Consequences of Failure to Deduct or Pay TDS
Introduction
If any person fails to deduct TDS or deducts but does not deposit it with the Government, they are deemed an assessee-in-default and are subject to interest, penalties, prosecution, and disallowance of expenses.
When Is a Deductor Deemed to Be in Default?
- Failure to deduct TDS.
- Failure to deposit TDS after deduction.
- Failure to deposit tax on non-monetary perquisites (paid by an employer).
When is a deductor not considered in default?
- If the payee (resident or non-resident) has paid the tax and reported the income in their ITR. The deductor must obtain a Certificate of Chartered Accountant (Form 26A).
Time limit for passing the order of assessee-in-default
- The Assessing Officer (AO) must pass an order within:
o 6 years from the financial year-end in which payment was made/credited; or
o 2 years from the financial year-end in which a correction statement was furnished, whichever is later.
Interest on TDS Default
|
Default Type |
Interest Rate |
Calculation Period |
|
Failure to deduct TDS |
1% per month |
From the due date of deduction to the actual deduction date |
|
Failure to deposit TDS |
1.5% per month |
From the deduction date to the actual deposit date |
Additional Consequences
- Charge on Assets – Unpaid TDS becomes a charge on the deductor’s assets.
- Penalty & Prosecution –
o Penalty under Section 271C for failure to deduct TDS.
o Prosecution under Sections 276B & 278A for failure to deposit TDS.
o Reasonable cause defence available under Section 278AA.
o If deemed in default u/s 201, the person is liable to a penalty u/s 221 as directed by the AO.
- Disallowance of Expense –
o Business expenses disallowed under Section 40 while calculating business income.
o Other expenses disallowed under Section 58 while calculating income from other sources.