TDS, TCS and Finance Bill
Author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at eboard@icai.in.
The deductee or the seller, as the case may be, from whose income tax has been deducted or collected at source would be entitled to get credit of such amount so deducted or collected. The amount of credit is determined on the basis of Form 26AS or TDS/TCS certificate issued to him.
The Finance Bill, 2022 has made comprehensive proposals to amend provisions of the Income-tax Act, 1961 (the Act) relating to TDS and TCS. The proposals are dealt with in this article.
1. Immovable Property Purchase: Alignment with Stamp Duty Value (Section 194-IA)
Section 194-IA of the Act provides for TDS from payment of consideration to a resident, on transfer of certain immovable property, where it is not less than Rs. 50 lakh at the rate of 1%. Transfer of agricultural land is spared from TDS.
For taxation in the hands of the transferor, any income from such transaction is computed as per Section 43CA (where property is held as stock-in-trade) and Section 50C (where property is held as a capital asset). Under both these sections, the stamp duty value is considered as the full value of consideration if it exceeds the transaction value. Heretofore, TDS under section 194-IA was deducted only from the amount of consideration paid by the transferee to the transferor, without considering the stamp duty value of the immovable property.
Definition of “Stamp Duty Value”
“Stamp duty value” for this purpose means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property [Section 56(2) – Explanation (f)].
The Finance Bill 2022 Amendment: Higher of Consideration or SDV
It is proposed to amend section 194-IA of the Act by providing that in case of transfer of an eligible immovable property, TDS should be made of sum paid or credited to the transferor or the stamp duty value of such property, whichever is higher.
Effective Date & Part Payment Rules:
This amendment takes effect from 1st April, 2022. Therefore, eligible property transactions entered into on or after April 1, 2021 shall be covered under the changed provision where consideration is paid or credited on or after April 1, 2022.
Moreover, where part consideration has been paid for property purchase and part TDS has been made before April 1, 2022, the new amendment shall apply for the balance of payment, and TDS should be made with reference to the stamp duty value, if it is higher than transaction value.
2. Immovable Property Rent: Rationalization under Section 194-I & Section 194-IB
Any person, not being an individual or a Hindu Undivided Family (HUF), paying rent to a resident is required under Section 194-I to deduct tax at source therefrom, where the amount of rent exceeds Rs. 2,40,000 in a financial year. Rent covered includes rent for land; building (including factory building); land appurtenant to a building (including factory building); machinery; plant; equipment; furniture; or fittings.
Whereas, Section 194-IB requires TDS from payment of rent by an individual or Hindu Undivided Family who is not required to make TDS from rent under section 194-I (i.e. those not subjected to tax audit under section 44AB). Section 194-IB provides for TDS from payment of any rent exceeding Rs. 50,000 for a month or part of a month to a resident. The statutory rate of TDS is 5%.
Amendment to Section 194-IB(4): Omission of Section 206AB
Section 194-IB(4), inter alia, provided that where TDS was required as per the provisions of Section 206AB (higher rate of TDS for non-filers of income-tax returns at twice the normal rate), such deduction shall not exceed the amount of rent payable for the last month of the previous year or tenancy, as the case may be.
The Finance Bill 2022 amends sub-section (4) of Section 194-IB to omit the reference to Section 206AB, thereby simplifying compliance for salaried individuals and HUFs paying residential rent without saddling them with the verification of the landlord’s return filing status.
3. Business Perquisites: Introduction of Section 194R & Section 28(iv)
“It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs. 20,000 during the financial year.”
For the purpose of computation of income from ‘Profits and gains of business or profession’, Section 28(iv) of the Act provides that the following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”:
Thus, Section 28 requires the value of perquisites to be included in taxable business income. However, as noticed by the Central Board of Direct Taxes (CBDT), recipient businessmen frequently omitted reporting the receipt of such benefits in their returns of income, leading to furnishing of incorrect particulars of income. Heretofore, there existed no reporting mechanism for the Tax Department to track perquisites enjoyed or instituted by businessmen or agents.
