Know the changes introduced in new TDS Returns

 

The Finance Act, 2020 has made several changes to the Chapter-XVII (Collection and Recovery of Tax). Twenty-Five Sections of the Income-tax Act, 1961 have been impacted due to the Finance Act, 2020 either by way of amendment to the existing provision or by insertion of new provisions for deduction or collection of tax. E- Commerce operators, tour operators, Mutual Funds, domestic companies and authorized dealers have been entrusted with obligations of deduction or collection of tax at source from certain transactions. To incorporate the impact of recent changes, the CBDT has notified the amendment to Rule 31A and Annexure to Form 26Q and Form 27Q vide Income-tax (16th Amendment Rule), 20201.

A summary of the changes introduced in the form for filing of TDS Statement and Rule 31A are explained in the below paragraphs.

1.      Reporting of nil or lower deduction of tax in cases notified under Section 194A(5) or Section 197A(1F)

As per section 194A of the Income-tax Act, every person (other than an individual or HUF, whose turnover or gross receipt during the preceding year does not exceed Rs. 1 crore in the case of business and Rs. 50 lakhs in case of the profession) is required to deduct tax at the rate of 10% from interest, other than on securities, paid or payable to a resident person.

Section 194A(3) contains clauses (i) to (xi) to provide an exemption from deduction of tax in certain cases. As per clause (iii), no tax is required to be deducted by a person from the interest paid or payable to a Bank, Financial Corporation, Insurance Company or such other institutions or bodies as may be notified by the Central Government. Various persons had been notified for this purpose by the Government through various notifications.

The Finance Act, 2020 amended the said clause (iii) of Section 194A(3) to provide that no notification shall be issued by the Central Government in respect of the said clause on or after 01-04-2020. Alternatively, a new sub-section (5) has been inserted to empower the Central Government to notify the cases where no tax shall be deducted or the tax shall be deducted at the lower rate. In other words, this amendment empowers the Central Government to provide an exemption from deduction of tax or

deduction at the lower rate for entire section 194A instead of issuing notifications clause-wise or sub-section wise.

A similar amendment has also been made to Section 197A. As per current provisions of Section 197A(1F), no deduction of tax shall be made from the specified payment to such institution, as may be notified by the Central Government in this behalf. To empower the Central Govt. to notify the specified payments for both nil deduction of tax and lower deduction of tax, the sub-section (1F) of Section 197A has been substituted. The new sub-section provides that no deduction of tax shall be made or deduction of tax shall be made at a lower rate by the deductor in cases notified by the Central Government.

Accordingly, the CBDT has made the consequential changes to Rule 31A and Form 26Q requiring deductor to furnish the particulars of the amount paid or credited on which tax was not deducted or deducted at a lower rate in view of the notification issued under sub-section (5) of section 194A or sub-section (1F) of Section 197A. Further, the deductor shall be required to provide the following remarks in respect of such payments:

 

Remark	Reason for no deduction or lower deduction of tax
D	If no deduction or lower deduction is on account of payment made to a person or class of person on account of notification issued under sub- section (5) of section 194A
Z	if no deduction or lower deduction is on account of payment being notified under section 197A(1F)

 

2.      Reporting of interest paid by Offshore banking unit without deduction of tax

 

As per sub-section (1D) of section 197A, an Offshore Banking Unit is not required to deduct tax from ‘interest’ paid in respect of deposit made by or borrowing from a ‘non-resident’ or ‘not ordinarily resident in India’.

 

New Form 27Q now requires Offshore banking unit to furnish particulars of the amount paid or credited on which tax was not deducted under sub-section (1D) of section 197A and write remark “G” under reasons for not deducting tax.

 

3.      Reporting of tax deducted under Section 194J at concessional rate of 2%.

 

Section 194J of the Income-tax Act requires every person (other than an individual or HUF whose turnover or gross receipts does not exceed Rs. 1 crore in case of business and Rs. 50 lakhs in case of the profession) to deduct tax at the rate of 10% from the payment made to a resident if such payment is in the nature of fees for professional services, fees for technical services, director’s fee, non-compete fees or royalty.

 

The Finance Act, 2020, has amended Section 194J with effect from 01-04-2020, to provide for a concessional rate of TDS at the rate of 2%. This concessional rate shall be applied to the fees for technical services (not being professional services) and royalty paid or payable for the sale, distribution or exhibition of cinematographic films.

The annexure to Form 26Q has been amended to incorporate the effect of this amendment. New annexure has revised the list of section codes to bifurcate section 194J in two parts as follows:

 

Section	Nature of payment	Section Code
194J(a)	Fees for technical services (not being professional services), royalty     for      sale,     distribution     or      exhibition     of cinematography films and call centre (at the rate of 2%)	94J-A
194J(b)	Fee for professional services or royalty etc. (at the rate of 10%)	94J-B

 

 

4.      Reporting of tax deducted by an e-Commerce operator under Section 194-O

 

The Finance Act, 2020 has inserted a new Section 194-O in the Income-tax Act with effect from 01-10-2020, to provide that every e-commerce operator facilitating the sale of goods or provision of services of an e-commerce participant through its digital or electronic facility or platform, shall be required to deduct tax at source at the rate of 1% of the gross amount of sale or service or both facilitated by the e-commerce operator.

