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Govt to cast TDS net wide on outsourced value addition
July, 14th 2006

With government eyeing new areas to bring under the tax deducted at source (TDS), outsourced manufacturing could fall in the net. Officials said if a manufacturer outsourced a part of his value addition, the payment made by him would attract TDS.

In other words, the outsourcer will be responsible for deducting the tax at source and pay it to the government. However, manufacturers who outsource a complete product and put their brand name on it may be kept out of this.

Simply put: It would apply if the product was owned by one company before it was sent to another company for carrying out value addition. For example, if a shirt maker outsources button stitching to another company, its payment for this could attract TDS.

However, if a company contracts out the whole shirt and just puts its brand name on it, it would be treated as an outright purchase and not attract TDS. Since this could vary transaction to transaction wise, the tax department wants to tread on this very cautiously, official sources told ET.

This issue was brought to light at the last weeks Chief Commissioners and Director General of Income Tax conference and it was felt that though it could be seen as one the target areas for TDS, there was a need for clear cut guidelines on the subject. The Central Board of Direct Taxes may look at bringing in some clarifications on the issue, officials said.

Another area for taxation at source which the department is looking into is the commission paid by companies to their distributors. Officials said in the case of commission, it has been seen that a lot of companies give incentives to their distributors for selling a particular number of units.

It is at times passed on in form of discount to the dealer per piece basis in their commission. This area also, the officials felt would need detailed guidelines as it might have grey areas which would have potential for unnecessary litigations.

 
 
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