Withholding tax is a responsibility cast upon the payer and failure to withhold appropriate taxes shall result in liability to pay such taxes along with interest and penalty.
Withholding tax is a responsibility cast upon the payer and failure to withhold appropriate taxes shall result in liability to pay such taxes along with interest and penalty. But how far can the taxman go back in time to cast these liabilities. If you are making payment to an Indian resident and failed to withhold necessary taxes, the taxman can come knocking your door for next seven years, however, where the recipient is a non-resident, the law is silent on the period of limitation. When the law is silent on an aspect, it becomes open to interpretation depending upon the facts of the case in hand. On this aspect of the “period of limitation”, Indian courts have laid varying principles but in the recent past the ruling have been in favour of the assessee, holding that where period of limitation is not provided in a particular provision, the same should be imported from similar provisions of the law.
Courts dealt with the issue?
Allahabad High Court has recently held that since no time limit has been prescribed for initiating proceedings against an assessee who failed to withhold appropriate taxes, it can be executed at any time, especially when the law of limitation is not there. The issue with respect of initiation of these proceedings have been a matter of debate before courts and tribunal. Delhi High Cout has in the past held that period of limitation of four years prescribed for re-assessment proceedings shall apply in these cases as well. Andhra Pradesh HC has also held that limitation period of four years shall apply and Bombay HC also prescribed period of limitation.
However, Calcutta HC expressing its disagreement with the Delhi HC ruling, declined to prescribe a limit stating that if no period of limitation is prescribed in the statute, no bar on limitation can be imported. It is pertinent to note that Delhi HC has recently (2017) also held that these proceedings can be initiated only within a reasonable time i.e. 4 years as held in its earlier rulings.
In the case before Allahabad HC, the tax department explored the possibility of recovering the entire tax liability from the person ultimately responsible for paying the taxes. It is only when that opportunity failed that the tax department exercised powers against the payer. Accordingly, Allahabad HC held that since the delay in exercise of power is for a valid reason, alleged delayed exercise of power cannot be held invalid. But here the question arises, “Whether delay on part of authorities should cause hardship on the taxpayer”?
Non-withholding of taxes
Going by the principle laid down by Allahabad HC, proceedings against the resident taxpayer in case of non-withholding of taxes from payments made to non-resident can be initiated anytime in future. For how long should the taxpayer maintain the relevant documents i.e. income tax return, books of accounts etc. in relation to a transaction with a non-resident.
We all know that the tax world is in constant motion, what was true yesterday or even today may prove to be wrong tomorrow. But taxpayers of the country have been rooting for a trust based taxation system. It is imperative that certainty, fairness and stability should continue to serve as guiding principles and not the amount of tax that can be collected. It is necessary to guarantee and enforce taxpayer rights and safeguards to counter excessive discretion and corruption. In that sense, keeping the doors open for scrutiny and not providing for a period of limitation in such cases compromises on the certainty and trust sought by taxpayers.
Central Board of Direct Taxes (CBDT) should come up with clarification in this regard, putting to rest the unwarranted litigation on this aspect causing undue hardship to the taxpayers, should provide for a period of limitation for initiation of withholding tax proceedings.
The author is managing partner, Nangia & Co LLP.