TDS (Tax Deducted at Source on payment of interest (or any other service fees) to non Banking financial Companies and Public Financial Institutions.
Non Banking Financial Institution
A Non Banking financial Company is a company registered under Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/ stocks/bonds/debentures/securities issued by Government or Local authority or other marketable securities of a like nature, leasing, hire – purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any service and sale / purchase/ construction of immovable property.
Public Financial Institution
Section 4A of Companies Act, 1956 – Public financial Institutions
1. Each of the financial institutions specified in this sub-section shall be regarded, for the purposes of this Act, as a public financial institution namely-
i. the industrial Credit and Investment Corporation of India Limited, a company formed and registered under the India Companies Act, 1913;
ii. the Industrial Finance Corporation of India, established under section 3 of the Industrial Finance Corporation Act, 1948;
iii. the Industrial Development Bank of India, established under section 3 of Life Insurance Corporation Act, 1956;
iv. the Unit Trust of India, established under section 3 of The Unit Trust of India Act, 1963;
v. the Infrastructure Development Finance Company Limited, a company formed and registered under this Act.
vi. the securitisation company or reconstruction company which has obtained a certificate of registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
2. Subject to the provisions of sub-section (1) the Central Government may, by notification in the Official Gazette, specify such other institution as it may think fit to be a public financial institution:
Provided that no institution shall be so specified unless-
i. It has been established or constituted by or under any Central Act, or
ii. Not less than fifty – one percent, of the paid – up share capital of such institution is held or controlled by the Central Government.
From the above, we can conclude that Non Banking financial Companies and Public financial Institution both are not same.
What is Interest? Is this term includes all related service fees charged for processing of loan or for any other purpose?
In accordance with the Section 2 (28A) of Income Tax Act, 1961
Interest means interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit, claims or other similar rights or obligation) and includes any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilized.
Interpretation of the above definition
From the above definition it is being clarified that Interest and loan processing fee are same in the eyes of law (Income Tax Act, 1961). Hence, TDS compliances on both must be same.
If TDS is required to be deducted by any entity on interest then it must be deducted on loan processing fee or any other service fee.
Section 194A of Income Tax Act, 1961 - TDS on Interest (other than interest on securities)
Section 194A explains that Any person, not being an individual or a Hindu Undivided Family who is responsible for paying to a resident any income by way of interest, other than interest on securities, is required to deduct income tax thereon at the rate of 10% at the time of credit of such income to the account of payee, or interest payable account or suspense account or at the time of payment thereof, in cash or by issue of a cheque or draft or by any other mode, whichever is earlier,
However this section also state some cases where provisions of this section are not applicable which includes:
TDS is not required to be deducted where interest is credited or paid to any banking company, co-operative societies engaged in banking business, public financial institutions, the Life Insurance Corporation, the unit Trust of India, a company or a co – operative society carrying on the business of insurance, or notified institution.
But this section does not provide any exemption from TDS to Non Banking financial companies.
Conclusion: TDS is not required to be deducted on payment of interest (or any other service fee) if the payment is made to some Public financial Institutions, however need to comply with the TDS provisions under section 194A if payment is made to any Non – Banking financial Companies.
Points to be remembered while Auditing
a. No difference is made between interest and any loan processing fee or any other related service fee under Income Tax act,1961, hence TDS Compliance on their payments must be checked under Section 194A – TDS on Interest ( other than interest on securities). Refer Section 2(38) as explained above.
b. Auditors must check the status of the company or institution form whom the loan is taken before applying the provisions regarding TDS under section 194A of Income Tax Act,1961 as exemption is provided to only Public financial Institutions and not to Non Banking financial Companies.
Tags tds Income Tax