Small service providers to come under tax net

A recent notification issued by the Central Board of Direct Taxes (CDBT), the apex body on direct tax matters, is likely to widen the tax base by bringing in even small service providers.

That is because the notification, which will be effective from April 1, says that the TDS form should contain the Permanent Account Number (PAN) of deductees, the person from whom tax is deducted.

This is a departure from the current practice where companies using services of small service providers are not required to furnish PAN of deductees.

“The move will bring more small service providers under the tax net but it will increase the bureaucratic hassles for the taxpayers,” said Samir Kanabar, partner with Ernst & Young, an audit and consulting firm.

Apart from PAN, the system will generate a Unique Transaction Number (UTN) for all payments. Therefore, these two numbers (PAN and UTN) would mean that payments are tracked and service providers would be able to claim credit on their tax payments. While paying final tax, Indian tax system allows taxpayers to deduct tax that is already paid.

In addition, the use of two numbers would enable tax authorities to catch hold of tax deductors who had deducted tax but have not paid to the government, said Kanabar.

The notification also mandates that all deductors of TDS, irrespective of their size of operations, would now have to make payment through electronic mode. Earlier, small deductors or collectors are excluded.

If there are negative news for small service providers, the new notification also has simplified procedures for large companies, which deduct tax under different heads- salaries, rent or consultancy fees.

Earlier, companies had to specify under which head (whether salaries or rent) the taxes were deducted. The latest notification allows firms to make one combined payment.