Section 204 of Income Tax Act: Provisions and Compliance Requirements for TDS on Payments to Non-Residents

Section 204 of the Income Tax Act, 1961 deals with the requirement of deducting tax at source (TDS) by an employer or any other person responsible for making payment to a non-resident. In this blog, we will discuss the provisions of Section 204 of the Income Tax Act, its applicability, and the consequences of non-compliance.

Introduction to Section 204 of the Income Tax Act:

Section 204 of the Income Tax Act, 1961 mandates the deductor to deduct tax at source while making payment to a non-resident. The tax so deducted is required to be deposited to the credit of the Central Government within the prescribed time limit.

Applicability of Section 204 of the Income Tax Act:

Section 204 is applicable to all persons responsible for making payment to a non-resident, including individuals, firms, companies, and other entities. The provisions of this section apply to both resident and non-resident taxpayers.

Rates of TDS under Section 204 of the Income Tax Act:

The rate of TDS under Section 204 of the Income Tax Act depends on the nature of payment made to the non-resident. For instance, the TDS rate for royalty and fees for technical services is 10%, while it is 30% for winnings from horse races.

Consequences of Non-Compliance with Section 204 of the Income Tax Act:

Non-compliance with the provisions of Section 204 of the Income Tax Act can lead to severe consequences. The following are the consequences of non-compliance with this section:

1. Interest and Penalty: The deductor may be liable to pay interest and penalty for non-deduction or delayed deduction of tax at source.
2. Prosecution: In case of deliberate non-deduction or under-deduction of TDS, the deductor may face prosecution under the Income Tax Act, which can result in imprisonment and/or fine.
3. Disallowance of Expenditure: If the deductor fails to deduct TDS, the expenditure incurred by the deductor may be disallowed as a deduction while computing income under the Income Tax Act.

Procedural Compliance under Section 204 of the Income Tax Act:

Apart from the rate of TDS, deductors must comply with other procedural requirements under Section 204 of the Income Tax Act. These include:

1. Obtaining Tax Deduction Account Number (TAN): Every person who is responsible for deducting tax at source must obtain a TAN from the Income Tax Department. TAN is a 10-digit alphanumeric code that is mandatory for all TDS deductors.
2. Issuing TDS Certificates: The deductor must issue TDS certificates to the non-resident payee within the prescribed time limit. Form 16A is the TDS certificate issued to non-resident taxpayers.
3. Filing of TDS Returns: The deductor must file TDS returns on a quarterly basis, indicating the amount of tax deducted and deposited with the government. Failure to file TDS returns can result in interest, penalty, and prosecution.
4. Complying with other provisions of the Income Tax Act: The deductor must comply with other provisions of the Income Tax Act, including the provisions related to tax payment, tax deduction, and tax collection.

Penalty for Non-Compliance under Section 204 of the Income Tax Act:

If a deductor fails to comply with the provisions of Section 204 of the Income Tax Act, the following penalties can be levied:

1. Interest: The deductor may be liable to pay interest at the rate of 1% per month or part of the month for non-deduction or delayed deduction of TDS.
2. Penalty: A penalty of up to the amount of tax deductible may be levied for non-deduction or under-deduction of TDS.
3. Prosecution: In case of deliberate non-deduction or under-deduction of TDS, the deductor may face prosecution under the Income Tax Act, which can result in imprisonment and/or fine.

Conclusion:

Section 204 of the Income Tax Act is a crucial provision that mandates the deductor to deduct tax at source while making payment to a non-resident. Non-compliance with this section can lead to interest, penalty, prosecution, and disallowance of expenditure. Hence, it is important for deductors to comply with the provisions of this section to avoid any adverse consequences.

Read more useful content:

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Frequently Asked Questions (FAQs) 

1. Who is required to deduct TDS under Section 204 of the Income Tax Act?

• Any person responsible for making payment to a non-resident is required to deduct TDS under Section 204 of the Income Tax Act.

2. What is the rate of TDS under Section 204 of the Income Tax Act?

• The rate of TDS under Section 204 of the Income Tax Act depends on the nature of payment made to the non-resident. It can range from 10% to 30%.

3. Can TDS be deducted on the entire payment made to a non-resident?

• No, TDS can only be deducted on the income component of the payment made to a non-resident. It cannot be deducted on any other component, such as reimbursement of expenses.

4. Is it mandatory for a deductor to obtain a Tax Deduction Account Number (TAN)?

• Yes, every person responsible for deducting TDS must obtain a TAN from the Income Tax Department.

5. What is the time limit for depositing TDS to the government?

• The TDS deducted must be deposited to the credit of the Central Government within seven days from the end of the month in which the deduction is made.

6. What is the time limit for issuing TDS certificates?

• The deductor must issue TDS certificates to the non-resident payee within fifteen days from the due date of filing of the TDS return.

7. What are the consequences of non-compliance with Section 204 of the Income Tax Act?

• Non-compliance with the provisions of Section 204 of the Income Tax Act can lead to interest, penalty, prosecution, and disallowance of expenditure.

8. Can the TDS rate be reduced for non-residents under Double Taxation Avoidance Agreements (DTAAs)?

• Yes, the TDS rate can be reduced under DTAAs, subject to certain conditions.

9. Is it mandatory to file TDS returns?

• Yes, every person responsible for deducting TDS must file TDS returns on a quarterly basis.

10. Can a non-resident claim a refund of TDS?

• Yes, a non-resident can claim a refund of TDS if the tax deducted is higher than their actual tax liability.