Inside this Article

  1. Introduction
  2. What is Lower Tax Deduction Certificate
  3. Need for Lower TDS Application
  4. Who is Eligible to Apply
  5. Online Application Process
  6. Usage and Validity of Certificate
  7. Timeline for Application
  8. Modification of Certificate
  9. Practical Issues and Challenges faced
  10. Governing Sections and Rules
  11. TDS on E-Commerce Sellers

Introduction

  • As per Indian tax laws, specific payments are subjected to deduction of tax at source (TDS) at applicable rates. Such tax deducted at source by the person making the payment, can later be claimed while filing the Income Tax Return by the Recipient of the payment/ deductee.

However, there are scenarios where :

  • The total income of recipient/ deductee at the year end is either under the taxable limit i.e. not taxable or subject to tax at lower rates or
  • Business is incurring tax losses in the year on account of which no tax is payable
  • Business is in Early Stages of its lifecycle (Startups) and in such cases, it is burdensome for the deductee to wait till the filing of Return to claim and processing of the Returns to get refund of TDS.
  • To reduce the hardship faced by the deductee, the Government introduced section 197 to the Income Tax Act, 1961, wherein a certificate is issued to the Deductee permitting the latter to get tax deducted at lower/specific rates as mentioned in the said certificate.
What is Lower Tax Deduction/ No Tax Deduction Certificate?
  • Lower deduction/No Deduction Certificate is a Certificate given by the deductee to the deductor either for reduction in rate or NIL rate of TDS on the receipt amount due to the deductee.
  • This certificate is obtained by the deductee from the Jurisdictional TDS Officer on providing relevant information as required under the Rules.
What is Lower Tax Deduction/ No Tax Deduction Certificate?
  • The incomes/ receipts represent the working capital of the deductee.
  • In cases where the total income of the deductee is not liable to tax or liable to tax a lower rate, the amount so withheld and deposited with Government can be claimed by the Deductee only at the time of filing return of income.
  • Blockage of working capital of the deductee with the Government until the same is claimed in the return of Income at the end of the year.
  • This will result in higher cash flows upfront for the Company and no funds are locked up with Government.

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Every person who is in receipt of income which is subject to TDS under the respective section and where income of the recipient justifies non- deduction or lower deduction of income tax based on their estimated final tax liability can apply for Lower/ No Deduction Certificate.
The eligibility of an assessee to claim the benefits of this rule is determined by the Assessing Officer by assessing his/her existing and estimated liability, which is determined by considering the following :
  • Tax payable on estimated income of the previous year relevant to the assessment year.
  • Tax payable on the assessed or returned income of the preceding three years..
  • Existing liability under the Income-tax Act, 1961.
  • Payment of advance tax for the assessment year relevant to the previous year until the date of making the relevant application.
  • Tax collected at source for the assessment year relevant to the previous year until the date of making the relevant application
  •  % of deduction applicable
    The deductor is then responsible to deduct tax at the rate mentioned in the certificate or not deduct any tax as the case may be.

Online Application Process

  • The application for the Certificate is completely online and can be filed through Form -13 available on the TDS Portal www.tdscpc.gov.in.
  • Put in place the following requirements for the online application as detailed in Annexure-I
  • In certain cases the Assessing officer may call for further information and documents for validation of details mentioned in the application.

Timeline for Application

  • One can apply for Lower Deduction Certificate upto 15th March of the F.Y. for which deduction is sought for. The Application can be submitted for the next F.Y. from 1st March of the Previous F.Y.
  • For example, if one has to apply for Lower Deduction Certificate for F.Y. 2020-21, the applications can be submitted from 1st March 2020 to 15th March 2021
  • Once the application is submitted, the AO may accept, seek clarification, reject or accept on modified terms which may generally take 15-45 Days which differs on case to case basis.

Usage and Validity of Certificate

  • Time period of validity – One Financial Year\
    Once the certificate has been issued by the AO, then it shall be valid for the rest of the financial year. In simple words, the application can be made and certificate can be issued for a particular financial year, and for next year assesse has to follow the same process. Also the certificate shall apply only to the transactions entered into after approval of application.
  • Parties entitled to use
    Only the parties mentioned in the application are entitled to use the Lower Deduction Certificate. The Deductee cannot claim lower/No deduction from any party other than those mentioned in Form 13 while making application.
2. Cases that require modification
The procedure for modification is similar to that of original / fresh application. However the deductor will have to submit additional documents as evidence to the modification required.
2. Specific requirements
The deductor will have to re submit revised projected financials for the financial year under consideration. In addition the deductor will also have to submit Form 26AS with the application. However, the AO may again demand for additional evidences based on the case of modification.
4.Time limitation for modification
The Certificate can be modified only till15th of March of the current financial year. The Certificate shall be applicable prospectively and not retrospectively.

