The government on Friday exempted certain payments to banks from the purview of tax deducted at source (TDS) to reduce compliance burden associated with the income earned by banks from financial services such as cash management, bank guarantee, Demat and depository services.
Prior to the exemption, which came into force on January 1, section 197 of the Income Tax Act required that the tax on such income accruing to banks be deducted at source or be paid in advance to the government.
Non-compliance to this provision exposed the bank concerned to the risk of being seen as an assessee in default.
The Central Board of Direct Taxes said in a notification that from January 1, payments received by banks for seven specified services are exempt from TDS obligation.
These include payment received as bank guarantee commission, cash management service charges, depository charges on maintenance of Demat accounts, charges for warehousing services for commodities, underwriting service charges, clearing charges (MICR charges) and credit card or debit card commission for transaction between the merchant establishment and acquirer bank.
Such payments can be made without TDS, the notification said. Exemption from TDS on credit or debit card commission on transactions between the merchant establishment and banks will also positively impact the use of plastic money in the economy, the notification said.
“The notification will obviate the uncertainties about the applicability of specific TDS provisions on payments mentioned above and consequent litigation,” said a ministry statement.