Govt halves TDS rates on rental income and contractor; No education cess on TDS on non-salary payments by domestic Cos

By TIOL News Service

NEW DELHI, JULY 07, 2009: IF one takes a close look at the chain of some of the recent developments emanating from the TPL, what has been proposed in the Finance Bill 2009 for overhauling TDS provisions has not come as a big surprise. The misuse of TDS credit appears to be dominating the mind of TPL honchos for quite some time. And that is how it erred in coming out a little futuristic TDS Scheme two months back. Although that scheme based on success of UTN generation has been postponed for indefinite period, the Budget 2009 has taken a giant step forward to overhaul the TDS regime.

In the bargain, the taxpayers have got the unexpected bounty of windfall gains. The Govt has proposed to slash the TDS rate on rental income u/s 194I to 10%. If the PAN of the payee is not available, the rate to be applied is 20%. In other words, this rate may be regarded as penal in nature and thus PAN has become a mandatory condition. As per the proposals, the TDS on rental on plant and machinery is proposed to be reduced from 10% to 2%. For land and building, it is proposed to be reduced from 15% on individual and HUF to 10%. Similarly, it is reduced to 10% from 20% applicable to companies.

The TDS rate for contract u/s 194C has also been reduced from 2% to 1%. In other words, the TDS on contractor has become equivalent to the rate applicable to sub-contractor. If PAN of the deductee is missing, the penal rate of 20% will attract.

Interestingly, for not understanable reasons, the Govt has waived the requirement of surcharge and education cess on TDS on non-salary payment by resident taxpayers. One possible reason could be the intention to make it simple for domestic companies as TDS is a vicarious liability and the primary liability to pay tax on income lies with the payee who ultimately pays the tax with surcharge and education cess.

But a simple corollary of this proposal is that education cess will continue to be applicable to non-residents and foreign companies.

The Govt has also granted a TDS waiver to transport contractors u/s 44AE.

In another interesting change the Budget clarifies the application of TDS on outsourcing contract u/s 194C. If a brand owner provides raw materials and technical specifications to a jobworker, the TDS will be applicable. But if only technical specifications are provided and goods are sourced by the jobworker from third party, no TDS to be applied.