Over the years, we have seen revenue authorities focusing on widening the withholding tax net, and ensuring stricter compliance. More and more transactions have come within the ambit of withholding tax, be it expansion of services for tax deducted at source (TDS) on ‘contractors’, or definition of ‘rent’ or other sources of income.

Withholding tax not only ensures regular, month-on-month flow of money into Government coffers, as compared to advance tax (which falls due on specific dates, quarterly or thrice a year), it also widens the tax net. The authorities have been stressing on withholding tax compliance, be it through initiation of survey proceedings in 1998-99, or initiation of prosecution proceedings in the past year.

Recently, they have been issuing notices asking companies to disclose the name of the principal officer for initiating prosecution proceedings under Section 276B of the Income-tax Act, 1961. This section covers delays in deposit of TDS, which may tantamount to withholding the Government’s dues and liable to prosecution. The punishment is imprisonment ranging from three to seven years, with or without fine.

However, initiation of prosecution is not automatic. The taxpayer has an opportunity to represent the grounds for non-initiation. If a reasonable cause can be established, prosecution cannot be initiated.

In the past, the provisions of Section 276B were generally not enforced. However, owing to the drop in direct tax collection this fiscal, the authorities are strictly enforcing compliance of withholding tax provisions by invoking the section. Accordingly, several hundred notices have been issued across India, purporting to initiate prosecution proceedings. The Income-Tax Act does not provide for any time limit beyond the statutory period for deposit of tax. However, the current notices in most cases relate to delays of more than 12 months in deposit of taxes post deduction, or where the default amount exceeds Rs 25,000.

It is possible for a taxpayer to opt for compounding under the law in lieu of prosecution. Based on an earlier circular issued by the Central Board of Direct Taxes, compounding can be done only once in a lifetime on payment of interest at 5 per cent per month for the default period along with administrative fee. An application in prescribed form should be sent to the Chief Commissioner of Income-Tax concerned, subject to conditions.

Still, as prosecution is a criminal proceeding, the current approach adopted by tax authorities cannot be taken lightly. It should be a wake-up call for every taxpayer to evaluate business affairs, achieve commercial rationale, and relook compliance processes to avert prosecution.

Divya Baweja is Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd, and Divya Agarwal is Manager and Tarun Garg is Assistant Manager, Deloitte Haskins & Sells

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