Analysis of default notice
Analysis of default notice: A quick explanation of common issues
1. Pan error
This happens when an incorrect or invalid PAN is provided while tax is being deducted. According to Section 206AA, if the PAN is wrong, the tax must be deducted at a higher rate of 20%, even if the PAN is corrected later. The main two kinds of errors are:
- PAN Invalid: This occurs when an incorrect PAN is quoted during TDS returns. If the PAN is wrong or doesn’t exist, the tax should be deducted at 20%. Even if corrected later, it’s treated as if no PAN was provided.
- PAN Inoperative: A PAN becomes inoperative if it isn’t linked with Aadhaar or doesn’t comply with regulations. It’s treated as if no PAN was provided, and tax must be deducted at 20%.
2. Short payment
This happens when the amount of TDS deposited is less than what was deducted, often due to errors in challan details or mismatches with OLTAS data.
- Overutilization of Challan: Short payment can also occur if the amount deposited through a challan is less than required. If a challan is overused (more tax than deposited is linked to), it leads to a mismatch and short payment.
3. Interest on short payment
Under Section 201(1A), interest is charged at 1.5% per month (or part of a month) on the amount of short payment, calculated from the date the tax was deducted until the date of payment as per the order.
4. Short deduction
This default occurs when the deducted tax rate is lower than what is specified by the Income-tax Act. Reasons include PAN errors or incorrect lower deductions, such as applying the wrong TDS rate for a company or individual.
a. PAN Error
If an invalid or inoperative PAN is provided, the tax deducted should be at 20%. If a lower rate is applied due to the wrong PAN, it results in a short deduction.
b. Lower Deduction
This occurs when tax is deducted at a rate lower than what is mandated by the Income Tax Act. For example, if TDS is supposed to be deducted at 2% for a certain payment but is only deducted at 1%, this leads to a short deduction.
5. Interest in short deduction
Interest on short deduction is charged under Section 201(1A) at 1% per month (or part of a month) from the date of payment/credit until the date of payment as per the order.
6. Interest on late payment
Interest is charged when TDS is paid late. It’s 1% per month for delays in deduction and 1.5% per month for payment delays. The two types of interest on late payments are:
- Late Deduction: Interest is charged when TDS is deducted after the due date. For example, if tax was supposed to be deducted in March but was deducted in April, interest is charged at 1% per month from the due date to the actual deduction date.
- Late Payment: Once TDS is deducted, it must be deposited on time. If not, interest is charged at 1.5% per month from the deduction date until it’s deposited. This interest applies even if the tax was deducted on time but paid late.
7. Late filing levy
As per Section 234E, a fee of ₹200 per day is charged for each day of delay in filing the TDS statement, limited to the amount of TDS deducted.
8. Additional processing fees
Additional processing fees may be charged when discrepancies or errors in TDS returns require correction or when processing correction statements. This fee is usually charged to compensate for the additional workload on the tax authorities due to incorrect filings or delays in submitting the correct information.
9. Additional late filing levy
If a correction statement is filed late and includes entries with deducted TDS, a late filing fee of ₹200 per day may be levied, even if the original statement did not include tax deductions.
10. Invalid certificate
This occurs when an incorrect certificate number is provided for a lower deduction under Section 197. The certificate number must be validated before being quoted in the TDS statement.
11. Improper Tax and interest amount Allocation
This happens when the interest portion of a TDS payment isn’t correctly allocated in the TDS statement, leading to a default notice.
12. Interest under section 220
Interest is charged at 1% per month for non-payment of tax within the specified period as mentioned in a demand notice under Section 156. The interest starts from the day after the notice period ends until payment is made.
13. No filing charges
If no transaction occurs, we still have to file the return, and if we fail to do so within the prescribed time, charges will be imposed.
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