to deduction "till its validity," but does not prescribe the duration; this again is left to rules. In practice, certificates are typically valid for a financial year, but this could be subject to change. * Scope of Application: The provision is general and not limited to specific sections, unlike Section 197, which lists the sections to which it applies. This could be interpreted as a br....
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....pective, the provision seeks to prevent leakage by ensuring that lower deduction is permitted only after due verification. At the same time, it reduces administrative burdens associated with processing large volumes of refund claims arising from excess TDS. Comparative Analysis with Section 197 of Income-tax Act, 1961 1. Structure and Language Section 197 of the 1961 Act provides for certificates for deduction at lower rates or for no deduction, subject to rules. It specifically lists the sections to which it applies (sections 192, 193, 194, 194A, etc.), and empowers the AO to issue such certificates upon satisfaction that the recipient's total income justifies a lower or nil deduction. The provision is supplemented by rules notified....
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....mplementation, was drafted in an era of manual processing and has been updated piecemeal. * Inclusion of TCS: * Clause 395(3) expressly provides for lower collection certificates for TCS, whereas Section 197 is silent on TCS (which is addressed separately in Section 206C(9) of the 1961 Act). * This reflects an effort to harmonize and consolidate procedures for both TDS and TCS under one umbrella. * Non-Resident Payments: * Clause 395(2) provides for applications by payers to non-residents for determination of the taxable portion, which is analogous to the existing Section 195(2) and (3), but is integrated into the same procedural framework. * Certificate Issuance and Cancellation: * Clause 395(5) explicitly provides for cancel....
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..... Overly restrictive or bureaucratic rules could undermine the relief intended by the provision. * Appeal and Review: There is no express provision for appeal against denial or cancellation of certificate. While general appeal provisions may apply, an explicit right could enhance taxpayer confidence. * Alignment with International Practice: The consolidation of TDS and TCS procedures, and the integration of non-resident payment rules, brings Indian law closer to international best practices, but further harmonization and clarity may be needed. Conclusion Clause 395(1) of the Income Tax Bill, 2025 represents a significant step towards modernizing and rationalizing the process for obtaining certificates for lower deduction of tax at sou....