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The government’s spending programmes are heavily dependent on tax collection, which makes timely collection of taxes vital. Tax deducted at source (TDS) is an important tool for the government to manage its cash flow.

As in India, TDS is used widely as a tax collection tool by almost all governments across the world for the very same reason, under nomenclature such as ‘withholding tax’ or ‘pay as you earn or go’.

TDS is also used to enforce payment of taxes in situations where the collection of tax after the end of the year may become difficult for the government—for example, payments made to foreign entities by Indian entities.

Over time, the government has also used tax collected at source (TCS), a modified form of TDS, in order to curb tax evasion. TCS is currently being levied on specific transactions such as purchase of gold, a house or car; remitting money abroad; or the use of a credit card for foreign currency transactions.

TDS and TCS are widely applicable on a variety of transactions, including those that do not involve any underlying income—for example, remittance made overseas for the education of children by borrowing money. Also, there are cases where the TDS is much higher than the tax payable on income. In such situations, the taxpayer has no choice but to apply for refund of TDS or TCS at the end of the year. In the post-covid world, where every individual is in cash conservation mode, TDS or TCS may exacerbate the liquidity crisis. Waiting for refund post filing the tax return may not be a feasible option in such a situation.

In the past few years, the tax administration has made rapid strides through the adoption of automation, data analytics and artificial intelligence. With various systems providing data to the government, its ability to track and curb evasion has increased. Investment and bank account details of individual taxpayers are now collected through the tax returns. With this data, the government’s ability to recover taxes due has improved.

Given the above, therefore, the moot question is, “Would the government do away with TDS?"

The simple answer is NO. On the one hand, TDS accounts for more than 30% of the direct tax collections of the government and doing away with it would create a liquidity crisis for it. On the other hand, there is a possibility of taxpayers running out of cash by the end of the financial year and thus being unable to pay taxes. This can cause severe problems for the government.

In view of the above challenges, what can the government do to alleviate the problems faced by taxpayers? Below are some of the steps that the government can consider:

1. In the case of interest payments, certain taxpayers who are not liable to tax have the option to self-declare in Form 15H/15G to the bank, etc., that TDS need not be done due to their tax status. The government can expand areas for such self-declaration to cover a variety of situations, payments and taxpayers. Of course, misuse can be tackled through stricter penalties.

2. In certain cases, taxpayers can apply to the tax officer and seek a certificate for lower rate of TDS as compared to the normal rate. However, getting such a certificate is not easy for everyone and is also not instantaneous. Using technology and automation, the tax department can consider speedier issue of such lower TDS certificates for a variety of cases and taxpayers.

3. Similarly, the TCS burden can be relaxed in certain cases—for example, when there is no income liable to tax or in cases where the underlying payments are being funded through loans, etc. This can again be done through a self-certification system with penalties to check abuse.

4. While the government has increased the speed at which refunds are being issued, in cases where the refunds are due simply because of TDS or TCS, a scheme could be introduced to issue refunds immediately on filing of the tax return.

5. There are some situations where TDS is done by the payer, but the payee does not get TDS credit and must pay income tax. Thus, the payee loses at both ends! In the post-covid world, with many businesses struggling to stay afloat, it is possible that they may retain the TDS money. The government could help ensure that payees do not suffer in such situations by ensuring that tax is not recovered from the payee but only from the payer.

The government has been making efforts to honour the honest taxpayer through initiatives like faceless assessment, Taxpayers’ Charter, quicker refunds and pre-filled forms. There is no doubt that reforms in TDS can also be expected, given the advances in technology, analytical prowess and converged systems. If these reforms are fast-tracked, they will bring considerable relief to a large section of the population during these challenging times.

Sanjay Tolia is partner and leader, tax and regulatory, PwC India. The views expressed here are personal.

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