With the advent of time, almost all the procedures of our day to life is becoming online. In this, one of the processes is applying lower withholding tax certificate (or order) under section 197 of the Income tax Act, 1961 (‘the Act’) from the income tax authorities is also included. The CBDT, vide notification no. 08/2018 made it mandatory to apply lower withholding tax application online.
Ofcourse, the above change was made in expectation that it will reduce the total time taken to obtain the said certificate. However, there are certain issues which still need to be addressed which includes mandatory requirement of PAN, allocation of application to officer not having jurisdiction on the application and more time in application getting reflected on TRACES portal to the income tax officers.
Moreover, among others, one of the biggest challenges in obtaining LWTC from the income tax department is strict application of Rule 28AA of the Income tax Rules, 1962 (‘the Rules’) in granting LTDS certificate to the applicants. The Rule 28AA provides for the mechanism for the computation of the rate of tax deduction at source for the purposes of disposal of the application filed u/s 197 of the Act.
The relevant extract of the Rule 28AA has been reproduced hereunder: –
Certificate for deduction at lower rates or no deduction of tax from income other than dividends.
- Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax.
- The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following: —
- tax payable on estimated income of the previous year relevant to the assessment year;
- tax payable on the assessed or returned income [or estimated income, as the case may be, of last four] previous years;
- existing liability under the Income-tax Act, 1961 and Wealth-tax Act, 1957;
- advance tax payment [tax deducted at source and tax collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28];”
Although the above rule only provides for ‘considerations’ to be followed, certain officers apply the same strictly to the application as a ‘pre-condition’ and reject the application of the applicant especially in the cases where clause (ii) of the said Rule is not satisfied.
Generally, a show cause notice is issued before rejection of the application wherein the applicant is asked to submit a legal submission to justify the reason of granting lower withholding tax certificate. In the said legal submission, support can be taken from available judicial precedents wherein it has been held that satisfaction of above considerations is not mandatory and Rules cannot override the provisions of the Act.
Practically, the legal support holds good when applicant has applied for LTDS certificate for consecutive 3rd and 4th year and LTDS certificate has been granted for previous years. However, where the applicant is in 1st year or 2nd year of operations, the officers do not issue certificates on the ground that estimated tax liability cannot to be calculated as the relevant data is not available and hence, the application is subject to rejection basis Rule 28AA of the Rules. Thereafter, the applicant has an option to move to Hon’ble High Court for disposal of application through writ petition.
Basis the current scenario of the LTDS certificates specially the new applicants, it is somehow contradictory to Government’s policies of attracting foreign investments in India viz. make in India, ease of doing business etc. as without LTDS, it definitely creates a major cash blockage for the applicant who is in need of the same specially those engaged in Infrastructure sector who work at a low profit margin for a project.