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Delayed Payment Of TDS? You May Get Hit With A Prosecution Notice

If the delay in TDS payment is long, mere payment of interest would not absolve the deductor.

A pair of standard issue handcuffs. (Photographer: Jerome Favre/Bloomberg)
A pair of standard issue handcuffs. (Photographer: Jerome Favre/Bloomberg)

While India has acquired the tag of being an aggressive tax jurisdiction, history reveals that putting someone behind the bars for tax offences has never been the norm in India. Things are changing however, with the tax administration aggressively calling out tax offenders and issuing prosecution notices.

Prosecution notices for delayed payment of tax deducted at source have gained traction over the past few years. Recently, well-known filmmaker Firoz Nadiadwala was convicted to a sentence of three months imprisonment for a year-long delay in deposit of TDS of Rs 8.56 lakh. This makes one sit down and ponder as to how something as simple as complying with the TDS provisions can lead to a jail term.

So why is it that delays in the deposit of TDS result in prosecution proceedings being launched? The answer can be explained by way of an example. Let’s suppose you receive a salary of Rs 90,000 per month after deduction of tax of Rs 10,000. The amount of Rs 1,20,000 deducted over the course of the year represents the tax which the deductor has collected from you on behalf of the government. As per law, the deductor is duty bound to deposit the same with the government within the prescribed timeframe. This is logical, as at the end of the year, you will file your tax return and claim credit of the TDS. If the TDS is not paid by the deductor you do not get a credit and the tax authorities claim the Rs 1,20,000 from you plus applicable interest. As a taxpayer, you will have to run from pillar to post to get this corrected.

Tax deducted on behalf of the government is not supposed to be used by the deductor as a short-term funding facility. Delayed deposit of TDS attracts interest at a rate of 1.50 percent per month.  

TDS returns are filed electronically by the deductors and contain all the information that the authorities need to determine whether there were any delays in the payment of TDS. Mining the data uploaded by the deductors, authorities issue the prosecution notices. In the case of companies, notices are usually issued to all the directors of the defaulting company.

One might argue that prosecution should not be launched where payments are made by the deductor suo-moto, along with the applicable interest for the delay. This is a plausible defense if the delay is short and unintentional.

However, if the delay is long, mere payment of interest would not absolve the deductor.

The reason again is that government funds cannot be used by deductors for their own purposes. If prosecution proceedings are to be dropped, the deductor has to provide evidence that there existed a valid and justifiable reason for the delay.

One of the principle reasons why prosecution proceedings do not reach a conviction stage is that legal procedures permit the deductor to apply for compounding of the proceedings. Simply put, this means that the deductor accepts that he or she has committed an offence in delaying the payment of TDS and agrees to pay a monetary fine to the government in the form of a 'compounding charge'. These compounding charges are levied at a rate of 3 percent per month for a first-time offence and 5 percent per month for a second-time offence.

Compounding, however, cannot be claimed as a right by the deductor.

Compounding is at the discretion of the authorities who need to be convinced that the applicant has approached them in good faith.

In case the authorities are not satisfied with the compounding application, the matter is then taken to the courts and the authorities press for a conviction. Courts then take up the matter for adjudication and, where considered justified, can punish the offender under Section 276B of the Income Tax Act, with rigorous imprisonment for not less than three months which may extend to seven years with a fine.

There has been a substantial increase in the prosecution notices that have been issued to deductors over the past two-three years. As per a recent CBDT press release, prosecutions have been launched against four big business houses where more than Rs 50 crore of tax was collected from taxpayers but not deposited in time with the government.

The increase in notices serves as a deterrent and has increased compliance on the part of the deductors. On the other hand, the government has also benefited from the collection of compounding charges, which have substantially helped in filling the government’s coffers.

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While a step in the right direction, there have been cases where the authorities have gone too far. Prosecution notices have been issued in a mechanical manner on small defaults of two-three months for genuine reasons or where defaults are of a few thousand rupees. Some officers have pressed deductors to apply for compounding and pay charges even though the cases are unlikely to hold up before courts. This collateral damage is unfortunate.

Going forward, deductors need to be extremely careful that taxes deducted by them are paid within prescribed timelines. While genuine cases should get a break, what is inescapable is that if there is undue delay in deposit of TDS, the taxman may come calling.

Rahul Jain is Partner, Nangia Advisors (Andersen Global).

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.