The Implications of Failing to Deduct or Pay TDS: What You Need to Know

Introduction

If any person responsible for deduction of tax at source fails to deduct or after deduction fails to pay the same to the credit of the central government, then he shall be deemed to be an assessee in default.

1.1. When deductor is deemed to be in default?

1.1-1. In case of TDS

If any person, responsible for deduction of tax at source, fails to deduct the whole or any part of the tax or after deduction fails to deposit the same to the credit of the Central government, then he shall be deemed to be an assessee-in-default.

The deductor cannot be deemed to be an assessee-in-default, on failure to deduct tax at source from the amount payable to a resident, after expiry of 7 years from the end of the financial year in which payment is made or credit is given or after expiry of 2 years from the end of the financial year in which correction statement is furnished, whichever is later.

1.1-2. In case of tax on non-monetary perquisites

Where an employer opts to pay the tax on the value of non-monetary perquisites but he fails to pay it to the credit of the central government, he shall be deemed to be an assessee-in-default.

1.2. When deductor is not deemed to be in default?

Any person responsible for deduction of tax at source (i.e., deductor) shall not be deemed to be an assessee-in-default in the following cases:

• In case payee paid the tax

Payer will not be treated as an assessee-in-default if payee (resident person or a non-resident person), has included the income in the return submitted under Section 139 and has paid tax due on the income declared in such return of income. The payer will have to obtain a certificate to this effect from a Chartered Accountant in Form No. 26A and submit it electronically.

• In case shortfall is due to increase in surcharge rate

The CBDT has clarified that a deductor shall not be considered as assessee-in-default if there is a shortfall in deduction of tax in respect of rate of surcharge enhanced by the Finance Act, 2019, if following conditions are fulfilled:

(a) Transaction has been completed and entire payment has been made to the deductee on or before 05-07-2019;

(b) There is no subsequent transactions between the deductor and deductee during the Financial year 2019-20 (after 05-07-2019)from which shortfall could have been deducted;

(c) Tax has been deducted as per the rates applicable prior to the enactment of Finance Act, 2019;

(d)  Tax deducted has been deposited by the due date; and

(e)  Statement of tax deducted at source has been furnished by the due date.

1.3. What is the time-limit to pass the order of assessee-in-default?

1.3.1. If payee is a resident person

Where the deductor makes default in deducting tax from the amount payable to a resident, the order of assessee-in-default shall be passed by the AO within 7 years from the end of the financial year in which payment is made or credit is given or within 2 years from the end of the financial year in which correction statement is furnished, whichever is later.

It is be noted that the provision provides for the time-limit to pass the order where the deductor makes default in deducting tax. However, no time-limit has been prescribed where the deductor after deducting the tax does not deposit the same to the credit of the Central Government. As the deductor is considered as assessee-in-default in both situations of making default in deduction and payment of TDS. The aforesaid time-limit may also apply where deductor makes default in making payment of TDS.

1.3.2. If payee is a non-resident person

The provision does not prescribe the time limit to pass an order of assessee-in-default when the payee is a non-resident. However, in this regard, the Delhi High Court has held that the limitation period prescribed in case of payment to a resident payee can also be applied in respect of non-residents.

1.4. Consequences of default

The payer, who is deemed to be an assessee-in-default, shall be liable for payment of interest on or before furnishing the TDS Statement. The interest shall be calculated at the following rates.

• Interest for default in deduction of tax

If deductor fails to deduct tax at source, he shall be liable to pay interest at the rate of 1% for every month or part thereof on the amount of tax he failed to deduct. The interest shall be calculated for the period starting from the date on which tax was required to be deducted and ending on the date on which tax is actually deducted.

It is to be noted that if an assessee fails to deduct tax under Section 195 from payments made to non-residents or foreign companies, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax in India in the hands of such non-resident or foreign company. This calculation is crucial for determining the tax liability for which the deductor will be treated as an assessee in default under Section 201. The calculation depends on various factors, including the nature of the remittances, the income component involved, or any other pertinent facts in each case .

Where deductor fails to deduct the tax from the amount paid or payable to a person (resident or non-resident person1), but he is not deemed to be assessee-in-default (subject to the conditions as referred to above), he shall continue to be liable to pay the interest from the date on which tax was required to be deducted to the date of furnishing of return of income by the deductee.

However, no interest shall be levied, if shortfall in deduction of tax has occurred in respect of rate of surcharge enhanced by the Finance Act, 2019 and such shortfall has been deducted from the transaction made after 05-07-2019.

• Interest for default in payment of tax

If deductor fails to deposit tax at source, he shall be liable to pay interest at the rate of 1.5% for every month or part thereof on the amount of tax he failed to deposit to the credit of the Central Govt. The interest shall be calculated for the period starting from the date on which tax is deducted and ending on the date on which such tax is actually deposited.

1.5. Interest shall be paid as per AO's order

If the Assessing Officer has passed an order treating assessee in-default, then the interest shall be paid by the assessee in accordance with the said order .

It should be noted that if the assessee is not satisfied with the amount of interest computed by the AO, he can file an appeal or an application for rectification of such order. 

1.6. Waiver of Interest

The CBDT has the authority to issue general or special orders aimed at facilitating the efficient management of income assessment and revenue collection. These orders provide guidelines, principles, and procedures for Income-tax authorities to follow in their work. Such directions cannot be prejudicial to the assessee. The directions can be by way of relaxation under various provisions of the Income-tax Act, including, levy of interest for the assessee in default under Section 201(1A).

1.7. Charge on Assets of Defaulter

If deductor fails to pay the tax deducted at source, there would be a charge on all his assets to the extent of amount of tax and interest thereon.

1.8. Penalty and Prosecution

If deductor fails to deduct the tax at source, he shall be liable to pay penalty under Section 271C. If deductor fails to deposit the tax to the credit of Central Government, he shall be liable for prosecution under Section 276B and Section 278A if he is again convicted for the same offence. However, in view of Section 278AA, he shall not be punishable for such failure if he proves that there was reasonable cause for such failure.

Further, where he is in default or is deemed to be in default under Section 201, he shall be liable for payment of penalty under Section 221 of an amount as the Assessing Officer may direct.

1.9. Disallowance of expense

If deductor fails to deduct the tax or after deduction fails to deposit the tax, the underlying expense shall be disallowed under Section 40 while calculating the income from business or profession or under Section 58 while calculating Income from other sources.

1.10. Appeal against order

Assessee aggrieved by an order treating him an assessee in-default can prefer an appeal before CIT(A).

1.11. Summary

Rate of Interest	To be calculated on	To be calculated from	To be calculated till
1%	The amount of TDS, the payer failed to deduct from the sum paid or payable	The date on which tax was required to be deducted	Date on which tax is deducted
1.5%	The amount of tax deducted but the payer failed to deposit with the Central Govt.	The date on which tax was deducted	The date on which tax is actually deposited with the Central Govt.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability 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.