TaxTMI 
TaxTMI 
Evolution, Enforcement, and Relief Mechanisms in TDS/TCS Defaults : Clause 398 of Income Tax Bill, 2025 Vs. Section 201 of the Income-tax Act, 1961 - Changing Landscape of TDS/TCS Compliance and Liabi
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....rules such as Rule 31ACB of the Income-tax Rules, 1962. Together, these provisions establish the legal framework for tax deduction and collection at source (TDS/TCS), the liabilities arising from non-compliance, and the procedural safeguards for deductors and collectors. The evolution from Section 201 to Clause 398 reflects both continuity and reform, aiming to address administrative challenges, plug loopholes, and provide clarity for taxpayers and tax authorities alike. This commentary provides an in-depth analysis of Clause 398, its objectives, operative mechanisms, practical implications, and a comparative evaluation with the earlier regime u/s 201 and Rule 31ACB. It further examines interpretational nuances, compliance requirements, an....
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....yers for TDS on salaries). The provision applies where such a person: * Does not deduct or pay; * Does not collect or pay; or * After deducting or collecting, fails to pay the whole or any part of the tax as required. Such a person is deemed to be an "assessee in default" in respect of the unpaid tax, without prejudice to any other consequences under the Act. This deeming provision triggers the machinery for recovery, interest, and penalty, and is pivotal to the enforcement of TDS/TCS obligations. 2. Relief from Default Status Clause 398(2) introduces a substantive relief mechanism, echoing the first proviso to Section 201(1) of the 1961 Act. It provides that a person (including principal officers and specified collectors) wi....
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....an order under sub-section (1), the interest is payable as per such order, maintaining procedural fairness. 4. Charge on Assets Where tax is deducted/collected but not paid, the amount of tax plus interest becomes a charge on all the assets of the defaulting person. This statutory charge strengthens the hands of the tax authorities in securing recovery and acts as a deterrent against misappropriation or diversion of deducted/collected funds. 5. Time Limits for Passing Default Orders Clause 398(5) prescribes that no order deeming a person as assessee in default shall be made: * After six years from the end of the tax year in which tax was deductible/collectible; or * After two years from the end of the tax year in which the cor....
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....onitoring. For Payees, Buyers, Licensees, Lessees * They must ensure proper disclosure of income and payment of taxes to facilitate relief for deductors/collectors. * Non-compliance or misreporting may expose both the payer and payee to adverse consequences. For Tax Authorities * The provision provides a clear statutory basis for recovery and enforcement, with defined interest and penalty mechanisms. * Discretion is preserved in penalty matters, subject to satisfaction regarding reasons for default. * Time limits require prompt action and efficient administration. Comparative Analysis with Section 201 of the Income-tax Act, 1961 1. Scope and Structure Both Clause 398 and Section 201 apply to persons required to deduct or coll....
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...., such as specifying that interest is to be paid before furnishing the statement u/s 397(3)(b). 5. Statutory Charge on Assets Both provisions create a statutory charge on the assets of the defaulting person for unpaid tax and interest, ensuring the revenue's interests are protected. 6. Time Limits for Proceedings Section 201(3) and Clause 398(5) both lay down time limits for passing orders deeming a person as assessee in default: * Six years from the end of the financial year in which payment is made or credit is given (tax year in Clause 398). * Two years from the end of the year in which the correction statement is delivered, whichever is later. Clause 398 refers to section 393(3)(f) (corresponding to section 200(3) in the 19....
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....ng with principles of natural justice. Ambiguities and Issues in Interpretation While Clause 398 substantially carries forward the established regime, certain interpretational issues may arise: * Definition of "good and sufficient reasons": The standard for waiver of penalty is inherently subjective, and may lead to inconsistent application unless clarified by guidelines or judicial interpretation. * Scope of "correction statement": The linkage between the time limit and delivery of correction statements u/s 393(3)(f) may require further clarification, especially in complex cases involving multiple corrections. * Procedural Delays: The process for obtaining and furnishing accountant's certificates (Form 26A) can be cumbersome, a....