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Clarification on Short deduction of TDS due to the Enhanced Surcharge

Circular No. 8/2020 dated 13.04.2020 The Finance (No.2) Bill, 2019 was presented before the Lok Sabha on July 5, 2019, which received the assent of the President of India on August 1, 2019. The Finance Act (No.2) enhanced the surcharge in the case of Individual/ HUF/ Association of Persons (AOP)/ Body of Individuals (BOI) as mentioned in the table below. (Surcharge for Domestic/ Foreign Company, Firm/ LLP/ Co-operative Society was unchanged) Net Income (Rupees) Surcharge Before the Act Surcharge After the Act 50 Lakhs to 0.99 Crore 10% 10% 1 Crore to 1.99 Crore 15% 15% 2 Crore to 4.99 Crore 15% 25% 5 Crore and above 15% 37% The provisions of the Act were applicable w.e.f. April 1, 2019. Hence, the rates of surcharge will be applicable w.e.f. April 1, 2019. This has led to a problem of short deduction in cases where the TDS has to be deducted at the rate of Income Tax + Surcharge + Cess. Since the rates of surcharge were enhanced on July 5, 2019, via Finance (No.2) Bill, 2019 the taxpayer was not able to deduct TDS as per the new surcharge rates for transactions entered before July 5, 2019. This has created a genuine hardship on the taxpayer, as demand was created due to the short deduction of TDS and consequential interest. To better understand the above hardship please refer to the below example: - X (Company) has availed Technical services of Rs. 3 Crore in the month of April 2019 from a Non-resident Individual which is taxable @ 10% + Surcharge + Cess. Now, the company is under the obligation to deduct TDS u/s 195. TDS shall be deducted as below: - Before the Act: 3 Crore x 10% x 115% x 104% = 35.88 Lakhs After the Act: 3 Crore x 10% x 125% x 104% = 39 Lakhs This has created a short deduction of Rs. 3.12 Lakhs on payment made in April 2019. The above hardship has been examined and has been removed by way of a Circular No. 8/2020 dated April 13, 2020. The circular contains 4 conditions and after satisfying all such conditions the taxpayer shall not be considered as an assessee in default u/s 201: - 1. The transaction is completed and payment is made before July 5, 2019, and there is no subsequent transaction in FY 2019-20 to recover the shortfall of such tax from the Non-resident.

2. TDS/ TCS has been deducted as per the provisions prevailing before the Act.

3. The tax deducted has been deposited on or before the due date of depositing the same to the government. (7th on next month)

4. TDS/ TCS statement has been furnished on or before the due date of filing of such a statement. (31st July)

Note: If the taxpayer has in subsequent transactions, deducted the shortfall of tax after 5th July 2019 then no interest will be charged on such delay in deduction of TDS/TCS.

Warm Regards CA. Mehul Gupta +91-8368972811

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