The TDS History You Inherit When You Buy an Indian Company

Quick answer: In a share purchase, you inherit the target company's TAN and its full TDS compliance history along with it — including defaults nobody disclosed, going back up to seven years under Section 201(3) of the Income Tax Act. Interest at 1-1.5% per month, a penalty equal to the full defaulted amount under Section 271C, and a statutory charge on company assets under Section 201(2) all transfer with the entity, not with the promoter. Check the actual TRACES filing history against real payment records before you sign, since a generic "pending tax disputes" question in a standard diligence list almost never catches this.

A share purchase doesn't just buy the balance sheet you were shown. It buys the TAN, the Tax Deduction and Collection Account Number the company files its TDS returns under, and with it, every TDS default the company has ever committed, reaching back up to seven years, whether or not anyone in the room knew about it at signing.

This is a narrow diligence item, and it's almost never covered specifically. Most Indian SME diligence checklists ask about "pending tax disputes" in general terms. Almost none of them ask a buyer to pull the company's actual TDS filing and payment history and check it against what Section 201 of the Income Tax Act does to a defaulting deductor.

Why This Transfers Automatically in a Share Purchase

The mechanism is simple once you see it. In a share purchase, the legal entity never changes, only its shareholders do. The same company, the same PAN, the same TAN, continues to exist exactly as it did the day before closing. Every TDS return it filed, every payment it made or missed, sits under that same TAN before and after your purchase, because from the tax department's perspective, nothing about the deductor's identity has changed at all.

An asset purchase works differently. There, the buyer typically operates through a separate legal entity with its own fresh TAN, and a TDS default committed by the seller's original entity generally stays with that entity rather than following the specific assets you bought. This is one more entry in the growing list of consequences that hinge on the share-versus-asset structural choice covered in our due diligence red flags guide, and it's worth confirming explicitly with your tax advisor which side of that line your specific deal falls on.

What a TDS Default Actually Costs

Section 201 of the Income Tax Act sets out what happens when a company fails to deduct tax at source on a payment, or deducts it but fails to deposit it with the government on time. The consequences stack, and none of them are trivial.

Interest under Section 201(1A). A company that fails to deduct TDS at all owes interest at 1% per month, or part of a month, from the date the tax should have been deducted. A company that deducted the tax but deposited it late owes interest at the higher rate of 1.5% per month from the date it was deducted until the date it's actually paid. Neither rate can be waived by any authority once a default is established, and even a single day's delay is charged as a full month, which is how a modest-looking default can compound into a real number over several years of neglect.

Penalty under Section 271C. Separately from interest, a penalty equal to the full amount of tax not deducted or not deposited can be levied. This is not a percentage or a slab, it's the entire defaulted amount again, on top of the interest already accrued.

Prosecution under Section 276B. In serious cases, failure to deposit tax already deducted is a criminal offence carrying rigorous imprisonment of three months to seven years, plus a fine. The provision applies to the company and to whichever officer was in charge of and responsible for the business at the time the offence was committed. This matters for how you read your own exposure: the officer liable is the one responsible when the default happened, not automatically whoever holds the title today, so a new owner isn't personally exposed to prosecution for a default that occurred entirely under the previous promoter's watch. The company itself, however, remains liable regardless of who's running it now, and a default left uncorrected under new ownership starts building fresh exposure for whoever is now in charge.

The Part Most Buyers Miss: It's a Charge on the Company's Assets

Section 201(2) states plainly that unpaid tax and the interest on it become a charge on all the assets of the defaulting company. This is the detail that turns an abstract compliance gap into something concrete for a buyer specifically: it's not just a number on a contingent liabilities schedule, it's a statutory claim that can attach to the very assets, the land, the machinery, the receivables, you just paid for.

The Seven-Year Tail

Section 201(3) sets a limitation period, but it's a long one. No order deeming a person an assessee-in-default for non-deduction or non-deposit can be passed after seven years from the end of the financial year in which the payment was made or credited. In practice, this means a default sitting quietly in a company's TDS filings from years before you ever considered buying it can still surface as a live, assessable liability well into your ownership, with interest that has been compounding the entire time you weren't looking at it.

How to Actually Check This During Diligence

This is genuinely checkable, which is exactly why skipping it is avoidable rather than unlucky.

Pull the company's full TDS return filing history, Forms 24Q, 26Q, and 27Q depending on the payment types involved, through the TRACES portal rather than relying on a summary the seller's accountant provides. Cross-check the filed returns against actual bank statements and ledger entries for TDS payments, since a return can be filed showing tax deducted without the corresponding deposit ever having been made on time. Ask specifically, by name, whether the company has received any notice or order under Section 201 in the last seven years, rather than folding this into a generic "any pending tax matters" question a seller can answer narrowly and technically truthfully while still omitting a live TDS issue. This kind of targeted, document-backed check belongs alongside the GST, MSME, and related-party checks covered in our broader due diligence red flags for Indian SMEs, and factors directly into how you should be thinking about what the business is actually worth once contingent tax exposure is on the table.

The One Real Piece of Relief

There's a genuine mitigant worth knowing before you assume every gap is a full-blown liability. The proviso to Section 201(1) provides that a deductor isn't treated as an assessee-in-default for the principal TDS amount if the payee, the person the tax should have been deducted from, already included that income in their own return, paid the tax due on it, and the deductor obtains a certificate confirming this from an accountant on Form 26A. Where this applies, the company still owes interest under Section 201(1A), calculated at the reduced 1% rate up to the date the payee actually filed their return, but the larger principal exposure and the 271C penalty risk built on top of it fall away. If diligence turns up a historical short-deduction, ask directly whether a Form 26A certificate exists or can still be obtained for the relevant payees before treating the full liability as live.

Frequently Asked Questions

Does buying a company's shares really make me liable for TDS defaults I had nothing to do with?

The company remains liable regardless of ownership change, since the TAN and legal entity are unchanged, and the unpaid tax plus interest is a charge on the company's assets under Section 201(2). You're not personally criminally exposed for a default that occurred before you owned it, but the business you now own is.

How far back could an undiscovered TDS default reach?

Up to seven years from the end of the financial year the relevant payment was made in, under the limitation period in Section 201(3). A default from several years before your acquisition can still be assessed well into your ownership.

Does an asset purchase avoid this problem?

Generally yes, since the buyer typically operates through a new legal entity with its own TAN, and the seller's historical TDS defaults stay with the original entity rather than transferring with specific assets. Confirm this with your tax advisor for your specific deal structure rather than assuming it by default.

What's the actual financial exposure on a real default?

Interest at 1% or 1.5% per month depending on whether the failure was non-deduction or late deposit, uncapped and non-waivable, plus a penalty under Section 271C equal to the full defaulted amount, before any prosecution risk is even considered.

Is there any way to check this before signing, rather than discovering it after?

Yes. Pull the actual TDS filing history from the TRACES portal, reconcile it against real payment records, and ask specifically about any Section 201 notices or orders in the last seven years, rather than relying on a general tax-disputes question in your standard diligence request list.

Can a seller's TDS default ever be forgiven or reduced?

Interest under Section 201(1A) cannot be waived once established. The proviso to Section 201(1) can eliminate the principal liability, not the interest, where the payee already paid tax on the income and a Form 26A certificate is obtained, and penalty under Section 271C can be waived where the assessing officer accepts the failure was for good and sufficient reason.