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Can TDS provisions be made less tedious?
February, 25th 2008

TDS provisions have become fairly cumbersome due to a variety of reasons, such as, differences in interpretation, rates being difficult to understand and, sometimes, unjustifiably high.

Mr Ketan Dalal, Executive Director, PricewaterhouseCoopers.

You can blame it on the abbreviation, but TDS (tax deduction at source) rhymes with tedious, as if in empathy with the plight of tax students and practitioners.

To add to the dreariness of the exercise involved in the levy, there is a perception that the TDS rates are too high, and that the Government is bent on keeping the rates at a particular level, since the collection impacts the cash flow.

No, not all the rates are high, says Mr Ketan Dalal, Executive Director, PricewaterhouseCoopers. For example, the rates on salaries mirror the normal tax rate and others, such as on interest or several cross-border payments, seem to be appropriate.

However, it may be appropriate to reduce the TDS rate on property rental from 20 per cent to 10 per cent, as the recipient is entitled to a standard deduction of 30 per cent on such income as also deduction for interest on funds borrowed for acquiring/reconstructing property, he reasons, in the course of a recent e-mail interaction with Business Line. Removal of surcharges/cesses would also simplify matters, but admittedly that is a function of change in the basic tax regime.

Excerpts from the interview:

Are TDS provisions too cumbersome?

Current TDS provisions broadly cover two types of payments domestic and cross-border. TDS provisions for domestic payments are extensive and cover not only salaries and interest, but also rent, royalties, etc. TDS on cross-border payments extends even to business income, primarily from a tax recovery standpoint.

However, these provisions have become fairly cumbersome due to a variety of reasons: such as, difficulties and differences in interpretation, the rates being difficult to understand, and sometimes, rates being unjustifiably high. Further, compliances for tax deductors are also quite unwieldy.

On penalties for not withholding taxes.

There are various consequences of not withholding taxes, including interest (12 per cent per annum), penalties (equal to tax amount) and also prosecution. The relevant payment may, in fact, also be disallowed in the payers hands.

Is there fairness in the disallowance of the payment where tax is not withheld at source?

First, let us understand the provision. Section 40(a)(i)/(ia) of the Income-Tax Act, 1961 provides that where tax is not deducted in accordance with the relevant provisions, the amount would be disallowed.

Given the complexities and interpretation issues, who will decide whether it is so? In any case, though perhaps justifiable for cross-border payments, it is particularly harsh for domestic payments, especially since even short deduction may attract full disallowance and even though the ability to track the recipient is an adequate safeguard from the Revenues perspective.

If there is a dispute (example, as to deductibility or rate) between the payer and the Revenue, it may result in a disallowance for the payer, even if the payer appeals against the non-withholding charge.

This litigation could take years, though, in the interregnum, the recipients assessment maybe completed, and full taxes recovered by the Revenue from him.

Dont practical difficulties arise when non-residents have to withhold tax at source?

For most TDS provisions, there is no requirement for the payer to be a resident. Accordingly, if a non-resident employer makes payment to an Indian employee, tax would be deductible.

In fact, the requirement for one non-resident being expected to know the Indian tax liability of another non-resident and then being expected to withhold tax thereon is particularly harsh.

Unfortunately, this is the prevailing judicial interpretation and it is really for the Government to address this issue; holding a non-resident payer liable, merely because it may be difficult to pin the recipient down, seems unreasonable, especially when, whether the recipient is liable or not, is itself often very unclear.

Your views on the niggling problems arising in cross-border payments.

There are two ways for a payer to remit monies in relation to cross-border payments. In plain vanilla cases, the simplest is by a certificate issued by a chartered accountant certifying the relevant rate at which taxes are withheld, backed by an indemnity from the payer.

In other cases, that is, where there may be a doubt regarding deductibility or otherwise, or as to the rate of tax or quantum on which tax is to be withheld, then the payer/payee usually approach the tax office for a certificate.

In practice, this causes considerable difficulty, as, sometimes, the Revenue has a tendency to take harsh and revenue-based positions. This causes undue hardship and also impacts the cash flow.

One possible way to address the latter is implementation of the recommendation made by the Non-Resident Working group in January 2007 that if the Revenue has been approached for a certificate, 80 per cent of the amount should be allowed to be remitted, so that the cash flow impact on the recipient is minimised.

Often, the recipient of an income subject to TDS may not have enough net income to absorb the tax. A genuine hardship that merits effective addressing?

Individuals, not having taxable income, may furnish a self-declaration to the payer in a prescribed form for receipt of certain incomes without TDS. In relation to corporates, an application may be made to the Revenue for a certificate of lower rate of TDS, which would be based on the higher of the average tax on the recipients estimated income for the year, or the average rate of tax of the last three years, so that loss making/low profit earning assessees may suffer no/lower TDS.

However, the provision is not broad based enough to address genuine hardship faced by the recipient of income. The hardship caused to recipients (example, courier companies) on whose income small amounts of tax is deducted by innumerable parties is not considered while issuing such certificate, even though collecting TDS certificates from all such parties is cumbersome and time consuming.

How far do you think IT measures such as the introduction of TIN (tax information network) make TDS-compliance less bothersome?

Once the recently introduced computerisation methods are fully in place, and the tax office also moves towards full computerisation, the procedural requirements should be substantially mitigated. However, till then, payers may have to fulfil not only the computerisation requirements, but also the paper ones, such as issuance of TDS certificates.

In fact, due to e-filing of tax returns, recipients are statutorily no longer required to file TDS certificates with their returns, but the Revenue is required to gather the information from the TIN and grant credit accordingly. However, since currently the TIN is not fully functional, assessees are not only asked to subsequently file the certificates, but the tax officer is also separately writing to the deductors to confirm the same, and, only thereafter granting credit.


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