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Cos come under I-T scanner on payments to consultants
August, 09th 2007
CBDTs move to enhance collection of tax at source

Sources say some companies hire employees, but on paper, they are consultants to the company to evade higher TDS

The tax collectors are on the move and on their crosshairs are companies that make salary payments under the guise of professional contract payments to so-called consultants in order to avoid a larger sum being deducted as tax at source (TDS).

Scrutinising such transactions of companies is one of a massive list of 73 types of transactions highlighted in an internal document prepared by the Central Board of Direct Taxes (CBDT) and circulated to all income-tax circles in order to enhance TDS tax collection in the current fiscal.

Mr K.R. Girish, Partner and Head of Tax Practice (South India) at KPMG, said that company-employee and company-consultant relationship are defined under the Income-Tax Act. However, some companies have company-consultant relationship for taxation sake but continue to have company-employee relationship. They even track the work of such a consultant through time sheets. Such kind of companies will come under scrutiny, he said.

In company-employee relation, the company defines the work for the employee and guides him/her at every stage. In the case of company-consultant relation, the company is only interested in the final outcome of the work, Mr Girish said.

Industry sources on condition of anonymity said that some companies especially in the media sector hire employees, but on paper, they are consultants to the company to evade higher TDS.

These sources also pointed out that the status as a professional provides an assessee greater leeway in claiming certain expenses as deductible in the computation of taxable income a privilege generally not available to those earning a salary income. From the tax departments point of view, there is also the question of timing of tax collections. The TDS on contractual payments for professionals works out to a rate of a little over 11 per cent. But as salary payments the effective rate is invariably higher.

The CBDT is also keen that income-tax officers examine inter-corporate transactions among group companies to see if they are in the nature of dividend payment and bring them within the purview of TDS.

Sick companies

The CBDT has also suggested that officers check loss-making companies for timely deposits of TDS as they tend to default on their remittance obligations due to lack of funds. It has also pointed to the need for educating, drawing and disbursements officers of large organisations and government departments to ensure proper deduction of tax on salaries.

The CBDT has stressed the TDS angle for ensuring better revenue mobilisation as such collections in fiscal 2006-07 amounted to Rs 70,000 crore, or roughly 27 per cent of the gross tax collection of the country.

The CBDT has also asked tax officials to scrutinise banks and public sector undertakings, stockbrokers, commodity brokers and sub-brokers, who have received brokerage of over Rs 1 crore or have claimed bad debts of over Rs 10 lakh.

For the current fiscal, the estimated tax collection is Rs 2,67,490 crore, which is 16.25 per cent more than last years collections. The CBDT has set a target of adding 15 per cent more assessees over the last year number. It also wants the number of assessees declaring total income of above Rs 10 lakh to be increased by 30 per cent over last year.

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