Clause 391 Direct payment.

Income Tax Bill, 2025

Introduction

Clause 391 of the Income Tax Bill, 2025, represents a significant statutory provision governing the direct payment of income tax by an assessee in circumstances where tax deduction at source (TDS) is either not mandated or not effectuated. The provision is a successor and re-codification of the principles enshrined in Section 191 of the Income-tax Act, 1961, which has, for decades, formed the backbone of the direct payment mechanism under Indian tax jurisprudence. This commentary provides an in-depth analysis of Clause 391, its objectives, operative mechanics, and implications, and juxtaposes its provisions with those of the extant Section 191, highlighting both continuity and innovation in legislative approach. The analysis also delves into the practical and compliance implications for stakeholders, and explores interpretative nuances that may arise in application.

Objective and Purpose

The primary objective of Clause 391, much like Section 191 of the 1961 Act, is to ensure the collection of income tax in situations where the mechanism of TDS does not operate, is not applicable, or has failed. The legislative intent is twofold:

• First, to prevent revenue leakage by placing the ultimate responsibility for tax payment on the recipient of income (the assessee) in the absence of TDS, and
• Second, to provide a clear legal framework for the timing and manner of such direct payment, including special provisions for specified securities or sweat equity shares allotted by eligible start-ups.

The provision is also designed to reinforce the accountability of persons responsible for deducting tax at source, by deeming them assessees-in-default in cases of non-deduction or non-payment, subject to the failure of the recipient to discharge the tax liability directly.

Detailed Analysis of Clause 391 of the Income Tax Bill, 2025

Direct Payment by Assessee

The sub-clause (1) codifies the principle that the liability to pay income tax is not extinguished merely because the mechanism of TDS is not triggered. Two scenarios are envisaged:

1. No TDS Provision: Where the nature of income is such that the law does not require TDS at the time of payment (for example, certain exempt incomes, or incomes outside the TDS net), the assessee must pay tax directly.
2. Failure to Deduct: Where TDS is required but has not been effected (either due to oversight, error, or intentional omission), the onus shifts to the assessee to pay the tax directly.

This ensures that the tax liability is not contingent upon the actions or inactions of the payer, and that the revenue's right to collect tax remains intact.

Special Provision for Specified Securities or Sweat Equity Shares

The sub-clause (2) addresses a contemporary issue arising from the grant of specified securities or sweat equity shares by eligible start-ups to employees. Recognizing the unique challenges in taxing such perquisites-often illiquid and difficult to value at the time of grant-the provision mandates a deferred timeline for direct tax payment, as prescribed in section 289(3). The cross-reference to section 17(1)(d) and section 140 ensures that the provision is tightly scoped to start-up-related employee stock benefits.

The rationale is to balance the need for tax collection with the practical difficulties faced by employees in liquidating such securities to meet tax obligations immediately upon grant.

Consequences of Non-deduction/Non-payment by Deductor or Employer

The sub-clause (3) creates a cascading liability mechanism. If the person responsible for TDS (including principal officers and employers) fails in their duty, and the assessee also defaults in direct payment, the former is deemed an assessee in default for the purposes of section 398(1) (analogous to section 201(1) of the 1961 Act). This provision:

• Ensures accountability of the deductor/employer, and
• Protects the revenue by providing a fallback liability on the payer in addition to the payee.

The deeming fiction is "apart from any other consequences", preserving the applicability of penalties, interest, and prosecution under other provisions.

Practical Implications

• For Assessees: There is an unequivocal obligation to pay tax directly on incomes not subject to TDS, or where TDS has not been deducted. This requires vigilance in tax computation and timely payment to avoid interest and penalty consequences.
• For Employers and Deductors: The risk of being treated as an assessee in default is contingent on the failure of both the deductor and the assessee. However, if the assessee discharges the tax liability, the deductor is shielded from default status, though interest for delayed deduction may still apply.
• For Start-up Employees: The deferred tax payment mechanism for sweat equity or ESOPs provides relief, but also necessitates tracking of statutory timelines (as per section 289(3)), which may be linked to sale of shares, cessation of employment, or expiry of specified periods.
• For the Revenue: The provision maintains the integrity of tax collection, ensuring that procedural lapses in TDS do not result in permanent revenue loss.