 

The annexure to Form 26Q has been amended to incorporate the effect of this amendment. New annexure has revised the list of section codes to incorporate reference of section 194-O, namely:

 

Section	Nature of payment	Section Code
194-O	Payment of certain sums by the e-commerce operator to e- commerce participant	94O

 

5.      Reporting of payment made to the entities whose income is exempt from tax

 

The CBDT has clarified2 that no tax is required to be deducted from the following income of Ramakrishna Math and Ramakrishna Mission as they are exempt under section 10(23C)(iv):

 

(a)  Interest on securities (Section 193);

(b)  Interest other than 'interest on securities' (Section 194A); and

(c)  Income in respect of units of Mutual fund specified under section 10(23D) or of Unit trust of India (Section 194K)

 

The CBDT has further clarified3 that no tax is required to be deducted from the income of specified entities which are unconditionally exempted under section 10 and which are also statutorily not required to file the return of income under section 139.

The amended Rule 31A(4) requires deductor to furnish particulars of the amount paid or credited on which tax was not deducted due to the aforesaid circulars.

Consequently, new annexure to Form 26Q has incorporated a new code "E" under "Reason for non-deduction/lower deduction/ Higher Deduction/ Threshold/ Transporter etc." requiring the deductor to furnish the information in respect of payment made to these entities without deduction of tax.

6.      Reporting of tax deducted from income in respect of units of mutual fund

 

The Finance Act, 2020, has abolished dividend distribution tax with effect from Assessment Year 2021-22. Consequently, a new Section 194K has been inserted to provide for deduction of tax at source at the rate of 10% from income paid or payable in respect of units of a Mutual Funds.

Consequently, the annexure to Form 26Q has been amended to incorporate the effect of this amendment. New annexure has revised the list of section codes to incorporate reference of section 194K, namely:

 

Section	Nature of payment	Section Code
194K	Income in respect of units	94K

7.      Reporting of tax deducted on cash withdrawal

The Finance Act, 2020 has expanded the scope of provisions related to deduction of tax at source (TDS) on cash withdrawal by substituting the existing section 194N with a new Section 194N. The new section 194N provides different tax rates for two different class of persons. Further, it also prescribes two threshold limits.

As per the new section 194N, a banking company or a co-op. bank or a post office which is responsible for paying any sum, being the amount or the aggregate of amounts, in cash exceeding Rs. 1 crore during the previous year, to any person from one or more account, shall at time of payment of such sum, deduct 2% of such sum as income-tax.

A proviso has been inserted to Section 194N to reduce the threshold limit for deduction of tax from Rs. 1 crore to Rs. 20 lakh if the person has not filed return of income for all of the three assessment years relevant to three previous years, immediately preceding the previous year in which cash is withdrawn, and the due date for filing ITR under section 139(1) has expired. The deduction of tax under this situation shall be at the rate mentioned in sub-clause (a) and (b):

 

(a)  2% from the amount withdrawn in cash if the aggregate of the amount of cash withdrawal exceeds Rs. 20 lakhs during the previous year but does not exceed one crore rupees; or

(b)  5% from the amount withdrawn in cash if the aggregate of the amount of cash withdrawal exceeds Rs. 1 crore during the previous year.

The tax is deductible under the sub-clause (a) if the aggregate of the amount withdrawn during the previous year exceeds Rs. 20 lakhs but does not exceed Rs. 1 crore. The tax under the sub-clause (b) shall be deducted if the aggregate of the amount withdrawn during the year exceeds Rs. 1 crore. Where the payee is covered in sub-clause (b), that is, the amount or aggregate of the amount withdrawn exceeds Rs. 1 crore, the tax shall be deducted at the rate of 2% from the sum in excess of 20 lakhs but up to Rs. 1 crore and at the rate of 5% from the sum in excess of Rs. 1 crore.

The necessary changes have been made to the annexures to Form 26Q and Form 27Q to enable the deductor to furnish the information of tax deducted under Section 194N or First Proviso to Section 194N. The details are required to furnished deductee/payee wise.

The new Forms 26Q and 27Q have following three columns to report the details of tax deducted under Section 194N:

(a)              Amount of cash withdrawal in excess of Rs. 1 crore (in cases not covered by the

first proviso to Section 194N);

(b)              Amount of cash withdrawal in excess of Rs. 20 lakhs but does not exceed Rs. 1 crore (for cases covered by sub-clause (a) of clause (ii) of first proviso to section 194N);

(c)              Amount of cash withdrawal in excess of Rs. 1 crore (for cases covered by sub- clause (b) of clause (ii) of first proviso to section 194N).

