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S. Ramachandran

The penalty for delayed payments of TDS is rather harsh, says S. Ramachandran

THROUGH an amendment to Section 40(a) of the Income-Tax Act, 1961, small and medium business establishments that delay in remitting tax deducted at source invite punitive measures without even getting an opportunity to defend themselves.

It is common knowledge that the costs of complying with the various laws — excise, customs, sales tax, service tax, income-tax, PF, ESI, and so on — is very high.

A small- or medium-size organisation cannot afford to engage persons qualified in each of these fields. Even if qualified hands are appointed to take care of these matters, they have to be educated and trained on a continuous basis, as amendments to these Acts take place ever so many times.

In practice, the import of most of the provisions are known only after notices are received from the departments concerned for non-compliance. And much money is spent setting things right.

Tax deduction at source is not a tax on the assessee. The business community is obliged to help the I-T department help in the latter's tax collection efforts at its own cost and for no benefit.

Businesses have to deduct tax at source from the payments made towards various expenditures incurred — such as salary, rent, interest, commission, professional fees, and contract payments — and remit the same to the account of the government.

If they err, interest and penalty would be levied. The assessees are generally appraised by their auditors about the shortfall/non-collection of TDS. They, therefore, pay the required tax along with interest before filing their I-T returns.

But now a harsh reality awaits them. The amended Section 40(a)(ia) states that the entire expenditure would be disallowed if the TDS on the same were not deducted and paid within the due date specified under Section 200(1). The following example would throw more light on the issue:

Assessee: A small partnership firm engaged in job work and subcontracting.

Labour charges receipts (for financial year 2004-05) — Rs 1,00,00,000

Less: Subcontract payments — Rs 80,00,000

Administrative expenses (no TDS assumed) — Rs 10,00,000

Total — Rs 90,00,000

Net taxable profit — Rs 10,00,000

Income-tax payable thereon (at 35 per cent + 2.5 per cent SC + 2 per cent cess) — Rs 3,66,000

The assessee should have deducted and remitted the TDS on the subcontract payment at 1.02 per cent, Rs 81,600, on or before May 31, 2005, to claim the entire amount of expenditure.

Assume that there is a short delay and the assessee remitted the TDS in June 2005, the entire expenditure will be disallowed and his taxable income will be Rs 90 lakh as against the Rs 10 lakh said above.

The tax on Rs 90 lakh would be Rs 32.94 lakh before any interest under Sections 234B and 234C and, in all probability, the tax liability would cross Rs 35 lakh. Thus, for a delay in remittance of Rs 81,600, the penalty paid is Rs 31.34 lakh.

The result: The assessee pays Rs 35 lakh as income-tax, whereas he has earned only Rs 10 lakh. Where will he go for the money? What will happen to his working capital — the oxygen of the business?

If the assessee pays this sum, his business could collapse. And if he has borrowed money from banks, he is likely to default.

A similar disallowance was made vide Section 43B for delayed payment of statutory dues. After causing considerable hardship for many years, the section was amended to allow expenditure if the statutory dues were paid before the due date for filing the income-tax returns.

The small and medium size businesses should seek modifications to Section 40(a)(ia).

The CBDT must issue a circular soon, as the due date for filing the returns is October 31, and adopt a lenient view on the application of this section for assessment year 2005-06, till the section itself is amended.

(The author is a Coimbatore-based chartered accountant.)

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