Obtain non/lower Tax deduction certificate under Sec 197 for business

The provisions of Income- tax act impose an obligation on the customer (i.e., recipient of service) to withhold a certain portion of payment as tax deduction at source. Accordingly, the customer deducts such portion and releases the balance amount.

Assuming TDS rate is 10% and bill value is Rs.50,000/-, the service provider would get Rs. 45,000/- in the form of cash or cash equivalents and balance of Rs. 5,000/- would be available as tax credit which can be available for adjustment against taxes payable.

In case of least profitable businesses or loss-making business, tax deductions at 10%(assumption) on revenue would cause real pinch on liquidity, though the same could be claimed as a refund in the subsequent year by filing Income tax return. Consequently, these business entities should at least wait for a period of 1 year to get their own money as a refund from Income-tax department.

Hence, Income-tax act provides a facility to obtain Nil Deduction Certificate or Lower Deduction Certificate by filing an application in Form 13 with Jurisdictional Assessing Officer (AO). Considering the merits of the case, AO issues a certificate seeking a list of customers of the assessee to neither deduct taxes nor deduct at a lower rate.

Who can ideally apply?

1. Loss-making businesses
2. Least profitable business (profit margins being less than rate of tax deduction)
3. Assessee having carried forward losses to set off with future year’s Income
4. Assessee eligible for deductions of profits (U/s. 10 or under chapter VI A etc.,)
5. Assessee eligible for weighted deduction of expenditure
6. A non-resident selling immovable property

Above list is an indicatory list but changes on case to case basis.

Requirements to file an application in Form 13

1. Financial statements of last 3 years and projected financial statements for FY 2018-19
2. Details of income of last 3 years and projected current year’s income of FY 2018-19
3. Income tax returns of last 3 years
4. Details of tax deduction of last 3 years (Form 26AS)
5. List of customers (with TAN) and projected income from customers
6. Details of tax deduction by assessee for last 3 years.

Procedure to file an application

States like Karnataka & Mumbai etc., have released online portal to file Form 13 application. In case of other states, duly filled application in Form 13 along with other necessary documents shall be filed physically.