Certificates.

395(1)

Where tax is required to be deducted on any income or sum under this Chapter, then subject to the rules made under this Act,—

• (a) the payee may make an application before the Assessing Officer for deduction of tax at a lower rate; and
• (b) the Assessing Officer on being satisfied that the total income of the payee justifies a lower deduction, shall issue a certificate as appropriate; and
• (c) when a certificate is issued under clause (b), the person responsible for paying the income or amount shall deduct the tax at the rate specified in such certificate till its validity.

395(2)

• (a) The person responsible for paying to a non-resident any sum chargeable under this Act (other than salary), may make an application to the Assessing Officer in such form and manner as prescribed, where he considers that the whole of such sum would not be chargeable in the case of the recipient;
• (b) the application under clause (a) shall be for determination of the appropriate proportion of the sum chargeable to tax, by the Assessing Officer in the manner as prescribed; and
• (c) when the determination is made by the Assessing Officer as per clause (b), the tax shall be deducted under section 393(2)(Table: Sl. No. 17) only on that proportion of sum which is chargeable to tax under the Act.

395(3)

Where tax is required to be collected on any amount under this Chapter, then subject to the rules made under this Act,––

• (a) the buyer or licensee or lessee may make an application before the Assessing Officer for collection of tax at a lower rate; and;
• (b) the Assessing Officer on being satisfied that the total income of the buyer or licensee or lessee justifies a lower collection, shall issue a certificate as may be appropriate; and
• (c) when a certificate is issued under clause (b), the person responsible for collecting tax shall collect it at the rates specified in such certificate till its validity.

395(4)

• (a) Every person deducting or collecting tax shall issue a certificate to the deductee or collectee, as the case may be, specifying–– (i) the amount of tax that has been deducted or collected; (ii) the rate at which tax has been deducted or collected; and (iii) any other particulars, as prescribed, within such period as prescribed.
• (b) An employer referred to in section 392(2)(a) shall issue a certificate to the employee, in respect of whose income payment of tax has been made by the employer, that the tax has been paid to the Central Government, and specify–– (i) the amount of tax so paid; (ii) the rate at which tax has been paid; and (iii) any other particulars, as prescribed, within such period, as prescribed.

395(5)

The assessing officer may cancel the certificate granted under sub section (1) or (3) after giving reasonable opportunity to the applicant.

Explanation

Section Summary:

Section 395 of the new income tax law in India deals with the issuance, application, and cancellation of certificates related to tax deduction or collection at lower rates. It provides a framework for taxpayers (payees, non-residents, buyers, licensees, or lessees) to apply for lower tax deduction or collection rates based on their total income. It also mandates the issuance of certificates by the Assessing Officer and requires the person responsible for deducting or collecting tax to comply with the rates specified in the certificate. Additionally, it outlines the obligations of employers and other entities to issue certificates to deductees or collectees.

Key Changes:

1. Lower Tax Deduction/Collection Certificates: The section formalizes the process for payees, non-residents, buyers, licensees, or lessees to apply for lower tax deduction or collection rates. This was previously governed by similar provisions but is now explicitly structured under this section.
2. Non-Resident Tax Determination: A new provision allows the payer of a non-resident to apply for determining the proportion of a sum chargeable to tax, ensuring tax is deducted only on the taxable portion.
3. Certificate Issuance by Employers: Employers are now explicitly required to issue certificates to employees confirming tax payments made on their behalf, including details like the amount and rate of tax paid.
4. Cancellation of Certificates: The Assessing Officer is empowered to cancel certificates issued under this section after providing a reasonable opportunity to the applicant.

Practical Implications:

1. For Payees and Collectees: Individuals or entities receiving income can apply for lower tax deduction or collection rates, reducing their immediate tax burden if their total income justifies it.
2. For Non-Residents: Payers to non-residents can seek clarity on the taxable portion of payments, ensuring compliance without over-deducting tax.
3. For Employers and Payers: Employers and other entities must issue detailed certificates to deductees or collectees, ensuring transparency and compliance with tax laws.
4. For Assessing Officers: They must evaluate applications for lower tax rates and issue or cancel certificates based on the applicant's total income and other prescribed conditions.

Critical Concepts:

1. Assessing Officer: The tax authority responsible for evaluating applications and issuing certificates.
2. Deductee/Collectee: The person from whom tax is deducted or collected.
3. Lower Tax Rate Certificate: A certificate issued by the Assessing Officer allowing tax to be deducted or collected at a rate lower than the standard rate, based on the recipient's total income.
4. Non-Resident Tax Determination: A process to determine the taxable portion of payments made to non-residents, ensuring tax is deducted only on the chargeable amount.

Compliance Steps:

1. Application for Lower Tax Rate: Payees, buyers, licensees, or lessees must apply to the Assessing Officer for a lower tax deduction or collection rate, providing necessary details about their total income.
2. Non-Resident Tax Determination: Payers to non-residents must apply to the Assessing Officer to determine the taxable portion of the payment.
3. Certificate Issuance: Employers and other entities must issue certificates to deductees or collectees within the prescribed period, detailing the tax deducted or collected, the rate applied, and other required particulars.
4. Adherence to Certificate Rates: Once a certificate is issued, the payer or collector must deduct or collect tax at the specified rate until the certificate's validity expires.
5. Cancellation Process: If a certificate is canceled, the applicant must be given a reasonable opportunity to respond before the cancellation takes effect.

Examples:

1. Lower Tax Deduction Certificate: A freelance consultant with a low annual income applies to the Assessing Officer for a lower tax deduction rate on payments received from clients. The Assessing Officer issues a certificate allowing tax to be deducted at 5% instead of the standard 10%. The client deducts tax at 5% until the certificate expires.
2. Non-Resident Tax Determination: A software company in India pays royalties to a non-resident company. The Indian company applies to the Assessing Officer to determine the taxable portion of the royalty payment. The Assessing Officer determines that only 60% of the payment is taxable, and the Indian company deducts tax accordingly.
3. Employer Certificate: An employer deducts tax from an employee's salary and pays it to the government. The employer issues a certificate to the employee confirming the tax paid, the rate applied, and other details within the prescribed period.