The Hindu : Duties of tax deduction can be overlapping

Online edition of India's National Newspaper
Monday, Feb 23, 2004

Business

Business

Duties of tax deduction can be overlapping

Q: We are a private limited company registered under the Companies Act, 1956 and licensed by the Insurance Regulatory and Development Authority (Government of India) under the IRDA (Insurance Brokers) Regulations, 2002. Sec. 19 of this Act stipulates payment of remuneration to insurance brokers (whether individual or otherwise) by Insurance Companies for various services rendered by them as defined in Sec. 3 of this Act. Now some insurance companies while deducting TDS on our brokerage follow Sec. 194D of Income-tax Act, 1961 and deduct 20 per cent tax and 2.5 per cent surcharge (total 20.5 per cent) while others relying on Sec. 194H of Income-tax Act, 1961 deduct 5 per cent tax and 2.5 per cent surcharge (total 5.125 per cent).

A copy of circular dated October 17, 2003 issued by the New India Assurance Company Ltd. to their operating offices is enclosed. Since our functions as defined in Sec. 3 of IRDS (Insurance Brokers) Regulation, 2002 are much wider compared to an insurance agent (individual or companies), it is not correct to equate us with such agents for the purpose of deduction of TDS. We feel Sec. 194H of the Income-tax Act, 1961 should apply to us and not 194D. Advise.

A: Sec. 194H, which was introduced with effect from October 1, 1991 dropped on June 1, 1992, but only to be revived from June 1, 2001 covers payment of commission (not being insurance commission referred to in Sec. 194D) or brokerage with tax deduction at 5 per cent on any amount exceeding Rs. 2500. It is because of the difference in the rate as between insurance commission and brokerage, the reader in this case would like to be covered by commission and brokerage rather than insurance commission.

The functions of the insurance brokers under IRDA (Insurance Brokers) Regulation, 2002 are wider, so that they can be construed as different from a mere insurance agency. But it is unlikely that revenue may accept it as covered by Sec. 194H. There is certainly some overlapping involved.

If it is felt that deduction under Sec. 194D is harsher in the light of expenditure, which has to be incurred by insurance brokers, it is a matter which is best sorted out by the Board.

The enclosure indicates that one of the companies has taken the responsibility to deduct tax at a lower rate probably after getting some clarification from responsible quarters. If it is so, it may be enquired into. If it is based on mere legal opinion, it is best got clarified by the Board.

S. Rajaratnam

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