The Finance Bill, 2008 proposes a steep reduction in income-tax rates especially for those whose total income does not exceed Rs 5 lakh. Curiously, the ad hoc tax deduction at source (TDS) rates has not been reduced concomitantly as a sequel. There is perhaps only one segment of taxpayers, namely, the salaried class, that is subjected to TDS not at ad hoc rates but at the actual rates.
For the salaried class, there is nothing ad hoc about the TDS because the employers are enjoined to compute the salary income exactly the same way the assessing officer (AO) would do and apply the actual tax rates. So much so, only a minuscule section of the salaried class is driven to paying advance tax, the other mode of discharging ones tax liability. Be that as it may.
From fees for professional and technical services, the tax required to be deducted at source is 10 per cent. A couple of years ago this was only 5 per cent. There is a strong case for reverting to 5 per cent now that the tax rates have come down sharply. One must keep in mind that the TDS rates are applied on the gross amount of fees without considering the expenses.
Let us take a practical example. A chartered accountant earning Rs 5 lakh as professional fees would have got only Rs 4,48,500 after his fees was pared down by a TDS of Rs 51,500 inclusive of education cess. Assuming, he has no other income, let us see whether such a high TDS is indeed warranted.
The Working Committee appointed in 1997 to rewrite the income-tax law de novo, among other things, made a revolutionary suggestion to resort to presumptive taxation in respect of professional incomes 30 per cent of their professional income would be deemed to be the expenditure necessary to earn such income, period.
Assuming this yardstick to be reasonable, the CA would be eligible for a deduction of Rs 1.5 lakh that would give rise to a taxable income of Rs 3.5 lakh and on this amount the tax liability for the assessment year (AY) 2009-10 would be Rs 25,000 plus education cess of 3 per cent thus giving rise to an aggregate tax liability of Rs 25,750.
He will now have to file his return and await refund for the excess tax paid which is the difference between TDS, Rs 51,500 and the actual tax liability Rs 25,750. May be the ad hoc TDS rates have not been cut perhaps on the plea that the maximum marginal rate of tax remains where it was, 30 per cent.
But then, tax law should keep in mind an average taxpayer who arguably in case of professionals in this country is the one with income of Rs 5 lakh or thereabouts. In fact, his actual tax liability could be well lesser given the fact that most of them could be having expenses in excess of 30 per cent of their gross fees. At any rate, given the saving rate of 30 per cent of the GDP in this country, it may perhaps not be far-fetched to assume that he would claim the Section 80C deduction to the hilt thus further bringing down his tax liability sharply.
Similarly, Section 194-I, mandates deduction of tax from rent which is 10 per cent for machinery, plant and equipment which is fine. What is not fine however is the 15 per cent deduction mandated for rental income earned by individuals and HUFs in excess of Rs 1.20 lakh per financial year?
While for professionals a 30 per cent standard deduction was just a suggestion that has not yet been translated into law, for landlords the same rate of standard deduction is already in place. And in addition, they are also eligible for claiming the actual interest on money borrowed for construction or purchase of the property.
If a 10 per cent TDS was found to be excessive in the context of professional fees, a 15 per cent TDS on rental income obviously would be even more excessive especially given the fact that expenditure on account of interest still remains to be factored in as far as our example is concerned.
One hopes the Government makes good these omissions before the Finance Bill, 2008 sails through in Parliament. Else, there would be a spate of refund claims which in itself is not bad. What is unfair is to subject taxpayers to harassment by prescribing high TDS rates not warranted by the realities. If the high TDS rates have been retained keeping in mind the high net worth individuals and other taxpayers whose substantive part of income attract tax rate of 30 per cent, then the Government is guilty of forgetting the advance tax regime under which all these persons pay the tax that has not been paid by way of TDS.
S. Murlidharan (The author is a Delhi-based chartered accountant.)