Comparative Analysis with Section 191 of the Income-tax Act, 1961

Textual and Structural Parallels

Both Clause 391 and Section 191 share a common legislative ancestry and are structurally similar in their core components:

1. Direct Payment Principle: Both provisions declare that the assessee is liable to pay tax directly where TDS is not applicable or not deducted.
2. Special Provision for Specified Securities/Sweat Equity: Section 191(2) (inserted by the Finance Act, 2020) provides a specific timeline for direct payment of tax on ESOPs granted by eligible start-ups, mirroring Clause 391(2), though with cross-references to different sections (section 80-IAC in the 1961 Act; section 140 in the 2025 Bill).
3. Deeming Default: Both provisions create a deeming fiction for the person responsible for deduction (including principal officers and employers) to be treated as an assessee in default if both the deductor and the assessee fail to pay the tax.

Key Differences and Innovations

• Legislative Drafting: Clause 391 is more streamlined, with clearer sub-clauses, and cross-references to other sections of the new Bill, reflecting an effort to modernize and clarify the law.
• Reference to Start-up Provisions: Section 191(2) refers to "eligible start-ups" u/s 80-IAC of the 1961 Act, whereas Clause 391(2) references section 140 of the 2025 Bill. The substantive eligibility criteria may differ based on the definitions in the respective statutes.
• Timeline for Payment: Section 191(2) specifies the tax must be paid within 14 days of the earliest of three events: expiry of 48 months from the end of the relevant assessment year, sale of the security, or cessation of employment. Clause 391(2) defers to section 289(3) for the timeline, suggesting a possible change or rationalization of the payment schedule in the new regime.
• Default Provisions: Section 191's explanation links the default to section 201(1) of the 1961 Act, while Clause 391 refers to section 398(1) of the new Bill. The substantive consequences may be similar, but the cross-referencing reflects the new legislative architecture.
• Coverage of Principal Officers: Both provisions include principal officers of companies, but Clause 391's language is slightly broader, encompassing persons "including the principal officer of the company."
• Clarity and Accessibility: Clause 391, being a product of legislative revision, is arguably more accessible, with explicit sub-clauses and improved readability.

Potential Ambiguities and Issues in Interpretation

• Scope of "Direct Payment": Both provisions are silent on the procedural aspects of how and when the assessee is to be notified or reminded of their direct payment obligation, especially in cases of unintentional non-deduction.
• Overlap with Advance Tax Provisions: The interaction between direct payment obligations and advance tax requirements could lead to interpretative challenges, particularly in timing and interest computation.
• Definition of "Eligible Start-up": Changes in the definition or eligibility conditions u/s 140 (2025 Bill) as compared to section 80-IAC (1961 Act) may affect the scope of relief available to start-up employees.
• Deeming Default and Double Jeopardy: The provision that both the deductor and assessee may be liable for the same tax, subject to appropriate credit being given, could give rise to disputes over recovery and adjustment of tax paid.
• Cross-referencing: The reliance on other sections (such as section 289(3) and section 398(1)) may require careful navigation to ensure compliance, especially for non-expert assessees.

Implications for Compliance and Administration

• Increased Compliance Burden: Assessees must be vigilant in identifying incomes not subject to TDS, and ensure timely direct payment, failing which interest and penalties may be levied.
• Employer and Deductor Risk Management: Employers and deductors must maintain robust systems to ensure TDS compliance, but may take comfort in the provision that liability as assessee-in-default arises only if the assessee also defaults.
• Start-up Sector: The special provisions for ESOPs and sweat equity shares are a recognition of the unique nature of start-up remuneration, but require careful tracking of vesting, sale, and employment cessation events to trigger tax payment within prescribed timelines.
• Revenue Assurance: The dual liability mechanism ensures that the revenue is protected, regardless of which party defaults, and provides for interest and penalty recovery from the appropriate person.

Comparative Table: Clause 391 vs. Section 191

Conclusion

Clause 391 of the Income Tax Bill, 2025, represents a thoughtful continuation and modernization of the principles embodied in Section 191 of the Income-tax Act, 1961. The provision balances the need for effective tax collection with practical realities faced by assessees, particularly in the context of start-up remuneration. While the core principle-that the ultimate liability to pay tax rests with the recipient of income-remains unchanged, the new provision offers improved clarity, accessibility, and administrative robustness.

The comparative analysis reveals a strong continuity of approach, with certain innovations aimed at addressing contemporary challenges, especially in the start-up sector. The cascading liability mechanism, special timelines for ESOP taxation, and streamlined drafting reflect a maturing tax legislative framework. Nevertheless, practical challenges in compliance, potential for interpretative disputes, and the need for clear administrative guidance persist, warranting ongoing attention from both the legislature and the revenue authorities.

Full Text:

Clause 391 Direct payment.