TDS on payments made to government/government agencies

As most of you are aware, from years this issue is bothering many vendors who are dealing with either the government or with governmental agencies. I researched in many websites, but no article/discussion/query provided me the satisfaction or clarity on this debatable issue. In this article I have tried to breakdown the logic and provide clarity by understanding section 10 and analyzing multiple circulars released by ITD.

As per Section 196 of Income tax act, 1961, no deduction of tax shall be made by any person from any sums payable to -

1. Government (e. State and Central Government)
2. RBI
3. Corporation established under central act which is, under any law for the time being in force, exempt from income-tax on its income, or
4. Mutual fund specified under section 10(23D)

Now to understand what is covered under point (iii) i.e. corporations established under central act, let us try and understand Circular No. 18/2017 which defines the scenario when an institution is considered to be exempted.

As per Circular No.18/2017, The Central Board of Direct Taxes (the Board) had earlier issued Circular No. 4/2002 dated 16.07.2002 and Circular No. 7/2015 dated 23 .04.2015 which laid down that in case of such entities, whose income is unconditionally exempt under Section 10 of the Income-tax Act (the Act) and who are also statutorily not required to file return of income as per Section 139 of the Act, there would be no requirement for tax deduction at source (TDS) from the payments made to them since their income is anyway exempted from tax under the Act.

As per CBDT, no tax is required to be deducted in case following points are satisfied by the institution:

1. Such institutions income is unconditionally exempt under Section 10 of Income tax Act, and
2. They are also statutorily not required to file returns under section 139 of the Act.

Further, let us try to understand which all institutions are covered under Circular 18/2017 and Section 10 of Income-tax act -

(i) "local authority", as referred to in the Explanation to clause (20);

(ii) Regimental Fund or Non-public Fund established by the armed forces of the Union referred to in clause (23AA);

(iii) Fund, by whatever name called, set up by the Life insurance Corporation of India on or after 1st August, 1996, or by any other insurer referred to in clause (23AAB);

(iv) Authority (whether known as the Khadi and Village Industries Board or by any other name) referred to in clause (23BB);

(v) Body or authority referred to in clause (23BBA);

(vi) SAARC Fund for Regional Projects set up by Colombo Declaration referred to in clause (23BBC);

(vii) lnsurance Regulatory and Development Authority referred to in clause (23BBE);

(viii) Central Electricity Regulatory Commission referred to in clause (23BBG);

(ix) Prasar Bharati referred to in clause (23BBH);

(x) Prime Minister's National Relief Fund referred to in sub-clause

(i), Prime Minister's Fund (Promotion of Folk Art) referred to in sub-clause
(ii), Prime Minister's Aid to Students Fund referred to in sub-clause
(iii), National Foundation for Communal Harmony referred to in sub-clause
(iiia), Swachh Bharat Kosh referred to in sub clause
(iiiaa), Clean Ganga Fund referred to in sub-clause
(iiiaaa) of clause (23C);

(xi) Provident fund to which the Provident Funds Act, 1925 (19 of 1925) referred to in sub-clause

(i), recognized provident fund referred to in sub-clause
(ii), approved superannuation funds referred to in sub-clause
(iii), approved gratuity fund referred to in sub-clause
(iv) and funds referred to in sub-clause (v) of clause (25);

(xii) Employees' State Insurance Fund referred to in clause (25A);

(xiii) Agricultural Produce Marketing Committee referred to in clause (26AAB);

(xiv) Corporation, body, institution or association established for promoting interests of members of Scheduled Castes or Scheduled Tribes or backward classes referred to in clause (26B);  

(xv) Corporation established for promoting interests of members of a minority community referred to in clause (26BB);

(xvi) Corporation established for welfare and economic upliftment of ex-servicemen referred to in clause (26888);

(xvii) New Pension System Trust referred to in clause (44)

There are no follow up circulars released by ITD for Circular 18/2017 till date. Hence we can assume this circular is relevant even today.

Hope the above analysis helped those people who are in need.