Clause 58 of Finance Bill, 2022: New Section 194R Framework
In order to track transactions relating to business perquisites and widen and deepen the tax base, Clause 58 inserts Section 194R. Any person responsible for providing to a resident, any benefit or perquisite (whether convertible into money or not) arising from business or the exercise of a profession by such resident, shall, before providing such benefit or perquisite, ensure that tax has been deducted at source.
Perquisites Wholly or Partly in Kind:
Where the benefit or perquisite is wholly in kind, or partly in cash and partly in kind but the cash component is insufficient to satisfy the TDS liability, the person responsible for providing the perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid (advance tax / challan) in respect of the benefit or perquisite.
Payer Liability & Turnover Thresholds:
- Every person (companies, firms, LLPs, AOPs) except Individual and HUF is unconditionally liable.
- An Individual or HUF is liable to deduct TDS under Section 194R only if total sales, gross receipts or turnover exceeds Rs. 1,00,00,000 (Rs. 1 crore) in case of business, or Rs. 50,00,000 (Rs. 50 lakh) in case of profession, during the financial year immediately preceding the financial year in which the perquisite is provided.
- “Person responsible for providing”: The person providing such benefit/perquisite, or in case of a corporate entity, the company itself including the principal officer thereof.
Judicial Precedents & Practical Interpretations
A. Waiver of Loan: Outside the Ambit of Section 28(iv)
In a present-day context, it is worthwhile to note that waiver of loan cannot be brought to tax under section 28(iv). The Supreme Court in CIT v. Mahindra & Mahindra Ltd. [2018] 255 Taxman 305 / 404 ITR 1 (SC) and the Bombay High Court in Essar Shipping Ltd. v. CIT [2020] 117 taxmann.com 389 held that for applicability of section 28(iv), the benefit received must be in some form other than in the shape of money. Furthermore, Section 41(1) does not apply to loan waiver since waiver of loan does not amount to cessation of a trading liability, as the loan principal was never claimed as a deductible revenue expenditure [PCIT v. SICOM Ltd 116 taxmann.com 410 (Bom.), PCIT v. Gujarat State Financial Corporation [2020] 122 taxmann.com 101 (Guj.)].
B. Sales Tax Deferral Schemes
On similar grounds, the difference between the sales tax loan amount and the amount paid on a Net Present Value (NPV) basis as per a sales tax deferral incentive scheme was held not to be a revenue receipt and cannot be treated as income under section 28(iv) [CIT v. Wheels India Ltd 123 taxmann.com 36 (Madras)].
C. Trade Discounts & Free Quantity
Special commercial discounts or free volume schemes (e.g. “buy one get one free”, 10+1 free schemes) represent price adjustments and do not fall within the realm of perquisites under Section 194R.
D. Pharmaceutical Gifts to Doctors & Explanation 3 to Section 37
The Medical Council of India (MCI) Regulations 2002 barred doctors from soliciting or receiving gifts. In Max Hospital v. MCI (WP 1334/2013, Delhi HC), the Court observed MCI regulations apply only to medical practitioners, not pharmaceutical companies. However, the proposed insertion of Explanation 3 to Section 37 explicitly disallows such promotional expenditure for pharma companies, and the new Section 194R concurrently mandates 10% TDS deduction.
E. Business Promotion Tours vs Personal Gifts
Business promotion tours, gifts, and performance benefits given to dealers and distributors for achieving sales targets will be squarely covered under Section 194R. Conversely, a personal gift given purely for personal qualities of an assessee as a token of personal esteem and veneration cannot be subjected to tax as perquisite income arising out of business or vocation [Dilip Kumar Roy v. CIT 94 ITR 1 (Bombay)].
In composite corporate events, bona fide conference expenses incurred to educate distributors on product features do not constitute a perquisite, whereas leisure extension tours or hospitality gifts offered to dealers will assume the character of a perquisite requiring meticulous quantification.
4. Virtual Digital Assets: Withholding Tax under Section 194S
The Finance Bill, 2022 introduced a dedicated tax regime for Virtual Digital Asset (VDA) transactions, imposing a flat tax rate of 30% on transfer profits, with zero deduction (except direct acquisition cost) and complete prohibition of loss set-off.
