By Sunil D. Shah and Meena Khivasara
Budget 2024 expectations
: In the intricate realm of tax regulations, simplicity holds paramount importance. The current landscape of tax collection at source (
TCS
) and tax deduction at source (
TDS
) is far from straightforward. With varying thresholds and a multiplicity of rates spanning from 0.1% to 40%, navigating these provisions has become akin to navigating a labyrinth, fraught with complexities and pitfalls.
This complexity not only creates confusion but also leads to disputes, culminating in the locking up of working capital, hindering growth and development. In light of these challenges, there is a need to rationalize and simplify the provisions to promote clarity and efficiency.
It should be kept in mind that
withholding tax
is a vicarious collection of tax and that the tax authorities can always have recourse to the primary taxpayer. Even in the case of non-resident taxpayers, the tax authorities can have recourse to treaty provisions for assistance in tax collection. There is also a comprehensive information collection system in place to obtain data on income and transactions such as Annual Information Statements, returns filed for Specified Financial Transactions, declaration of remittances in Form 15CA and 15CB, etc . Apart from the income-tax system, the government collects information about transactions under other laws such as GST. Accordingly, the government may contemplate the following measures:
Also Check | Budget 2024 Expectations Live Updates: Income Tax changes, record capex for roads and railways expected from FM Nirmala Sitharaman
Rationalization of Provisions and Rates
The current plethora of TDS rates and provisions engenders a convoluted system that needs simplification. To this end, the government may undertake the formulation of a comprehensive roadmap aimed at reducing the prevailing disparity in TDS provisions and rates. By consolidating payments into two or three categories, the TDS framework can be streamlined, fostering a more cohesive and comprehensible system. Several disputes arise not because of non-deduction but only because of differing views on the rate of tax. These disputes can be minimized if the number of rates is rationalized.
Abolition or rationalization of TCS Provisions
The essence of income-tax lies in levy of tax on income, rather than on expenses. Given that GST already applies to most expenses, the imposition of TCS appears redundant. A prudent course of action would entail either the abolition or the rationalization of TCS provisions, eliminating superfluous layers of taxation and promoting efficiency within the tax regime.
This is more so as regards the imposition of TCS on the sale of goods and TDS on the purchase of goods. This poses a formidable challenge characterized by compliance ambiguity. While in theory only one provision will apply, in several practical situations such a determination is difficult and time consuming. To mitigate these challenges, a harmonized approach is imperative, whereby one of the two provisions (preferably TCS) is dropped. Alternatively, regular taxpayers may be afforded the flexibility to opt for lower or nil tax deduction/collection certificates.
Such pragmatic measures will not only simplify compliance but also enhance the ease of doing business, fostering a conducive environment for economic growth.
Clarification of Definitions
Ambiguities surrounding the definition of critical terms such as "goods" undermine the efficacy of the tax framework, giving rise to interpretational discrepancies and disputes. To address this issue, precise definitions must be formulated, aligning with related statutes to obviate confusion and ease compliance.
Consideration of Foreign Tax Credit (FTC) in salary withholding tax
The absence of explicit provisions pertaining to credit for taxes paid outside India imparts an element of rigidity within the tax framework, hindering the facilitation of foreign tax credit (FTC). To address this lacuna, employers should be permitted to provide credit for taxes paid abroad while withholding taxes on salaries, with requisite amendments being made to facilitate the disclosure of FTC in relevant forms.
Adjustment of TCS on Liberalized Remittance Scheme (LRS):
Employees of multinationals are often provided with an option to participate in the employee stock option plan of the overseas parent. Acquisition of such shares by employees is being treated as a payment under LRS which is subject to levy of TCS. Such taxpayers are already paying taxes on income arising from exercise of stock options as a prerequisite which are deducted by the employer. Levy of both TDS and TCS impacts cash flow for employees since stock options are perquisites in kind and not in cash and they will be able to claim credit of TCS only after filing the return of income. To alleviate this burden, amendments may be enacted, enabling the adjustment of any TCS collected on such remittances against the TDS on salaries.
Withholding on Year-End Provisions:
Ambiguities surrounding the withholding of taxes on year-end provisions necessitate resolution to ensure fairness and certainty. Withholding should be predicated upon the actual crystallization of expenses, rather than estimations and avoiding a hyper-technical approach in favor of a pragmatic approach that engenders ease of compliance.
Resolution of Overlapping Provisions:
There are certain overlapping provisions, such as whether a particular service is a ‘technical service' or a 'contract for work' (194J v. 194C) or whether it is ‘professional service’ or ‘technical service’ (194 J(a) v 194J (b)), payment for lease or use of plant and machinery (194-I v. 194J). These overlapping engenders confusion and inefficiencies. To rectify these anomalies, efforts must be made to elucidate and clarify existing provisions, fostering coherence and consistency.
Streamlining TDS Penalty Provisions:
According to section 201, if a person who is required to deduct TDS fails to do so, or after deducting TDS fails to deposit the same with the government, he shall be deemed to be an assessee in default. This could result in a penalty under section 221. In addition, non-deduction could lead to a penalty under section 271C. This represents a potential double burden on taxpayers. By streamlining penalty provisions, the framework may be rendered more equitable so that double jeopardy is avoided.
Disallowance under section 40(a)(i) /(ia) and demand under section 201(1):
Disallowance may occur when taxes are not withheld as per section 40(a)(i) or (ia), and separately demands may be raised under section 201(1) for these omissions. Eliminating this duplication could be achieved by abolishing disallowance under section 40(a)(i) or (ia) as section 201(1) is adequate to compensate for the loss of revenue. Alternatively, a clarification may be inserted that only one of the two provisions will apply.
Conclusion
The measures proposed above have the potential to streamline withholding provisions and alleviate the administrative burden on deductors. It may also be kept in mind that the deductors are performing the task of tax collection on behalf of the government. It is reasonable to expect that deductors are fairly compensated for undertaking the responsibility. This could be achieved through the payment of fees commensurate with the workload or the revenue collected.
(Sunil D. Shah is Partner, Deloitte India and Meena Khivasara is from Deloitte Haskins & Sells LLP)
English (US) ·