Question 1

What are the primary structural changes in the transition from the Income Tax Act of 1961 to the Income Tax Act of 2025?

Accepted Answer

The transition represents a total structural reset where the old "194-series" for TDS has been scrapped and replaced by a consolidated system. The term "Assessment Year" has been eliminated in favor of "Tax Year," which now aligns directly with the Financial Year. Under the new Act, TDS and TCS are organized into a sleek three-drawer system: Section 392 for salary-related payments, Section 393 for all other TDS payments, and Section 394 for TCS. Furthermore, the old Form 16 has been replaced by Form 130, and the tax audit report has moved from Form 3CD to Form 26.

Question 2

How does the new numeric payment code system work for vendor payments?

Accepted Answer

Instead of simply citing a section number on a tax challan, businesses must now use specific four-digit codes ranging from 1001 to 1092. For example, payments to resident contractors fall under Code 1005 or 1006, while technical services are tagged as Code 1026 (at a 2% rate) and professional fees use Codes 1027 or 1028 (at a 10% rate). Using the incorrect code is a significant risk, as the system may treat it as an under-deduction, triggering an automated demand notice.

Question 3

What is the "Buyer First" rule regarding the overlap between TDS and TCS?

Accepted Answer

The "Buyer First" rule clarifies the priority of tax collection when both the buyer and seller meet high-turnover thresholds. Under Section 194Q, if a buyer has a turnover exceeding ten crore and purchases more than fifty lakhs worth of goods from a single supplier, they are responsible for deducting 0.1% TDS. Even if the seller is also liable to collect TCS under Section 206C(1H), the law dictates that TDS takes precedence. To avoid double-deduction errors, buyers should provide vendors with a formal declaration stating they will be handling the TDS deduction.

Question 4

How has the 2025 Act changed the reporting requirements for tax audits?

Accepted Answer

Tax audits have become significantly more granular and quantitative. The new Form 26 requires auditors to move beyond general compliance statements to providing exact counts and monetary values of transactions. Specifically, clauses 49, 50, and 51 require a disclosure of the total number of transactions, the number of transactions actually reported in returns, and the exact count of those that were missed. This shift removes the "materiality" defense and requires businesses to maintain real-time tracking of every transaction, including those where no tax was deducted.

Question 5

What are the consequences of an "inoperative" PAN under the new regulations?

Accepted Answer

A PAN becomes "inoperative" if it is not properly linked with the individual's Aadhaar. Under the new framework, an inoperative PAN is treated as if the person has no PAN at all, which automatically triggers a flat 20% TDS rate. This can lead to severe financial distress for employees or small vendors who suddenly see a fifth of their income withheld. To prevent this, companies are encouraged to use the income tax portal’s bulk verification tool to check the status of all vendor and employee PANs before processing payments.

TDS and TCS Compliance in the New Income Tax Act

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