Example, Mr. X withdraws the following sum in cash during the financial year 2020- 2021 as follows:

 

Date	Amount withdrawn
01-08-2020	10,00,000
15-09-2020	35,00,000
17-11-2020	25,00,000
28-01-2021	45,00,000
16-03-2021	30,00,000

He has not furnished his return of income for the previous year 2016-17, 2017-18 and 2018-19 and the due date for filing of return has already expired.

 

Since Mr. X has not filed return of income for three assessments years immediately preceding the previous year in which cash is withdrawn, and the due date for filing the return under section 139(1) has expired, the tax shall be deducted as follows:

 

Date	Amount withdraw n	Aggregate of amount withdraw n	Tax Deducted at Source			Reporting of         cash withdrawa l              in Column  of Form 26Q	Reporting of         cash withdrawa l              in Column  of Form 27Q
			Rat e	Computatio n	Tax     to be deducte d
01-	10 lakhs	10 lakhs	-	-	-	419B	720B
08-
202
0
15-	35 lakhs	45 lakhs	2%	[45 lakhs (-)	50,000	419B	720B
09-				20 lakhs] *
202				2%
0
17-	25 lakhs	70 lakhs	2%	25 lakhs *	50,000	419B	720B
11-				2%
202
0
28-	30 lakhs	100 lakhs	2%	30 lakh * 2%	60,000	419B	720B
01-
202
1
28-	15 lakhs	115 lakhs	5%	15 lakh * 5%	75,000	419C	720C
01-
202
1
16-	30 lakhs	145 lakhs	5%	30 lakh * 5%	1,50,000	419C	720C
03-
202
1

 

Second, Third and Fourth proviso to section 194N empower Central Government to notify the class of recipients where the provisions of this Section shall not apply or would apply a reduced rate of tax.

In case, deductor has not deducted tax or has deducted tax at a rate lower than the prescribed rate, the reasons for same are required to be mentioned in Annexure to Form 26Q and Form 27Q.

 

Annexure prescribes a list of notes which is to be mentioned in column ‘Reason for such non-deduction/lower deduction/higher deduction’.

New Annexure to Form 26Q and 27Q have inserted following two new notes for non- deduction or lower deduction of TDS under section 194N:

(a)  ‘M’ shall be used if no deduction or lower deduction of tax is on account of notification issued under the second proviso to section 194N;

(b)  ‘N’ shall be used if no deduction or lower deduction of tax is on account of payment made to a person referred to in the third proviso/fourth proviso to section 194N.

 

8.      Reporting of tax deducted from the income distributed by a Business Trust

 

Business Trust (REIT/InVIT) has been provided with the status of a hybrid pass- through entity under the Income-tax Act whereby it can pass certain income to its unit-holders without paying the income-tax at its end. Thus, ultimately unit holders are liable to pay tax on such distributed income.

 

The incomes which a business trust can pass to its unit-holders are as follows:

 

(a)  Rental income from real estate property directly owned by the REIT;

(b)  Interest received from SPV.

 

With effect from Assessment Year 2021-22, the Finance Act, 2020 has abolished the Dividend Distribution Tax and move to the traditional system of taxation wherein units-holders are liable to pay tax on dividend income. Thus, if a business trust distributes any dividend received from SPV to its unit-holders then such dividend income shall be taxable in the hands of unit-holders. However, if the dividend is received from SPV who has not opted for concessional tax regime of section 115BAA then such dividend shall be exempt in the hands of the unit-holders under section 10(23FD).

 

A business trust is liable to deduct tax while distributing the income to its unit-holders as per section 194LBA. Thus, the consequential amendment has also been made to section 194LBA and a new sub-section (2A) is inserted to provide that no tax shall be deducted by a business trust from dividend distributed to the unit-holders if such dividend is distributed out of sum received as dividend from an SPV and the SPV has not exercised the option under section 115BAA.

 

 

Accordingly, the Rule 31A and Annexure to Form 26Q and Form 27Q have been amended to incorporate the effect of this amendment.

Form 26Q has been amended to bifurcate the section codes relating to section 194LBA in following parts:

 

Section

Nature of payment

Section Code

 

194LBA(a)	Certain income in the form of interest from units of a business trust to a residential unit-holder	4BA1
194LBA(b)	Certain income in the form of a dividend from units of a business trust to a resident unit-holder	4BA2

 

Form 27Q has been amended to bifurcate the section codes relating to section 194LBA in following parts:

 

Section	Nature of payment	Section Code
194LBA(a)	Income referred to in section 10(23FC)(a) from units of a business trust	LBA1
194LBA(b)	Income referred to in section 10(23FC)(b) from units of a business trust	LBA2
194LBA(c)	Income referred to in section 10(23FCA) from units of a business trust	LBA3

 

Further, the business trust shall be required to write remark “O” under reason for not deducting tax if tax is not deductible in view of sub-section (2A) of Section 194LBA.