A provision in The Income Tax Law which acts as a balancing bridge between managing cash flow of the business and tax liability towards the government.
Brief and basics about need
Tax Deducted at Source (TDS) is the most commonly used term in the Finance and Tax World, as the name suggests it is deduction of tax by the recipient of service while making payment to the provider of service. The tax so deducted is available as credit while filing income tax return (ITR) after the end of year.
The annual tax liability of the service provider is computed and discharged at the time of filing ITR. Tax liability so computed has to be paid either in cash or it is adjusted against the Tax so deducted (TDS) during the year.
If TDS during the year is greater than the annual income tax liability then refund will be issued upon filing of ITR. if TDS during the year is less than the annual tax liability the balance tax has to be paid.
This can be better understood with the help of an example enumerated below
| Financial year 2022- 23 | Example – 1 | Example 2 |
| Tax Liability – A | INR 6,00,000 | INR 6,00,000 |
| TDS – B | INR 8,00,000 | INR 5,00,000 |
| (Balance Tax to be paid) /
Refund (B – A) |
INR 2,00,000 | INR (1,00,000) |
The taxpayers are entitled for interest on income tax refund, however such interest shall be calculated from 1st April of the Assessment year.
Example of interest – with the help of the same example mentioned above and additional information such as return filing date will be July 2023 and assuming refund will be issued in December 2023,
The Interest on income tax refund shall be for period 1st april 2023 till date of issue of order for releasing refund. It is pertinent to note here that even if tax was deducted in any month of the financial year (FY) 2022 -23 interest entitlement occurs after the end of FY only. Say Tax was deducted in April 2022 but refund will be issued in December 2023 which is blocked for the entire year without any interest benefits. It is further important to mention here that rate of interest is also substantially lower which is 0.5% per month or part of the month.
From the above analysis it can safely be concluded that deduction of tax at lower rate is attractive in terms of working capital cost, funds availibity and better liquidity in cases where these provisions can be applied.
Section 197 of the income Tax Act, 1961 contains Provisions for deduction of tax at Lower Rate or NIL rate. The Assessing officer will issue a Lower deduction certificate (LDC) upon approval of application by taxpayer in Form 13.
An indicative list containing circumstances where LDC can be obtained is mentioned below for quick reference. However there can be different circumstances where these provisions can be applied.
- Business or profession with lower net profit Ratio
- Businesses or profession having brought forward business losses or losses in current years
- Non Resident selling immovable property
Legal Provisions
Section 197 of The Income Tax Act, 1961
“(1) Subject to rules made under sub-section (2A), where, in the case of any income of any person 7[or sum payable to any person, income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of sections 192, 193, 194 194A, 194C, 194D, 194G, 194H, 194-I , 194J, 194K, 194LA and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.
(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.
(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.”
Rule 28 of the Income Tax Rules, 1962
“(1) An application by a person for grant of a certificate for the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, under sub-section (1) of section 197 shall be made in Form No. 13 electronically, —
(i) under digital signature; or
(ii) through electronic verification code.
(2) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall lay down procedures, formats and standards for ensuring secure capture and transmission of data and uploading of documents and the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the furnishing of Form No.13.;”
FORM 13 – “Please click here to download Form”
Benefits
- Funds avaiability
- Better Liquidity
- Low working capital cost – as interest at higer rate of interest from bank will be saved.
- Deduction of Tax at Lower Rates
- Positive cash flows
Procedure and documents requirements-
Application in form 13 has to be filed with the Assessing officer along with the following information or documents
- Assessment order of last 3 years
- Computation of income tax Liability
- Annexure containing TAN and estimated income customer wise. Copy of form 26AS
- Copy of ITR Filed for last 3 years
- List of pending cases
- List of outstanding demands
Time Limits –
The statue however does not provide time limits to decide the application filed in form 13. However Citizens’ charter, the Commissioner of Income tax (TDS) has issued certain guidelines for the Assessing Officers. These guidelines make it mandatory for the Assessing Officer to dispose of the applications u/s 197 within a time frame of 30 days from the end of the month in which application complete in all respects is received.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided. Neither Author nor Yes GST (collectively referred as we) assume no responsibility thereof. The user of the information agrees that the information is not professional advice and is subject to change without notice. We shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information in any circumstances. Neither Author nor Yes GST assume no responsibility thereof.
Mr. Setia is a CA by Profession and expert in the field of Indirect Taxation Based in Delhi. Rich experience of over 5 year.