Clause 398 Consequences of failure to deduct or pay or, collect or pay.

Income Tax Bill, 2025

Introduction

Clause 398 of the Income Tax Bill, 2025, represents a critical statutory provision governing the consequences of failure to deduct, collect, or pay tax at source. This clause is the legislative successor to the existing Section 201 of the Income-tax Act, 1961, and works in tandem with procedural 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, and potential areas of ambiguity or reform.

Objective and Purpose

The legislative intent behind Clause 398 is to ensure the robust enforcement of TDS and TCS provisions, which are foundational to India's system of tax collection. By imposing liability for failures to deduct, collect, or remit taxes, the law seeks to:

• Secure timely and efficient collection of revenue at the source of income.
• Hold persons responsible for non-compliance as "assessees in default," thereby enabling the tax authorities to initiate recovery and penal proceedings.
• Provide relief to deductors/collectors in genuine cases where the recipient has fulfilled their tax obligations, thus avoiding double taxation and undue hardship.
• Prescribe interest and penalty provisions to deter non-compliance and compensate the exchequer for delayed remittance.
• Set clear time limits for the initiation of proceedings, promoting certainty and finality in tax administration.

The historical context is rooted in persistent issues of tax leakage and delayed remittance under the TDS regime. Judicial pronouncements and administrative experience u/s 201 have shaped the current approach, balancing enforcement with fairness.

Detailed Analysis of Clause 398 of the Income Tax Bill, 2025

1. Scope and Applicability 

Clause 398(1) covers any person (including the principal officer of a company) who is required to deduct or collect tax under the Act, or is referred to in section 392(2)(a) (typically employers 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) will not be deemed an assessee in default if the payee/buyer/licensee/lessee:

• Has furnished their return of income u/s 263 (corresponding to section 139 of the 1961 Act);
• Has taken into account the relevant amount for computing income in that return;
• Has paid the tax due on the income declared in the return;
• And the deductor/collector furnishes a certificate from an accountant in the prescribed form (analogous to Form 26A u/r 31ACB).

This provision mitigates the hardship of double recovery where the tax has already reached the exchequer, and aligns with the principle that the revenue's interest is protected if the ultimate tax liability is discharged.

3. Interest Liability 

Clause 398(3) prescribes interest for failure to deduct/collect or for delayed payment:

• 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 Central Government.

The interest must be paid before furnishing the prescribed statement (section 397(3)(b)). Where the deductor/collector is not deemed an assessee in default due to sub-section (2), interest at 1% is payable only up to the date of the payee's return filing, not until actual deduction. This ensures that the exchequer is compensated for the period it was deprived of the tax, but not penalized beyond necessity.

If the Assessing Officer passes 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 correction statement is delivered u/s 393(3)(f);
• Whichever is later.

Sub-section (6) applies the provisions of sections 286(1) and 286(3) to the time limits, ensuring consistency with the general scheme of limitation under the Act. These limits provide certainty and protect taxpayers from indefinite exposure to proceedings.

6. Penalty Provision

No penalty u/s 412 (corresponding to section 221 of the 1961 Act) shall be charged unless the Assessing Officer is satisfied that the failure to deduct/pay was without good and sufficient reasons. This introduces an element of discretion and fairness, ensuring that penalties are not imposed mechanically but only where culpability is established.

Practical Implications

For Deductors and Collectors

• They must ensure timely deduction/collection and remittance of tax, failing which they are exposed to being deemed "assessees in default" and liable to recovery, interest, and penalty.
• In cases where the payee has discharged their tax liability, deductors can avoid default status by obtaining and furnishing the prescribed accountant's certificate (Form 26A or its successor).
• Interest liability is automatic and must be calculated and paid proactively, especially before furnishing TDS/TCS statements.
• Assets of the defaulting person are at risk of statutory charge, impacting creditworthiness and business operations.
• Strict time limits for proceedings bring finality, but require careful record-keeping and compliance monitoring.

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 collect tax at source, including principal officers of companies and employers. Clause 398, however, explicitly incorporates collectors (TCS) and references to section 392(2)(a), expanding the clarity of coverage.

