In a bid to tighten the noose around defaulters, the Income Tax (I-T) Department will set up a centralised system to identify entities which deduct tax at source but do not deposit it with the government.

"This Centralised Processing Centre (CPC) would be set up to process TDS (tax deducted at source) statements and to identify the defaults and PAN errors...," the Central Board of Direct Taxes (CBDT) said.

Besides, the idea behind creating the CPC is to develop a mechanism to rectify the defaults and errors in the process of TDS collection through intelligent technological aids and by persuading the deductors.

As per the income tax laws, entities, both corporate and non-corporate, are required to deduct tax at source while making payments to their employees and deposit the same with the government within a stipulated time period.

If a person or corporate entity fails to pay the deducted TDS to the government within the prescribed time, he could face rigorous imprisonment of 3 months to 7 years.

The CPC would identify TDS defaults, like non-payment, short payment, short deduction, late payment and others. TDS accounts form about 38 per cent of the total direct tax collection.

The Department would engage a Managed Service Provider (MSP) for setting up and managing the CPC for TDS.

"The selected MSP will create and operate the Centralised Processing Center [CPC] to process TDS statements for ITD," a revenue official said.

The MSP would design and develop the required IT software.

"Any future requirements like change in IT Acts/Rules, including Direct Tax Code, which is likely to come into force in 2012, or any modification in tax Information network application will also need to be taken into account at the time of designing the software," the CBDT said.