Dematerialisation of tax deducted at source certificates is likely to be deferred by a year from the proposed date of April 1, 2008. The scheme was originally scheduled to come into effect from April 2005, but was deferred twice.

"Demat of TDS certificates is likely to be deferred by a year or at least six months," a finance ministry official said. An announcement is expected in the Budget.

The delay will be a result of many central and state government departments not yet obtaining the Permanent Account Number and the Tax Deduction Account Number, both pre-requisites for moving to the proposed paper-less certificate system.

For dematerialisation to become a reality, all tax deductors need to file TDS returns electronically and mention taxes paid against each PAN. A tax deductor like a company, a firm or contractor, also has to mention the TAN.

Due to the delay, tax payers will have to continue holding on to their paper TDS or tax collected at source (TCS [Get Quote]) certificates as proof to avail of credit for the tax paid. Under the dematerialisation system, a tax payer will not be required to possess a physical certificate to claim credits.

Based on the TDS paid, an annual statement of taxes will be prepared in the e-format by every government department for each taxpayer.

The tax payer's annual return of income will then be compared with the TDS data available electronically. Refunds for excess tax paid will happen automatically and quickly, without manual intervention.

Official sources pointed out that not only have many government departments not applied for the TAN number, they do not even file their TDS returns and deposit tax collections in time. Similarly, other tax deductors like transport operators and race course organisations are also not providing the PAN of tax payers.

"Unless all tax deductors provide PAN and TAN correctly, it will not be possible to move towards dematerialisation and faster tax credit. As a result of providing incorrect numbers, taxes are getting deducted or paid to wrong accounts," officials added.

Until all taxes deducted, collected or paid are matched in the Online Tax Accounting System and complete information is entered in the deductees' account, dematerialisation cannot fully substitute the existing paper-based system, sources added.

E-filing of TDS returns, which has been made mandatory for companies and government departments, has been further extended for all TDS deductors from September 1, 2007.