New Delhi: The compensation structures of top executives in large companies may soon come under the tax department’s scanner as it looks to increase the tax deducted at source (TDS) from salaries.
The Central Board of Direct Taxes (CBDT) has asked taxmen to examine the nature of allowances, perks and reimbursements offered to these top ranking officials and also the practice of treatment of employees as consultants—all of which are ways of reducing TDS.
The tax department considers TDS as a non-obtrusive but highly efficient way of expanding the tax net and preventing tax evasion, explaining the emphasis on expanding its base further.
It is looking to use a mix of enforcement, capacity building and leveraging of information through various data sources to augment TDS revenue.
In 2015-16, TDS contributed more than one-third of the total gross direct tax collections.
In the last fiscal, TDS was at Rs.3.25 trillion, an increase of 11.6% from Rs.2.91 trillion in the year-ago period.
“In order to augment TDS from salaries, the focus should be on top companies/PSUs (public sector units)/large employers, where a look at the entire compensation structure of top executives is required with a view to examine the nature of allowances/perks and reimbursements made to them. The treatment of employees as consultants also needs to be probed,” said the action plan for 2016-17. Mint has reviewed a copy of the plan.
Every employer is required to deduct tax from employees’ salaries and deposit it with the tax department. However, classifying payments as reimbursements takes that amount out of the taxable net. Also, the payment to a consultant is subject to only a flat 10% TDS, irrespective of the tax bracket, with the onus on the consultant to pay the remaining tax.
CBDT has asked taxmen to monitor monthly TDS remittances from salaries—both from the private sector as well as government departments.
It has also asked taxmen to be on the lookout for instances where the employer has not been deducting tax at all or has been deducting at low rates. It has asked field officers to initiate penalty proceedings to dissuade employers “from indulging in such exercise that has a direct bearing on tax revenue”.
“One of the fundamentals of CBDT’s action plan is to increase revenue from TDS. TDS is an important source to plug revenue leakages. Salaries seem to be one area where the tax department thinks there is scope for more TDS collection,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates.
“Salary structures are decided by companies but sometimes in their zeal to give the maximum tax efficiency, they tend to overlook some important clauses that are in the Act,” he said.