2. Deeming Provision: Assessee in Default

The core concept-deeming a defaulting deductor/collector as an "assessee in default"-is retained in both provisions. Clause 398 mirrors the language and structure of Section 201(1), with minor refinements in phraseology and cross-references.

3. Relief Where Payee Has Paid Tax

The first proviso to Section 201(1) and Clause 398(2) are substantially similar. Both provide relief where the payee has:

• Filed a return (section 139/263);
• Included the sum in their computation;
• Paid the tax due;
• And a certificate from an accountant is furnished.

The requirement for an accountant's certificate is administered through Rule 31ACB (Form 26A), which is referenced in both regimes. Clause 398 expands this relief to collectors under specified TCS provisions, clarifying its application beyond TDS.

4. Interest Provisions

The interest regime u/s 201(1A) and Clause 398(3) is functionally identical:

• 1% per month from date tax was deductible to date of deduction.
• 1.5% per month from date of deduction to date of payment.
• Where relief is available under the first proviso, interest at 1% is payable only up to the payee's return filing date.

Clause 398 provides more explicit cross-references and procedural clarity, 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 1961 Act), reflecting updated cross-referencing in the new Bill.

7. Penalty Provisions

The second proviso to Section 201(1) and Clause 398(7) both require the Assessing Officer to be satisfied that the default was "without good and sufficient reasons" before imposing penalty, thus ensuring due process.

8. Procedural Rules: Rule 31ACB and Form 26A

Rule 31ACB operationalizes the requirement for an accountant's certificate under the first proviso to Section 201(1) (and by extension, Clause 398(2)). The Rule mandates the use of Form 26A, to be furnished electronically as specified by the Director General of Income-tax (Systems). This procedural safeguard is critical for the deductor/collector to obtain relief from default status, and its correct implementation is essential for the integrity of the regime.

9. Notable Differences and Enhancements

• Coverage: Clause 398 is more explicit in including TCS defaults and cross-referencing relevant sections for both TDS and TCS.
• Clarity of Relief: Clause 398(2) spells out the relief mechanism for collectors in addition to deductors, reflecting a harmonized approach.
• Reference Updates: The Bill updates cross-references to the new section numbers and terminology, providing greater legislative coherence.
• Procedural Streamlining: Requirements for interest payment and furnishing of statements are more precisely articulated.
• Penalty Safeguard: The requirement of Assessing Officer's satisfaction is reinforced, aligning 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, and any delay can prejudice the deductor/collector's relief.
• Overlap between TDS and TCS: Clause 398's dual coverage may create interpretational challenges in cases where both TDS and TCS obligations potentially apply.
• Interest Calculation: The computation of interest for part months and the precise period to be considered may generate disputes, particularly in cross-border or multi-stage transactions.

Potential for Reform and Judicial Clarification

The following areas may warrant further legislative or judicial attention:

• Issuance of detailed administrative guidelines on "good and sufficient reasons" for penalty waiver.
• Simplification and digitization of the Form 26A process, with defined timelines and accountability.
• Clarification on the interplay of TDS and TCS in overlapping transactions.
• Greater harmonization with international best practices, particularly for cross-border payments and global mobility of taxpayers.
• Periodic review of interest rates to ensure proportionality and fairness.

Conclusion

Clause 398 of the Income Tax Bill, 2025, consolidates and refines the regime for consequences of failure to deduct, collect, or pay tax at source. Inheriting the core structure of Section 201 and Rule 31ACB, it introduces enhanced clarity, procedural safeguards, and harmonization between TDS and TCS obligations. While the substantive legal framework remains stable, the refinements in cross-referencing, relief mechanisms, and time limits reflect a maturing tax administration responsive to both revenue imperatives and taxpayer rights. Ongoing administrative guidance and judicial interpretation will be vital in resolving residual ambiguities and ensuring effective, fair enforcement.

Full Text:

Clause 398 Consequences of failure to deduct or pay or, collect or pay.