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The Indian Income-tax Act, 1961 (the Act) contains expansive provisions relating to tax deduction at source (TDS). These provisions mandate the withholding of certain percent of the amount paid / payable by the payer (deductor) to payee (deductee), as taxes. The TDS provisions were introduced to tax the income at very source, ensure that transaction trail is available, avoid any tax leakages and help augment revenue collections throughout the financial year.

Over the years, the scope of these provisions has been expanded. Currently, there are over three dozen sections dealing with TDS. In addition, there is a huge list of the Rules and Forms associated with these TDS provisions. There are different rates ranging from 0.1% to 40% and different thresholds for different payments. TDS provisions cover both, residents, and non-residents i.e., both domestic as well as overseas payments. In this article we discuss the ‘tedious’ nature of TDS provisions and the need for rationalization and simplification of the provisions relating to payments to residents.

Numerous compliances

As per the current TDS regime, the person deducting taxes is saddled with various compliances, namely deduction of TDS and deposit in the government treasury, filing of periodic TDS returns and issue of TDS certificates. These are all time bound compliances.

Non-compliance leads to interest, stringent penal consequences and even prosecution in certain cases. In addition, there is disallowance on account of non-deduction or non-deposit of TDS after deduction.

This has certainly enhanced the compliance burden for taxpayers.

Ever expanding scope and litigation

Taxpayers feel that the ever-increasing coverage of TDS provisions coupled with interpretational challenges adds to the administrative burden and increases overall cost of doing business. There is litigation on numerous issues like. TDS on year end provisions, commission vs. discount, what constitutes interest for TDS purposes, identification of work contract, professional vs. technical fees. Taxpayers spend considerable time in assessment and litigations.

Guidance on various issues is available from the notifications and clarifications issued by the government from time to time. In addition, there are numerous decisions by Tribunals and Courts which provide clarity on some issues. Despite all these supportive measures, taxpayers still face challenges in many cases to take correct position on various issues like rate of TDS to be applied in a particular case.

Relevance of TDS to establish transaction trail

In today’s digital era, government has access to data from various sources. With advancement in technology, smooth flow of information between various government departments, the Income-tax Department is able to collect a wide range of information from alternative sources, which was not possible earlier.

It is pertinent to note that the Central Board of Direct Taxes (CBDT) signed Memorandums of Understanding (MoUs) with the several departments including Securities and Exchange Board of India (SEBI) and Central Board of Indirect taxes and Customs (CBIC) for exchange of data.

There are several other sources to track details of transactions undertaken by taxpayers viz. banking and financial institution, Statement of Financial Transactions (SFT), data collated from other government agencies like Ministry of Corporate Affairs, Enforcement Directorate etc. Notably, over the past few years, the scope of details to be furnished in SFT (earlier known as ‘Annual Information Return’) have also been expanded. Further, in the context of individuals, the Act provides for linking of PAN and Aadhaar. This

helps the government to track transactions undertaken by resident individuals, where the individuals are required to quote their PAN and / or Aadhaar

Hence, the role of TDS as a primary tool to establish transaction trail has significantly diminished.

Recommendations

There is a dire need to have a relook at the TDS provisions and following rationalization measures may be evaluated:

· Use of GST ecosystem/ other alternatives to track transactions - Data generated by the GST ecosystem and other government sources could be used to establish transaction trails. This would obviate the need of TDS in majority of cases. TDS could be done only in exceptional cases of high value transactions which do not get captured in the GST system or underother options available with the government. In these cases, again there could be a carve out for small businesses.

· Reliance on Advance Tax - Considering that TDS ensures regular collection of taxes by the government on a periodic basis, the advance tax provisions may be edited to take this into account

· Consolidation /Deletion of provisions - In many countries TDS provisions in domestic payments are used as an exception rather than a norm. It is suggested that various TDS sections could be segregated, basis the data available with the government, for the purpose of simplification into following categories:

a. Retention of key sections (3-4 sections), where the collections are high

b. Deletion of sections where there is insignificant contribution to the overall tax collections

c. Consolidation of other sections where transaction trail cannot be established from other sources

· Limited rates and increase in thresholds - To streamline these provisions, it is desirable that one or two TDS rates may be prescribed. This would achieve the twin objective of creating a log of the transaction in tax department’s database while reducing litigation on applicability of the tax rate. It is pertinent to note that as per the first batch of recommendations by the Income Tax Simplification Committee headed by Justice R.V. Easwar, it was suggested that TDS is collected at a higher rate in many cases thereby resulting in administrative burden as a consequence of sizable tax refunds. Thus, there is need to lower the rates and increase thresholds. The lower rates and higher thresholds would also help resolve cash flow problems for MSMEs

· Responsibility of checking whether the payee has filed tax returns-The government vide Finance Act 2021, has introduced new provisions that require higher rate of TDS to be deducted in case of non-filers of income-tax return. Similarly, higher rate of TDS is to be deducted in case of non-furnishing of PAN. , These requirements have increased the compliance burden for taxpayers and should be re-evaluated.

· Introduction of TDS Ledger - There is a lot of litigation on matching the TDS credit with the year in which relevant income is offered to tax. Detailed reconciliation statements are required to be maintained by the deductee in such cases to ensure that there is no mismatch and credit is claimed in the correct year. This is a cumbersome exercise, particularly where the number of transactions is very high. This issue can be mitigated to a great extent by providing for a TDS Ledger for the deductee. The deductee could claim credit of the amount of TDS to its credit against its final tax liability for each year and the balance could be carried forward. It’s a revenue neutral measure, however, would remove the need for detailed reconciliation by the deductees. It will also reduce litigation on this issue of linking income of a particular year with the TDS.

· Overlapping provisions to be avoided - It is recommended that only one of the provisions i.e., TDS or Tax Collection at Source (TCS) provisions should be made applicable on a particular transaction and any overlap or possible conflict should be avoided / clarified upfront

· Removing requirement of issuance of TDS certificates - As per law, TDS certificates are required to be provided to deductee within stipulated timelines. Need of issuance of TDS certificates should be

done away with considering that all the information is already available on government portal (in Form 26AS). This will reduce compliance burden on taxpayers.

Way forward

In the recent past, the government has taken various steps for improving ease of doing business in India. Rationalisation and simplification of the TDS regime will save time, and resources being spent on compliance and litigation for both the tax payers and revenue authorities.

CA Richa Sawhney and CA Vedika Kedia contributed to this article.

Vikas Vasal is national managing partner-tax, Grant Thornton Bharat LLP.

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