from tedious to tds | entrepreneur's guide to withholding taxes in india

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MAKING

TDS NOTSO TEDIOUS

An entrepreneur’s guide to withholding taxes in India for recurring business services transactions360 FINANCE

A performance enablement company

© Prequate 2014

What is the logic behind TDS?What is the basic applicability of TDS?UNDERSTANDING TDS

TDS is a tax compliance mechanism adopted by the Government at the source of transaction

TDS is a way of augmenting working capital of the government and checking tax evasion

Serves as a way of collecting tax as the income is earned as against at the end of the year

1 2 3

GOODS vs SERVICESTANGIBILITY vs INTANGIBILITY

TRADING vs RENDERING

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What does TDS mean to the provider of services?Why TDS is important for Business?HOW TDS WORKS

Scenario 1 – Where TDS was deducted

Revenue 100,000

Expenses (40,000) Expense is deductible for Tax Purposes

Profit 60,000

Tax @ 30% 18,000

Less: TDS 10,000

Income Tax to be paid 8,000 Payable with interest on INR 8,000

Scenario 2 – Where TDS was not deducted by Client

Profit as per Company 100,000

Expenses 40,000 Expense is deductible for Tax Purposes

Profit for Tax Calculation 60,000

Tax @ 30% 18,000

Less: TDS Nil

Income Tax to be paid 18,000 Payable with interest on INR 18,000

Illustration: Client Private Limited (Client) is hiring NOTDS Private Limited to provide IT Development Services. They charged a fee of INR 100,000.Assume the following for ease of understanding, about the above transaction: It falls within the ambit of TDS (Professional Fees)• Rate of TDS deduction applicable is 10% (Section 194J) | NOTDS Private Limited received INR 100,000 – INR 10,000 = INR 90,000• Hence NOTDS Pvt Ltd.'s profit during the year is Income (INR 100,000) less expenses (say INR 40,000) = INR 60,000Assuming, the NOTDS Private Limited's Income Tax rate is 30%.

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

When do I need to comply with TDS?DUE DATES FOR PAYMENT OF TDS

31st

of the month immediately following the month of transaction

March for transactions up to March 30

30thof April for transactions on March 31

7th

March

What are the transactions that attract TDS?TRANSACTIONS THAT ATTRACT TDS

Salaries Interest Payments to Contractors/

Sub Contractors

Commission or Brokerage

Professional and Technical

ServicesRent

Exception if PAN is not Provided

The rate of TDS will be higher of, the rate in force or 20%

Payment Covered Taxable Salary of the employee

Time of deduction At the time of payment only

Threshold Limit On any amount which does not exceed the basic exemption limit after deductions and/or exemptions

Rate At an average rate of tax, computed based on the slab rate for the relevant Assessment Year

All emoluments by what ever name called which are

taxable

This applies to all the remaining

transactions on which TDS is applicable

Section 192SALARIES

Payment Covered Amount Payable as Interest

Time of deduction At the time of payment or credit, whichever is earlier

Threshold Limit INR 10,000 per annum

Rate @10% of the amount exceeding the Threshold Limit as above

Applies only to Interest earned from Depositing money in banks or other institutions

Section 194 AINTEREST

Payment Covered Consideration payable towards Contracts and/or Sub Contracts


Threshold Limit In case of a Single Payment = INR 30,000In case of Multiple Payments = INR 75,000 (Considered per annum per Payee)

Rate 1% if the payee is Individual or HUF2% if the payee is any other category of Person

• Advertising• Goods Carriage• Catering• Job Work• Broadcasting and

telecasting etc. (examples not limited to above)

Section 194 CCONTRACTORS

Payment Covered Amount Payable as Commission or Brokerage




Includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person or for any services in the course of buying or selling of goods, not being securities.

Section 194 HCOMMISSION / BROKERAGE

Payment Covered Amount Payable as Rent



Rate – Land and building

Rate – Plant & Machinery

@10% of the amount exceeding the Threshold Limit as above@2% of the amount exceeding the Threshold Limit as above

• Land• Building• Land Appurtenant to

Building• Machinery• Plant & Machinery• Equipment• Furniture & Fixtures

Section 194 IRENT

Payment Covered Amount Payable as Fees for Professional and/or Technical Services and Royalty




• Professional Services are those notified by the Income Tax Dept

• Technical Services means any consideration for the rendering of any managerial, technical or consultancy services”.

