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Direct tax code will make TDS a tedious issue
September, 09th 2009

Most readers would be familiar with the concept of TDS or tax deducted at source.
TDS is tax deducted in advance -- at the source of earning the income itself. At the end of the year, one aggregates one's total income for the year and calculates the final tax thereon.

From such final tax, the amount of TDS is reduced and it is only the balance, if any, that is payable. Therefore, it is important that there is a nexus between the rates of final tax and TDS since the latter is a part of the former. Sadly, this doesn't seem to be the case with respect to the new direct tax code (DTC) that seeks to replace the current Income-Tax Act, 1961.

For starters, the DTC has massive relaxations in the tax thresholds as they exist currently. Though the basic exemption limit is maintained at Rs 1.6 lakh, the 10% rate is applicable for incomes between Rs 1.60 lakh and Rs 10 lakh.

The 20% rate is applicable for incomes between Rs 10 lakh and Rs 25 lakh. It is only for incomes above Rs 25 lakh that the highest tax rate of 30% is payable. Moreover, the equivalent of the Section 80C deduction the maximum ceiling for which is Rs 1 lakh has been tripled to Rs 3 lakh.

While the increased limits will give great relief to the average taxpayer, the problem is that the TDS rules do not seem to go hand in hand. For example, the DTC has no provision for furnishing any declaration (as in current Form-15G for non-seniors and 15-H for seniors) for non-deduction of TDS. It will hurt all the investors earning income less than the tax threshold, particularly, senior citizens, widows, agriculturists and several others.

The only way of avoiding TDS is by making an application to the income-tax office (ITO). The rules regarding application and issue of such a certificate are as follows:
l The DTC specifies that the deductee may make an application in the prescribed form and manner, to the assessing officer (AO), seeking a certificate for no deduction of income-tax from payments to be received by him. Similarly, the deductor may make an application, in the prescribed form and manner, to the AO seeking a certificate for no deduction of income-tax from payments to be made by him to a non-resident deductee.
l The AO shall give to the deductee or the deductor, as the case may be, such certificate as may be appropriate, if he is satisfied that the total income of the deductee justifies no deduction of income-tax.
l The deductor shall not deduct any tax until the certificate issued is cancelled by the AO or until the expiry of the validity of the certificate.
Obviously, the lawmakers are not in touch with the ground reality. Several questions needing clear-cut and realistic answers arise:
l If all those who used to file Form-15G/H in ITA61 era make such applications and visit their ITOs in person, can the ITO handle this volume?
l Even if one is successful in inducing the ITO to issue a certificate, will he give one which is valid for long? Improbable. This appears to be a yearly exercise.
l Will he issue the certificate in good time to enable the assessee to sendit to the persons responsible for applying TDS?
l How can the individual send the original to two or more deductors?
l Will a certificate of a notary be acceptable or will the ITO issuemultiple certificates as requested by the applicant?
I have a suggestion for all those who are facing this peril. Distribute your investments in different avenues and ensure that the interest you earn is less than the prescribed limit for application of TDS.

Yes, this will increase paper work and your visits to the bank for crediting small amounts of cheques. This will also increase the cost of servicing your accounts. The I-T Department is moving towards paperless regime to the extent possible. No annexures, not even TDS certificates, need be filed along with the returns.

The taxpayer is expected to hold these in his custody and present them to the ITO if called for. It is obvious that under the new regime, crores of additional TDS certificates will have to be issued by the deductors, increasing voluminous paperwork at their end.

The department itself will be collecting money only to be refunded later, an activity which could have well been avoided. This will surely increase paperwork for the department by leaps and bounds. This is a national waste.

The only practical way out is to start filing your tax returns and begin praying for the refund due. Yes, this will create some liquidity problems for the assessee in addition to the fact that getting refund is associated with many hurdles. The woes do not end here. The thresholds for application of TDS are contemptibly small amounts.

The more common ones are of i) Rs 2,500 for interest on debentures, ii) Rs 10,000 for bank interest iii) Rs 5,000 for commission and brokerage vi) Rs 1.2 lakh for rent vii) Rs 1 lakh for acquisition of immovable property other than agricultural land and viii) Rs 5,000 for any other interest payable.

The least they could have done was to increase these thresholds to a realistic level. Have you come across any immovable property being sold for under Rs 1 lakh? Why have such impotent provisions which will never come into the picture?

Schedule 3 lists the TDS rates for specific incomes. These are:-- i) Salaries: rate applicable to the employee ii) Interest - 10% iii) Dividend which has not suffered DDT - 10% iv) Commission, brokerage, etc - 10% v) Rent - 1% for the use of machinery or plant or equipment and 10% for use of land or building and vi) Any other income - 10%.

This last item is a new residuary item. This is extremely frightful. It implies that any payment made for purchase of any goods or services or movable or immovable property, or for any item other than those listed above tax is required to be deducted at source and worse, there is no threshold. A strict reading of the above would suggest that TDS will also be applicable on day-to-day commerce and business income.

Hopefully the draftsmen of the code may not have realised the ramifications of some of the issues contained in the code. This article is dedicated to them with an earnest hope that corrective action would be taken.

The writer is director, Wonderland Consultants, a tax and financial planning firm.

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