TaxTMI 
TaxTMI 
Evolution and Implications of TDS/TCS Default Provisions : Clause 398 of the Income Tax Bill, 2025 Vs. 206C(6A), (7), (7A), and (8) of the Income-tax Act, 1961 of the Income-tax Act, 1961
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....rative framework u/s 206C and Rule 37J, and explores the implications, policy rationale, and practical considerations for stakeholders. The analysis also highlights areas of continuity, reform, and potential ambiguity, thereby providing a comprehensive understanding of the legislative evolution and its practical impact. Objective and Purpose The legislative intent behind Clause 398 is to establish a clear, robust, and equitable framework for addressing failures in tax deduction or collection at source. The provision aims to: * Ensure prompt and accurate collection of tax revenue at the source of income or transaction. * Prescribe consequences (including being deemed as 'assessee in default', interest liability, and asset charge) for non-compliance, thereby acting as a deterrent. * Provide relief in genuine cases where the deductee/collectee has fulfilled their tax obligations, thus preventing double taxation and undue hardship. * Streamline procedural aspects, including time limits for passing orders and the interplay with penalty provisions. Historically, the regime u/s 206C and related TDS/TCS provisions has evolved to balance revenue interests with taxpayer fa....
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....btaining timely and accurate certificates, especially in large-scale or complex transactions involving multiple deductees/collectees. * The provision does not expressly clarify the consequences if the certificate is delayed or found defective. Sub-section (3): Interest Liability Clause 398(3) imposes a two-tier interest liability: * 1% per month (or part thereof) from the date tax was deductible/collectible to the date it is actually deducted/collected. * 1.5% per month (or part thereof) from the date of deduction/collection to the date of actual payment to the government. Interest must be paid before furnishing the relevant statement u/s 397(3)(b). If the deductor/collector is not deemed in default under sub-section (2), interest is payable only up to the date of the payee's return filing. Interpretation and Scope: * The bifurcation of interest rates reflects the gravity of default-higher interest for failure to pay after deduction/collection, as this constitutes holding government funds. * The provision for interest up to the date of payee's return (in case of relief) is consistent with the principle that the government is deprived of timely revenue. * The....
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....d mechanically or in cases of bona fide error or hardship. * It aligns with judicial pronouncements emphasizing the need for a reasoned, discretionary approach to penalty imposition. Practical Implications Clause 398, if enacted, will have far-reaching implications for businesses, employers, and other persons subject to TDS/TCS obligations: * Compliance Complexity: The detailed conditions for relief, interest computation, and asset charge necessitate robust internal controls, timely reconciliation, and documentation. * Risk Management: The statutory charge and deeming fiction heighten the risk for non-compliance, especially for companies and their officers. * Procedural Safeguards: The limitation period and penalty safeguard provide much-needed certainty and protection against arbitrary or delayed enforcement. * Coordination with Deductees/Collectees: The exception for payee compliance requires effective communication and coordination, particularly in large organizations or transactions with numerous counterparties. Comparative Analysis with Section 206C of the Income-tax Act, 1961 Section 206C deals with the collection of tax at source on specified transactions (e.g.....
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....s. 6. Procedural and Compliance Aspects * Section 206C(6A) & Rule 37J: Relief from default is contingent upon the furnishing of an accountant's certificate in the prescribed form (Form 27BA), as governed by Rule 37J. * Clause 398(2): Requires a certificate in the prescribed form, which is likely to be governed by corresponding rules under the new Act, but the substance is unchanged. Observation: The procedural safeguard for preventing double taxation and ensuring due process is retained. Rule 37J of the Income-tax Rules, 1962: Procedural Nexus Rule 37J operationalizes the relief provision by prescribing Form 27BA for the accountant's certificate, to be furnished electronically to the Director General of Income-tax (Systems). The Rule empowers the DGIT (Systems) to specify procedures, formats, and standards for submission and verification. Practical Considerations: * Rule 37J is critical for the effective functioning of the relief provision, as it ensures standardization, traceability, and auditability of compliance. * The electronic filing and verification procedures minimize administrative delays and errors, but also require technological readiness and awarene....