TDS Deduction for Businesses Dealing with Vendors

TDS deductions can be complex for businesses dealing with vendors. For businesses that need to deduct TDS while paying their vendors, it’s crucial to understand the following key points:

TDS Rates Based on Vendor’s PAN and ITR Filing:

When engaging with vendors who lack a PAN (Permanent Account Number) or have defaulted on filing their Income Tax Returns (ITR), businesses must be aware that the TDS deduction rate is higher.

Failure to deduct the correct TDS can lead to non-compliance and result in working capital loss.

Mandatory PAN Furnishing: Vendors (deductees) must provide their PAN to businesses (deductors) to enable TDS deduction at the source. If the vendor doesn’t furnish their PAN, the tax will be deducted at a higher rate, which could be either the rate specified in the relevant provision, the current applicable rate, or 20%.

Special TDS Rate for E-commerce and Buyer Transactions: In cases where tax needs to be deducted by an e-commerce operator or buyer under specific sections, and the vendor hasn’t provided their PAN, the TDS rate is set at 5% instead of 20%.
Exemptions for Non-resident Vendors: Certain non-resident vendors are exempt from Section 206AA provisions in specific transactions, such as interest on particular bonds, specified income (like interest, royalty, fees for technical services, dividend, and capital asset transfers). Non-resident vendors, in these cases, are still required to provide specific details and documents to the deductor.

TDS Deduction for Non-filers of Income Tax Returns: In cases where vendors have not filed their income tax returns, Section 206AB comes into play. When TDS is required under this provision, it will be deducted at the higher of these rates:

Twice the rate specified in the relevant provision.
Twice the rate or rates currently in effect.
A flat rate of 5%.

Here are the key aspects to consider:

Conditions for Higher TDS Rates: If the vendor has not filed their income tax return for the relevant assessment year, and the due date for filing has passed, and the aggregate TDS and TCS amount is Rs. 50,000 or more in the previous year, a higher TDS rate applies. Such vendors are referred to as ‘specified persons.’

Applicability to Various Payments: The higher TDS rate is applicable to most payments, except those covered under below provisions like

TDS on salary
EPF withdrawals
Winnings from lotteries from lotteries, crossword puzzles, gambling, betting, online game, horse race etc.
Property purchases other than rural agricultural land
Rent payments
Income from investments in Securitization Trust
Payments to the contractor, commission agent, broker, or professional under section 194N
Cash Withdrawals
Payment on transfer of Virtual Digital Asset (if the payer is a specified person)

Exemptions for Certain Non-resident Vendors: The higher TDS rate does not apply when making payments to non-resident vendors without a permanent establishment in India or to individuals or entities not required to file income tax returns for the specified period, as notified by the Central Government.

TDS Deduction for Vendor Driven Businesses

In summary, businesses should be aware of these TDS regulations to ensure compliance with tax requirements when dealing with vendors. For more information on TDS, check out this FAQs resource by the government of India. Got any TDS deduction queries with add-on vendor complexities? Send them to sales@finsmartaccounting.com and have them answered by our accounting and taxation experts!