TDS Freight Forwarding Industry—Lower Tax Deduction Certificate Issuance—Some Practical Issues

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers Income Tax--TDS Freight Forwarding Industry--Lower Tax Deduction Certificate Issuance--Some Practical Issues Srivatsan Ranganathan Obtaining lower TDS certificate is a requirement for survival in the freight forwarding business. The author has dealt some issues on this based on a recent ITAT verdict. 1. Understanding the issue If the entire income/billing is not subject to tax especially as in the case of a pass through concept of the income like the freight forwarding industry, then the only way to avoid locking of working capital is to apply for a lower tax deduction certificate to the department. If this is not done, then working capital gets locked in even to the extent that it might jeopardize core business operations. Let us first understand this passthrough income concept. A freight forwarding company primarily buys and sells freight. The Sell minus the buy is the gross profit. Freight forwarding industry operate on wafer thin margins due to acute competition and industry fragmentation. If we were to assume that the freight billing is 100, the cost of the freight would be 96 and 4 is the taxable gross profit and after expenses it would come down to say 2, as the taxable income. If one were to apply a 2% TDS under section 194C on the revenue of 100, then the TDS amount will take away the entire taxable income as cash outflows. To avoid this is why freight forwarders apply to the department requesting for a lower TDS issuance certificate. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--TDS

Freight Forwarding Industry--Lower Tax Deduction Certificate Issuance--Some Practical Issues

Srivatsan Ranganathan

Obtaining lower TDS certificate is a requirement for survival in the freight forwarding business. The author has dealt some issues on this based on a recent ITAT verdict.

1. Understanding the issue

If the entire income/billing is not subject to tax especially as in the case of a pass through concept of the income like the freight forwarding industry, then the only way to avoid locking of working capital is to apply for a lower tax deduction certificate to the department. If this is not done, then working capital gets locked in even to the extent that it might jeopardize core business operations.

Let us first understand this passthrough income concept. A freight forwarding company primarily buys and sells freight. The Sell minus the buy is the gross profit. Freight forwarding industry operate on wafer thin margins due to acute competition and industry fragmentation. If we were to assume that the freight billing is 100, the cost of the freight would be 96 and 4 is the taxable gross profit and after expenses it would come down to say 2, as the taxable income. If one were to apply a 2% TDS under section 194C on the revenue of 100, then the TDS amount will take away the entire taxable income as cash outflows. To avoid this is why freight forwarders apply to the department requesting for a lower TDS issuance certificate.