The income tax department is now tightening the noose around government departments. All central and state government departments will be required to deduct tax at source and file quarterly returns on par with the corporate sector.

TDS collections from the government department were very low. Out of the total collection of Rs 70,000 crore in 2006-07, just Rs 1,500 crore came from government departments. This is even as some of these departments are the largest provider of contracts.

The government departments have to deduct tax whenever any payment is made towards a contract. However, most government departments show it as a book entry and do not even file returns. All government departments, both at central and state level, will be asked to take tax deduction account numbers (TAN) and e-file their returns every quarter like companies, the source said. They will also have to pass on the tax deducted to the department.

The I-T departments audit division will also carry out special audits of some government departments, like defence and railways, to ascertain the reason behind lower TDS collection by them, a government source said. A proposal in this regard has received a go-ahead from finance minister P Chidambaram.

The I-T department is creating a TDS directorate with a view to tighten TDS administration. About 12 commissionerates in the country would have dedicated officers focusing on expanding the TDS network and ensuring greater compliance.