Lessons on Tax Deduction at Source (TDS) for Startups

Lawyers at VakilSearch show you the way

As a business owner, you will undoubtedly have to grapple with issues of taxation.

At vakilsearch.com, we get asked a few questions all the time. Do I have to pay VAT? Do I have to pay PT? What about CST? And the big daddy of them all, Service Tax can’t be ignored either.

Although the Government has made efforts to simplify and “rationalize” the tax structure in India, our regime is anything but perfect.

One such effort to simplify tax payment was made in the form of “Tax Deduction at Source”. Tax Deduction at Source essentially means that the tax formalities are taken care of at the time of receiving salary / compensation itself – and there is no additional procedure to comply with.

This is in theory. In practice, a lot of doubts remain about TDS. How to file, when to file, what income can be exempted etc are looming doubts.

We will look at a few practical issues here, today. We take client confidentiality very seriously - none of these are taken from any client’s case. These are just illustrations to guide you.

Number 1:

What if I want to pay tax on my own and want to receive the full income (i.e. without TDS)? Can my company compulsorily deduct TDS?

Yes, your Company can compulsorily deduct TDS. The liability is on the part of the employer to pay tax (at source). In no event can the employer avoid it, even if the employee wants to pay the tax independently.

This was decided in John Patterson’s case before the Calcutta High Court.

If you are the employer, please note: You cannot avoid paying TDS. It is mandatory.

What if my employee has already paid tax? Then do I still need to deduct it? No, you need not. This is an exception to the rule above. If you have not deducted tax and your employee has already paid tax on his salary, you can avoid paying tax again on the same transaction.

So if for some reason the employee has already paid the tax and you have forgotten to deduct tax at source, you will have to explain why you are not deducting tax at source, show from the records that tax has already been deducted, and if this argument is accepted by the tax department, you can escape liability.

Number 2:

I am an employer. I forgot to deduct TDS for the first 4 months. Now can I deduct for the previous months?

Yes, you can. In the decision in CIT v. Enron Expat Services Inc. [2011] (330 ITR 496) (Uttarakhand) the same question came up before the Court. The “Assessee” had paid tax but forgotten to deduct it regularly every month.

The department held that the assessee had defaulted. The Court however disagreed with the department and held that the assessee had not defaulted. It held that the liability to deduct tax had to be measured with respect to the entire year and not for the specific month.

This is a very important decision because it gives you as an employer the flexibility to deduct tax at strategic intervals.

Number 3:

I had hired an employee till recently. I discovered that he was pilfering from the company stocks, and I relieved the employee. As per the contract, he refunded the salary for the last one month. Do I need to pay TDS on that salary as that is technically my income?

No, you do not. TDS is basically a different form of collecting income tax. Now what you have got in this case is not income, but a refund of an expenditure incurred by you.

It has been held on numerous occasions that a refund is not taxable, since a refund does not amount to income in the hands of the receiver.

This was decided by the Calcutta High Court in Dunlop Rubber’s case, where the Court held that a reimbursement of expenses would not be a “revenue receipt” and therefore would not be subject to taxation as per the Income Tax law.

Conclusion

We cannot draw a single conclusion from these three separate points. However, we would like you to take away one piece of legal advice: Remember to deduct TDS every month, without fail. If you as an employer pay salary more often than every month, deduct it every time you pay the salary. You can avoid most, if not all the situations described above.

About VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.