Introduction
Income tax provisions of several countries provide for withholding of tax on certain specified payments. Similarly, Indian income tax law also provides for deduction of tax at source (TDS) / collection of tax source (TCS). Person responsible for making the payment is entrusted with the responsibility of deducting the tax at specified rates either at the time of credit in the books or payment to the recipient. Such TDS/TCS is available as tax credit to recipient for adjustment against annual tax payable.
The rates of TDS vary from 1% to 10% and even 20% in case of non-resident recipient in certain cases. Such high rate of TDS may prove burdensome for certain taxpayers who may have much lower annual tax liability than that being withheld as TDS. Therefore, with an objective to mitigate this undue hardship on such taxpayers, section 197 of income tax law provides for an option to obtain a “nil/lower deduction certificate” confirming either a lower rate of TDS compared to the rate specified under the law or a NIL rate of TDS, depending on facts and circumstances of each case based on the application made.
Time limit to obtain a “nil/lower deduction certificate”:
There is no deadline prescribed to make an application under Section 197. However, payer is liable to deduct TDS at rates given in law, unless recipient presents a nil/lower deduction certificate. In such case payer will deduct TDS at rate mentioned in such certificate. Further each certificate is addressed to a specific person making payment, hence identification of payer is essential condition to obtain such certificate.
Therefore, it is advisable to make an application at the beginning of financial year in case of regular income throughout the financial year and as and when the need arises in case of one-off incomes.
How to obtain?
An application for nil/lower deduction of TDS is to be made by the recipient of income to the Assessing Officer(TDS). The online application in Form 13 can be made through TRACES portal. The application can be submitted using either digital signature or through e-verification code (Net Banking). The application is to be accompanied with following documents/information:
1. Details of deductors (i.e. payers) along with their TAN number and amount of income expected to be received from them.
2. Requested rate of TDS which essentially must be lower than rate provided in law.
3. Computation of estimated total income of financial year for which application is being made
4. Computation of estimated total income of the four preceding financial years for which return of income has not been filed.
5. Assessment Orders if assessed, for the last four assessment years.
6. Return of income for any of the four previous year has been filed in paper form.
7. Details of income claimed to be exempt and not included in the total income.
Application once submitted cannot be modified, however, applicant can withdrawal the same. Status of Application can be tracked online through the generated Request Number.
Validity of the certificate
The certificate is issued for a particular financial year and stands valid from the date of issue and throughout the financial year unless cancelled by the assessing officer (TDS) before the expiry.
This tool, if effectively used, can greatly facilitate availability of 6-8% of revenue as cash, especially, where rate of TDS is 10%. This is true in case of service providers such as BPO services, staffing services, software developers, digital marketing firms, etc.
For professional guidance, please contact us at +91 9757135306 or at hitarth.sheth@bhaskara.in.
Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.