There are Three major amendments in Budget-2014 effected on TDS Compliances u/s. 40(a(ia)) regarding disallowances to 30% of the amount of expenditure claimed. These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years means these amendments are applicable in Financial year 2014-15 onwards which is as under:
The disallowance under section 40(a)(ia) of the Act shall be restricted to 30% of the amount of expenditure claimed.
Existing provisions: The existing provisions of section 40(a)(i) of the Act provide that certain payments such as interest, royalty and fee for technical services made to a residents shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the Act. As mentioned above, in case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”.
The disallowance of whole of the amount of expenditure results into undue hardship.
Proposal: In order to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.
Disallowance under section 40(a)(ia) of the Act shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Act.
Existing provisions: Existing provisions of section 40(a)(i) of the Act provides that certain payments such as interest, commission,brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia) of the Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) of the Act may also be claimed as expenditure for the purposes of computation of income under the head “Profits and gains from business or profession”.
Proposal: Section 40(a)(ia) has proved to be an effective tool for ensuring compliance of TDS provisions by the payers. Therefore, in order to improve the TDS compliance in respect of payments to residents which are currently not specified in section 40(a)(ia), it is proposed that the disallowance under section 40(a)(ia) of the Act shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Act.
These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.
Non-payment of tax from payments made to non-residents, extended time limit of payment up to the date of filing of return of income under section 139(1) allowed
Existing provision: The existing provisions of section 40(a)(i) of the Act provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the Act. The Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to the residents.
Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.
Proposal: In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.
Text of Amendments
In section 40 of the Income-tax Act, in clause (a), with effect from the 1st day of April, 2015,—
(a) in sub-clause (i),—
(I) for the portion beginning with the words “during the previous year” and ending with the words, brackets and figures “sub-section (1) of section 200”, the words, brackets and figures “on or before the due date specified in sub-section (1) of section 139” shall be substituted;
(II) for the proviso, the following proviso shall be substituted, namely:—
“Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”;(b) in sub-clause (ia),—
(I) for the portion beginning with the words “any interest, commission or brokerage” and ending with the words and brackets “for carrying out any work (including supply of labour for carrying out any work)”, the words “thirty per cent. of any sum payable to a resident” shall be substituted;
(II) in the first proviso, after the words, brackets and figures “sub-section (1) of section 139,”,the words “thirty per cent. of” shall be inserted.
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