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Last month, the Bombay High Court held that an employee cannot be held liable if the employer fails to deposit the tax deducted at source (TDS) with the income tax department. The court laid the obligation to deposit the tax squarely on the employer, specifying that in the event of a default the burden cannot be shifted to the employee.
As per the Income-Tax Act, the employer should remit the deducted taxes to the central government on or before the 7th of every subsequent month. The TDS Return is also to be filed in Form 26Q once a quarter, quoting the employee’s PAN, salary and taxes deducted on it. They will be reflected in the employee’s Form 26AS, Annual Information Statement and Form 16A.
If the employer fails to deposit the deducted tax with the central government, what happens? Does the employee need to pay the tax again? No.
The Bombay High Court ruling is the latest in a series of court rulings on the matter. Earlier, the Delhi High Court had also observed that fresh tax demand cannot not be enforced. The Guwahati High Court held that deduction of TDS, being one of the modes of recovery of tax, once adopted, only that mode should be pursued and taxpayers should not be subjected to other modes. Thus, the tax department is to treat the deductor as an ‘assessee-in-default’ and initiate due recovery proceedings against him and not the employee. The Gujarat High Court also held that where the deductor has issued a certificate for TDS in Form 16A, the tax-deductee assessee is entitled to a tax credit/refund.
How does the employer’s default impact the employee?
The employee cannot file returns within the due dates and there claim refund of excess tax deducted, if any. On the flip side, the employee is not required to pay penalty or interest on tax deduction being less than his liability.
How can the employee secure his/her position?
In April, the Mumbai Bench of the Income Tax Appellate Tribunal held that the burden of deduction of TDS on salary lies on the employee. In other words, the employee has to be able to prove that he or she was subjected to TDS, with either pay slips, salary bank statements. An employee can check the status of the deposit of his TDS by his employer once a quarter, i.e. in July, Oct, January and May of the following year on logging into the income-tax e-filing website.
(Prabhakar K S is the Founder & CEO, Shree Tax Chambers)