Section 194 JPROFESSIONAL / TECHNICAL

TDS on FEES FOR PROFESSIONAL OR TECHNICAL SERVICES & PAYMENTS TO CONTRACTORS AND SUB-CONTRACTORSWhen Service tax is charged on Amount of consideration by the Payee, should I make TDS on Invoice amount or the amount exceeding Service tax?TDS has to be made on the entire amount of the Invoice including Service Tax.

TDS on RENTWhen Service tax is charged on Amount of RENT paid to the Payee, should I make TDS on Invoice amount or the amount exceeding Service tax?TDS has to be made only on the amount of RENT. Service Tax should not be included while making TDS..

Payment of TDSAm I required to make payment of TDS electronically?

Any Company Yes. Compulsory electronic payment

Any other person (say, Firm/ Proprietor etc.)

Compulsory electronic payment if covered by Tax Audit

FAQs

Special CaseFact 1

On April 1, 201X, XYZ Ltd. has engaged Mr. X to perform services in the nature of professional services. He has to be paid the following sums:JuneJulyAugust

INR 10,000INR 10,000INR 5,000

Action Payments made were as follows:

JuneJulyAugust

INR 10,000INR 10,000INR 5,000

No TDS deduction made as the aggregate does not exceed threshold of INR 30,000 for Sec 194J

Base scenario

Payments for professional fees were made to Mr. A as follows in the month of January of INR 100,000:

Fees payable INR 100,000 TDS @ 10% AMOUNT PAYABLE TO Mr. A

January INR 100,000 INR 10,000 INR 90,000

CALCULATING TDS

Action Payments made in the month of September will be:

Fees payable TDS PAYABLE

Invoice amount INR 10,000 INR 1,000 INR 9,000

TDS Recovered JuneJulyAugust

INR 1,000INR 1,000INR 500

INR (2,500)Total payment (after recovering earlier TDS dues as threshold limit was crossed during the FY) INR 6,500

Special CaseFact 1

On September 1, 201X, XYZ Ltd. Decided to extend further work to Mr. X for which the payment would be:

SeptemberOctoberNovember

INR 10,000INR 10,000INR 10,000

CALCULATING TDS

© Prequate 2014

If you haven’t done TDS, What’s the impact?NON-COMPLIANCE OF TDS

Scenario 1 – Where TDS was deducted and paid to Govt

Revenue 20,000

Expenses (10,000) Expense is deductible for Tax Purposes

Profit 10,000 Profit as per Company

Tax @ 30% 3,000

Scenario 1 – Where TDS was not deducted/ not paid

Profit as per Company 10,000

Expenses added back 10,000 Expense is NOT deductible for Tax Purposes

Profit for Tax Calculation 20,000

Tax @ 30% 6,000

• Extra Income Tax burden for the Defaulter• TDS Provisions dictate a 12% Interest on Non deduction and• 18% Interest on Non payment of the same to Govt.• Reporting in Tax Audit report

NON DEDUCTION IMPLICATIONS

Illustration: ABC & Co. provided IT Advisory Services to CLIENT Pvt Ltd. They charged a fee of INR 10,000 which was paid to them by CLIENT Pvt Ltd.Assume the following for ease of understanding, about the above transaction: It falls within the ambit of TDS• Rate of TDS deduction applicable is 10%• Hence CLIENT Pvt Ltd.'s profit during that year is INR 20K – 10K = INR 10KAssuming, the CLIENT Pvt Ltd.'s Income Tax rate is 30%.

© Prequate 2014

What are the other transactions that attract TDS I should be aware about though I may not encounter everyday?

OTHER TRANSACTIONS THAT ATTRACT TDS

Winnings from Lottery, Game Shows, Horse

Races Crossword

Puzzles

Interest on Bonds,

Debentures,Deposits etc. –

other than those in the Bank

Long Term Capital Gain on

sale of Fixed Assets, Forex Bonds, GDR’s

etc.

Payments in respect of NSC, Mutual Funds and Dividends

Income of FIIs from Securities

Payments to Non Resident

sportsmen and Associations

The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been

taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor Prequate and its affiliates accepts any liabilities for

any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document

should be distributed or copied (except for personal, non commercial use).‐

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© Prequate 2014

Prequate works with organizations to help them understand their environment and do business in a leaner and smarter way.By helping businesses interpret their surroundings, Prequate helps amplify the impact of their strategies and executional strengths without worrying too much, or with a lot more clarity, as to how their environment may be respond.

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from tedious to tds | entrepreneur's guide to withholding taxes in india

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