Statutory Withholding Mandate: Section 194S
To capture information and trace the audit trail of crypto transactions, Section 194S mandates that any person responsible for paying to a resident any consideration for the transfer of a VDA shall deduct TDS at the rate of 1%.
Timing of Deduction: Deduction must be effected at the time of credit of such sum to the account of the resident (by whatever name called, including a “suspense account”) or at the time of payment by any mode, whichever is earlier.
Operative Date: Section 194S is operative from 1st July, 2022.
Consideration in Kind & Crypto-to-Crypto Swaps:
Where consideration is wholly in kind, or in exchange of another VDA without any cash component, or where cash is insufficient to satisfy the 1% TDS liability, the payer must ensure that tax has been paid in advance before releasing the consideration.
Transactions of crypto exchange (swapping Bitcoin for Ethereum) will require TDS deduction at both ends, accompanied by complex Indian Rupee valuation mechanisms.
Threshold Limits for Section 194S Deduction:
- Specified Persons (Individual / HUF): Individuals or HUFs whose business turnover does not exceed Rs. 1 crore or professional receipts do not exceed Rs. 50 lakhs in the preceding financial year, or who have no PGBP income, are exempt from TDS unless aggregate consideration exceeds Rs. 50,000 during the financial year.
- All Other Persons: For corporate, firm, and high-turnover payers, the exemption threshold is Rs. 10,000 during the financial year.
- No TAN Requirement: Specified persons are exempted from obtaining a Tax Deduction Account Number (TAN) under Section 203A and from Section 206AB higher rates.
- Exclusivity: A transaction subjected to Section 194S TDS is not liable for TDS under any other provision of Chapter XVII.
The Government projected Rs. 1,000 crore from Section 194S. However, acute market friction arises because TDS is deducted even on loss-making trades (creating locked capital), while high-frequency algorithmic exchanges executing thousands of trades per hour face severe operational bottlenecks. The Finance Ministry explicitly clarified that taxing VDAs does not confer legal legitimacy onto private cryptocurrencies.
5. Interest on TDS / TCS Payment Default: Section 201(1A) & Section 206C(6A)
Section 201(1A) of the Act mandates simple interest where any person liable to deduct TDS either fails to deduct it or, after deducting, fails to deposit it to the credit of the Central Government.
Compensatory Nature of Interest: Landmark Bombay HC Ruling
Interest is not ‘penal’ but strictly ‘compensatory in nature’. In Bennet Coleman & Co. Ltd. v. V.P. Damle, Third ITO [1985] 21 Taxman 131 / [1986] 157 ITR 812 (Bom.), the Bombay High Court held that interest under Section 201(1A) is mandatory and compensatory; therefore, there is no question of waiver on the plea that the default was unintentional.
Proposed Amendment & Appellate Remedies:
It is now proposed that where an order is passed by the Assessing Officer for default referred to in Section 201(1) or Section 206C(6A) for TCS, interest shall be paid in accordance with such order. This amendment takes effect from 1st April, 2022. In case of continuing default, the order can cover periods prior to that date.
While interest orders were traditionally non-appealable, a right of appeal against these orders is now expressly provided under Section 246A, and rectification applications under Section 154 remain available for computational errors.
6. Rationalization of Higher TDS & TCS on Non-Filers: Sections 206AB & 206CCA
Sections 206AB and 206CCA levy higher TDS and TCS rates on “specified persons” who fail to file their income tax returns. Under existing law, a specified person was one who had not filed returns for both of the two assessment years preceding the financial year, with aggregate TDS/TCS of Rs. 50,000 or more in each year.
Key Amendments Effective 1st April 2022:
- Reduction from 2 Years to 1 Year: The non-filing condition is tightened from two previous assessment years to only ONE assessment year immediately preceding the financial year in which tax is to be deducted/collected, for which the time limit under section 139(1) has expired.
