Increasing Compliances on Non Audited Individuals/HUFs with respect to deduction of TDS/Collection of TCS

Do you know that high value payments or receipts made by non-audited individuals or HUFs have now come under the compliance net of direct taxes through TDS or TCS applicability?

In case of individuals or HUFs, whose books of accounts for the previous financial year had not been subjected to audit under Income Tax Act, 1961 (‘Act’), there has been an increasing trend in the requirement to deduct tax or collect tax while indulging in high value transactions. These steps are a part of Government’s effort to widen and deepen the direct tax base and increase the financial accountability of such individuals and HUFs.

Deduction or collection of tax at source, payment to the government and issuance of Tax Deducted at Source (‘TDS’) / Tax Collected at Source (‘TCS’) certificates are a time consuming and complex processes. Prior to 2013, bearing a couple of them, the compliance of TDS and TCS in case of individuals or HUF was only restricted to the class of taxpayers whose books of accounts in the previous financial year were subjected to tax audit under the Act, that is individuals or HUFs carrying on a business or profession with total turnover or gross receipts exceeding ₹ 1 Crore or ₹ 50 lakhs respectively. Due to this threshold, majority of individuals or HUFs were kept out of the ambit of TDS or TCS compliance and thereby high value payments made by such persons was escaping the levy of TDS/TCS, leaving a loophole for possible tax evasion on incomes received by the recipients. However, at present, even if you do not carry on a business or profession, or carry on a small business or profession which is not liable to tax audit, there are quite a few obligations to deduct TDS / collect TCS.

List of such obligations on non-audit Individuals and HUFs which attract TDS/TCS compliance are as follows:

Type

Nature Of Transaction

% of Deduction/ Collection

Threshold Limit

Income Chargeable Under the Head

(For Deductee)

Section

Effective Since

TDS

Any person being an employer pays any income chargeable under the head ‘Salaries’ shall, at the time of payment or credit whichever is earlier, shall deduct TDS on that amount

As per

Slab Rates

Salary paid > basic exemption limit of ₹ 2.5 Lakhs per annum

Income From Salaries

192

1st April 1961

TDS

Any Individual or HUF, not having turnover exceeding ₹1 Crore / ₹50 Lakhs from business/profession, paying to a resident any income by way of rent has to deduct TDS

5.00%

The payment of rent exceeds ₹ 50,000 per month

Income From House Property

194IB

1st June 2017

TDS

Purchaser of immovable property has to deduct the TDS, either at the time of executing the deed or at the time of payment of advance through cash or by cheque or draft or by any other mode.

1.00%

If the consideration is ≥ ₹ 50 lakhs

Capital Gains

194IA

1st June 2013

TDS

A person who pays consideration (not in kind) to the landlord under a Joint Development Agreement (JDA) must deduct TDS under this section.

10.00%

All Transactions

Capital Gains

194IC

1st June 2017

TDS

Any Individual or HUF, not having turnover exceeding ₹1 Crore / ₹50 Lakhs from business / profession, paying to a resident any income for carrying out any contractual work or commission or brokerage or professional fees need to deduct TDS

5.00%

If the consideration is > ₹ 50 lakhs

Profits And Gains From Business And Profession

194M

1st Sept 2019

TDS

Any person responsible for paying any non-resident/ foreigners, income chargeable under any head (except Salary) shall deduct TDS under this section

Income Tax Rate applicable for NRI / foreigners

All Transactions

All Heads (Except Salary)

195

1st April 1961

TCS

Any person being an authorised dealer, who receives any amount for remittance out of India from any resident Indian shall collect additional amount as TCS over and above the amount of remittance

5.00%

If the consideration is ≥ ₹ 7 Lakhs

-

206C

(1G)(a)

1st October 2020

If the amount remitted out of India is for pursuing any education

0.50%

TCS

A seller of an overseas tour program or package, who receives any amount from a buyer, shall collect additional amount as TCS over and above the package

5.00%

All Transactions

-

206C

(1G)(b)

1^st October 2020

Note:

1. Rate of TDS shall be 20% for the above transactions where the Permanent Account Number (‘PAN’) of the deductee (receiver of income) is not available ( Section 206AA);
2. Rate of TCS shall be double the specified rate or 5% whichever is higher for the above transactions where PAN of the deductee (receiver of income) is not available ( Section 206CC);
3. For FY 2020-2021, all the above rates of TDS and TCS have been reduced by 25% on account of COVID-19 pandemic.
4. For Individuals and HUFs carrying on business having turnover exceeding ₹1 Crore but not exceeding ₹2 Crores, have an option to pay tax on presumptive profits. Such persons are exempted from getting their books of accounts audited under the Act. However, they are not exempted from TDS or TCS compliance and they would be required to comply with the above sections (except 194IB & 194M) as well as all the other sections of TDS and TCS.

Future scope of widening such applicability on other similar transaction:

An observation of the dates mentioned in the column ‘Effective Since’ of the above table will make us realise that these scope of compliance is going to be widened even further in near future. A calculated guess can be made that apart from reducing the threshold limits of the above transactions, following transactions that would be carried out by individuals or HUF, may also be subjected to TDS or TCS compliance in order to widened the tax base:-

1. Payments made by individuals and HUFs which form part of the Deductee’s income under the head of ‘Incomes from Other Sources’; or

2. Capital Gains arising from transfer of movable properties.

Authors:

Vishal Kothari, Partner, ID: vishal.kothari@masd.co.in

Ashish Raithatha, Associate Consultant, ID: ashish.raithatha@masd.co.in