Changes in procedure relating to application for withholding tax at a lower / nil rate

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Where a taxpayer believes that its total income justifies withholding of tax at a lower rate, it can apply to the assessing officer for a certificate of withholding tax at a lower rate. The application by the taxpayer to the AO for a certificate of withholding tax at a lower rate is governed by Rule 28AA of the Income-tax Rules, 1962 (the Rules).

Recently, the Central Board of Direct Taxes (“CBDT”) has vide Notification No. 16 / 2011 dated 29 March, 2011 substituted Rule 28AA of the Rules, which requires the applicant to furnish additional details at the time of applying for a certificate for a lower / nil rate of withholding tax. The modifications are effective from 1 April, 2011.

The modifications made

The modifications made

Current Provisions	Amended Provisions	Impact / Change
Rule 28AA
The AO can issue a certificate for nil withholding of tax, or for tax at a lower rate. The rate of tax withholding was to be determined as follows: (i) at the average rate of tax, i.e the total tax payable on estimated income, less the sum of advance tax already paid and taxes already withheld, as a percentage of the total payment or (ii) at the average of the average rates of tax paid by the assessee in the last three years; whichever is higher.	o If the AO is satisfied that the existing and the estimated tax liability of a person justifies tax withholding at a lower rate, or at nil rate, the AO will issue a certificate. o The AO will determine the existing and the estimated liability after considering the following: – tax payable on estimated income of the previous year relevant to the assessment year; - tax payable on the assessed or the returned income of the three previous years; - existing liability under the Income-tax Act, 1961 and Wealth-tax Act, 1957; - advance tax payment and taxes withheld for the assessment year; - withholding tax up to the date of application relevant to the date of application year; and - tax collected at source relevant to the year until the date of application.	o The requirement of a minimum rate of withholding at the average of the rate of taxes paid in the last three years has been done away with. However, the AO is required to consider this in determining the estimated liability for the purpose of lower rate of withholding or for nil withholding. o Form 13, relating to the application, has been modified. In the new form 13, the following additional details are required to be furnished: – Tax Deduction and Collection Account No. (“TAN”) - Details of returns/statements which have become due but are not filed - Details of returned income/ assessed income for the last three assessment years - Details of sales, profit, etc. for the three previous years in the case of an assessee whose income includes income under the heading “Profits and gains of business or profession”: (copies of profit and loss account and balance sheet along with the audit report, if audited, for the three previous years must be enclosed). - Details of existing liability under Income-tax Act, 1961 and Wealth-tax Act, 1957. - Assessment year to which the payments relate. This will make the process of application and certificate issuance more comprehensive at the initial stage.
o Rule 31A
Quarterly statement of tax withholding is required to be furnished by the person responsible for withholding tax.	o In addition to the existing requirements, the particulars of amounts paid or credited on which tax was not withheld is also required to be furnished. o The details of the payment made to the contractors of specified business under section 194C(6) of the Act (i.e. plying, hiring or leasing goods carriages) without withholding tax on furnishing of PAN2 is now required to be included in the quarterly statement.	This is an additional compliance requirement for the person responsible for withholding tax. This will also lead to the possibility of scrutinising of the transactions at the filing stage of the process.

Conclusion – The amended requirements further standardises the process by seeking specific details which make the process of application and certificate issuance more comprehensive. The additional information that is called for by the modified Rule 31A was already being provided by the assessee while furnishing the quarterly statement.