What Is Tax Deducted At Source (TDS), Why Is It Important For Taxpayers?

According to the Income Tax (IT) regulation in India, for quick and efficient collection of taxes, a system of deduction of tax at the point of generation of income is called 'Tax Deducted at Source' or TDS. Under this system, tax is deducted at the origin of the taxpayer's income. Tax is deducted by the payer and is remitted to the government by the payer on behalf of the payee, the regulation informs.

The official IT portal informs that the provisions of deduction of tax at source will apply to several payment options like salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. In respect of payments to which the TDS provisions apply, the payer has to deduct tax at source on the payments made by him/her and he/she has to deposit the tax deducted to the credit of the government.

Additionally, as a payee you can approach the payer for non-deduction of tax at source, however, for that, you have to furnish a declaration in Form No. 15G/15H, as the case may be, to the payer to the effect that the tax on his estimated total income of the previous year after including the income on which tax is to be deducted will be nil, the government mentions.

A deductor would face the below-mentioned consequences if he/she fails to deduct TDS or after deducting the same fails to deposit it to the credit of the union government's account, according to the IT rule.

1. Disallowance of expenditure

According to section 40(a)(i) of the Income-tax Act, any amount, other than the salary, payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, will not be allowed to be deducted, if it is paid without deduction of tax at source, or if tax is deducted but is not deposited with the union government, till the due date of filing of return. But, if the tax is deducted or deposited in the subsequent year, the expenditure will be allowed as a deduction in that year.

According to section 40(a)(ia), any amount payable to a resident, which is subject to deduction of tax at source, will attract a 30% of disallowance, if it is paid without deduction of tax at source, or if the tax is deducted, but not deposited with the union government, till the due date of filing of return. But, where in respect of any such amount, tax is deducted or deposited in the subsequent year, the expenditure so disallowed will be allowed as 'deduction' in that particular year.
According to section 58(1A), as amended with effect from the assessment year 2018-19, the provisions of section 40(a)(ia) and 40(a)(iia) will also apply in computing the income chargeable under the head 'Income from other sources'.

2. Levy of interest

According to section 201 of the Income-tax Act, if you fail to deduct the tax at source or after the deducting the same fails to deposit it to the union government's account then he/she will be considered to be an assessee-in-default and liable to pay simple interest, as mentioned here:

(i) at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.

(ii) at 1.50% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.

3. Levy of Penalty

The penalty of an amount equal to tax not deducted or paid could be imposed under section 271C.