- Exclusion of Simplified Individual TDS Sections: To prevent undue compliance burden on individuals and HUFs buying property, paying rent, or hiring contractors, Section 206AB is amended to explicitly exclude payments covered under Sections 194-IA, 194-IB, and 194M.
- Existing Exclusions Retained: Section 206AB continues not to apply to transactions under Section 192 (Salary), 192A (PF withdrawal), 194B (Lottery), 194BB (Horse racing), 194LBC (Securitisation trust income), and 194N (Cash withdrawals).
- Drafting Corrections: Erroneous statutory references to “deductor” and “collectee” have been ironed out, and modern e-filing terminology substitues “furnishing of return” in place of “filing of return”.
7. Non-Resident TDS Refund: Insertion of New Section 239A & Section 248
Foreign enterprises contracting with Indian companies frequently insist on contracts structured ‘net of tax’, requiring the Indian resident payer to bear the withholding tax burden. When taxes are withheld and paid to the Government under Section 195, and it is subsequently discovered that no tax was lawfully deductible, the mechanism for claiming a refund was unduly cumbersome.
Deficiencies under Existing Section 248:
Under Section 248, the deductor was forced to appeal directly to the Commissioner (Appeals) [CIT(A)] within 30 days of payment under Section 249. The Assessing Officer was completely bypassed, denying the AO an opportunity to examine primary facts and documents. Furthermore, Section 248 did not cover TDS deducted from interest payments.
The Solution: Dedicated Application to AO under Section 239A
Finance Bill 2022 inserts Section 239A (effective 1st April, 2022). A resident payer who has borne tax under Section 195 on payments to a non-resident under an agreement can now make a formal application directly to the Assessing Officer for refund of such tax.
If aggrieved by the AO’s order, the payer can file an appeal before the CIT(A) under Section 246A. Section 248 will cease to apply where tax payment is made on or after 01.04.2022.
8. Penalty for Compliance Laxity: 500% Hike under Section 272A
Administrative TDS and TCS provisions ensure timely delivery of quarterly statements (Forms 24Q, 26Q, 27Q, 27EQ) and issuance of certificates (Forms 16 and 16A) so that tax credits reflect seamlessly in the deductee’s Form 26AS.
Administrative Lapses Subject to Section 272A(2) Penalties:
- Clause (c): Failure to furnish in due time returns/statements under section 133, section 206 (TDS quarterly statements), section 206C (TCS quarterly statements), or section 285B.
- Clause (f): Failure to deliver in due time declarations under section 197A (Form 15G / Form 15H).
- Clause (g): Failure to furnish TDS certificates required by section 203 or TCS certificates under section 206C.
- Clause (h): Failure to deduct and pay tax required under section 226(2).
- Clause (i): Failure to furnish statement required by section 192(2C).
- Clause (j): Failure to deliver declaration under section 206C(1A).
- Clause (k): Failure to deliver copy of statement under section 200(3) or proviso to section 206C(3).
- Clause (l): Failure to deliver statements under section 206A(1).
- Clause (m): Failure to deliver statement under section 200(2A) or section 206C(3A).
Penalty Escalated from Rs. 100 to Rs. 500 Per Day
The nominal penalty of Rs. 100 per day of continuing failure had remained unrevised since 1999 and was heavily criticized by the Comptroller and Auditor General (CAG) of India for having zero deterrent value.
The Finance Bill 2022 increases the penalty under Section 272A(2) by 500%—from Rs. 100 to Rs. 500 for each day of default, with effect from 1st April, 2022.
Section 273B continues to safeguard taxpayers against penalties if a reasonable cause for non-compliance is demonstrated. However, this steep escalation will bite erring deductors and instill strict reporting discipline.
9. Summing Up
From the legislative proposals across the arena of TDS and TCS in Finance Bill 2022, one can easily decipher that the Tax Department is affording paramount importance to source-based taxation as the primary vehicle of revenue mobilization and audit trail creation. Lapses in compliance will attract stringent consequences, including enhanced interest orders and 500% steeper penalties. It is essential for tax professionals and corporate deductors to discharge these obligations with utmost care, caution, and rigorous diligence.