Section 398: consequences of failing to deduct/collect or pay over TDS/TCS

Introduction

Section 398 deals with a deductor or collector who fails to deduct, collect or pay the required tax. It combines deemed-default rules, a narrow recipient-return exception, monthly interest, an order limitation period and a separate safeguard for a section 412 penalty.

Key takeaways

Deemed assessee in default

If a person - including the principal officer of a company - who is required to deduct or collect any amount under the Act, or an employer under Section 392(2)(a), does not deduct or pay, does not collect or pay, or after deducting/collecting fails to pay the whole or any part of the tax required, that person is deemed to be an assessee in default in respect of that tax, in addition to any other consequences under the Act.

Relief where the payee has already paid the tax

A person who fails to deduct (or, for Section 394(1) Table Sl. Nos. 1 to 5 and 9, fails to collect) tax is not deemed an assessee in default if the payee/buyer/licensee/lessee has: furnished a return of income under Section 263; included the relevant amount in computing income in that return; and paid the tax due on the declared income - and the person furnishes an accountant's certificate to this effect, in the prescribed form.

Interest on default - the rates

Without prejudice to the assessee-in-default consequence, a person who does not deduct/collect tax, or fails to pay it after deducting/collecting, is liable to pay simple interest:

• At 1% for every month or part of a month on the amount of tax, from the date the tax was deductible or collectible to the date it is actually deducted or collected; and
• At 1.5% for every month or part of a month on the amount of tax, from the date the tax was deducted or collected to the date it is actually paid.

When and how the interest is paid

This interest must be paid before furnishing the TDS/TCS statement under Section 397(3)(b).

Where the person is not deemed an assessee in default because of the payee's own compliance (sub-section (2)), the 1% interest under clause (a)(i) runs only up to the date the payee/buyer/licensee/lessee furnishes their return of income.

Where the Assessing Officer passes an order for the default under sub-section (1), interest is paid as per that order.

Charge on assets and time limit for the order

If tax deducted or collected is not paid over, the tax together with the simple interest under sub-section (3)(a) becomes a charge on all the assets of the defaulting person.

An order deeming a person to be an assessee in default for failure to deduct or collect cannot be made after six years from the end of the tax year in which the tax was deductible or collectible, or after two years from the end of the tax year in which the correction statement under Section 397(3)(f) is delivered, whichever is later.

Sections 286(1) and 286(3) apply to this time limit.

Link to penalty

No penalty is levied under Section 412 on the defaulting person unless the Assessing Officer is satisfied that the failure to deduct, collect or pay was without good and sufficient reasons.

Step-by-step flow for applying Section 398

1. 1

   Did the person fail to deduct, collect or pay the whole or part of the tax?

   • No: Section 398 does not apply.
   • Yes: The person is deemed an assessee in default (Section 398(1)), subject to the next step.
2. 2

   Was the failure only to deduct (or collect, for Table Sl. Nos. 1 to 5 and 9), and has the payee filed the return, included the amount and paid the tax?

   • Yes, with an accountant's certificate: Not an assessee in default (Section 398(2)); interest at 1% runs only up to the payee's return filing date.
   • No: Go to the next step.
3. 3

   Compute interest

   1% per month or part from when tax was deductible or collectible to when it is deducted or collected; 1.5% per month or part from deduction or collection to actual payment.

4. 4

   Pay the interest before filing the statement under Section 397(3)(b)

   Tax deducted but unpaid, with interest, is a charge on the person's assets (Section 398(4)).

Practical checklist

Glossary

Assessee in default

Status that may arise when a person required to deduct, collect or pay source tax fails the specified duty.

Accountant certificate

The prescribed confirmation of a payee’s return, inclusion of income and tax payment used for the stated default relief.

Frequently asked questions