Modification of
Certificate

As a general practice the application for lower deduction certificate is made at the beginning of any financial year. However, during the year there ought to be certain circumstances / transactions, as mentioned below, that may require modification of the said certificate.

1. Cases that require modification

  • Exhaustion of the permissible limit of transaction value mentioned in the certificate
  • Addition of new parties/deductor Deduction of tax under an additional
  • section by an already existing party/deductor
  • § Parties entitled to use

Only the parties mentioned in the application are entitled to use the Lower Deduction Certificate. The Deductee cannot claim lower/No deduction from any party other than those mentioned in Form 13 while making application.

Practical Issues and
Challenges faced

  • Limitations with respect to income submitted
    The benefit can be claimed only upto the amount mentioned in the certificate. Where there is an increase in the value of transactions during the year, the deductor will have to first apply for modification and only then utilize the benefit for additional transactions.
  • Time Consuming
    The said process of application is considered to be a time consuming one. On an average the whole process takes around 25-30 days. Till then the deductor continues to deduct tax at normal rates.
  • Rejection by AO asking for more documents
    Where the Assessing Officer rejects the application or demands additional documents the process gets further extended thereby delaying the approval.
Also, the application is governed by provisions of Rules 28, 28AA, 28AB and 29 of the Income Tax Rules as under :
  1. Rule 28 provides for filing of Form 13 electronically either under Digital Signature or through Electronic Verification Code
  2. Timeline for Application
  3. Rule 28AA provides for Certificate for deduction at lower rates or no deduction of tax from income other than dividends
  4. Rule 28AB provides for Certificate of no deduction of tax in case of certain entities and
  5. Rule 29 provides for Certificate of no deduction of
    tax or deduction at lower rates from dividends.

TDS on E-Commerce
sellers

In order to widen tax base, E-Commerce Sellers have been brought within TDS bracket. Consequently Section 194-O was introduced in the Union Budget 2020-21.
Section 194-O makes the E-Commerce Operators responsible to deduct tax at 1% from all E- commerce Sellers on every sale of goods and services in their platform.
  • If E-Commerce Seller is Resident Individual or HUF, then TDS need not be deducted if aggregate amount paid/credited during the year does not exceed INR 5 Lakhs and seller furnished PAN or Aadhaar
  • If PAN is not provided by the seller, then TDS of 5% would be deducted instead of 1%
  • TDS deducted by E-Commerce Platform operators at the time of Credit or payment whichever is earlier

Applicability of TDS on E-Commerce Sellers:

  • Applicable on all “Resident” E-Commerce sellers selling goods/services on E-Commerce Platform
  • Services includes Fees for Technical services and fees for Professional Services
  • E-Commerce is defined to include supply of goods or services or both, including digital products, over any digital or electronic network

Need for Lower TDS:

  • 1% TDS on sale of Goods/Services will result in Cash crunch for the sellers who are incurring Losses.
  • Tax Credit will be available at the time of filing return. This will result cash deficiency till the time of receiving refund.
  • Getting a lower TDS Certificate will help the E-Commerce sellers to run the business efficiently.

Appendix I : Pre – Requisites of application for
Lower Deduction Certificate

Below mentioned are the Pre- Requisites for application of lower deduction certificate:

  1. Traces Login ID and Password
  2. Know the Jurisdiction of the TDS officer
  3. Ensure No Online TDS default or Income Tax Demand is Outstanding
  4. Financial Statement for the last 3 financial years (or lesser if business is in existence for a lesser period) and projected financials for the current financial year.
  5. Details of Income of last 3 years and projected income for the current financial year.
  6. Income tax returns for the last 3 years
  7. Details of Tax deduction of the last 3 years – Form 26AS
  8. List of customers with respective TAN and projected income from each customer
  9. Registration/exemption Certificate in case of certain entities covered under section 11 or 12. It is mandatory, if declaration no. 1 is selected as a resident covered under Rule 28AB.
  10. Registration/exemption Certificate in case of certain entities covered under section 139(4C) where income is exempt under section 10, If declaration no. 2 is selected as a resident covered under Rule 28AB
  11. Computation of Income of last 3 Financial Year(or less as applicable) and projected Financial Years
  12. MAT Computation of Income of last 3 Financial Year(or less as applicable) and projected Financial Years

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To know more about this publication from us :
Eshank Shah CA, CFA
eshank.shah@bjaa.in
Sridevi Sathyanarayanan, CA
sridevi.s@bjaa.in
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Email
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This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining to act on any of the contents of this publication.

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