Ease of Doing Business: Reforms in TDS Provision

Article By Ms. Tripti Shinghal Somani of K G Somani & Co

Why only 25 % TDS? Why up to 31 March 2021 only? Why no immediate refund to corporate?

The focus of the Government from the past few years is to simplify business initiations in India.  The Government has been successful in reducing human intervention by computerizing and automating the processing of Income-tax return. But even after doing so much, substantial energy of the Income-tax department is going into the issuance of refunds and assessee are suffering.

The same was observed by the Task Force on Direct Taxes (Kelkar Committee) “the failure of the tax administration to issue refunds continues to be a major source of public grievance. As per the report of CAG India for the year ended March 2018, The Government has refunded Rs.1, 51,639 Crore which included interest of Rs.17, 063 Crore (11.3 per cent) in FY 2017-18.  In order to achieve ease of doing business, TDS rates must be rationalized for all time rather than up to 31 March 2021.

 We should acknowledge that as per section 208 of the Income Tax Act, 1961, every person whose estimated tax liability for the year accrues to Rs. 10,000/- or more should pay his tax in advance during the financial year. Once you have obligation to pay tax in the form of advance tax then there is no justification for such higher rates of TDS. In the last few years, the government has reduced Income tax rates, but TDS rates have reduced now but that also for limited period. The rate of TDS on Rental income, Professional Income, Interest Income and Dividend is 10%. This led to the increase in a number of recipients of refund, thereby enhancing the effort of the Government and cause hardships to the taxpayer , money is locked up as TDS refunds may take in many cases around 20-30 months to get credited back to their accounts, this is akin to as if they are giving a loan to the government @ 6% interest rate. 

It is hardening to note that this issue has partially addressed in the announcement made by the finance minister as part of financial package, by allowing TDS at a reduced rate of 75% of the applicable rate. However, certainly, there is a good case that TDS rate wherever is Ten per cent could be only five per cent.

 Although Sec.197 of the Income Tax Act read with the Income Tax Rules 28, 28AA and 28AB, prescribe guidelines and procedure for issuing a certificate of TDS at a reduced rate by the assessing authority, However, taking recourse to the provisions of section 197 is neither practical nor feasible as most of those who are entitled to refund (individuals etc.) of whom the tax liability is less than the amount they are subjected to TDS.

Even the Easwar Committee has recommended pruning of TDS rates and threshold limit in the year 2016, which has not been followed or applied. Besides the suggestion of rationalization and reduction in TDS rates, another important suggestion of the deletion of section 143(1D) of Income-tax was suggested. 

The report states as under: “It is desirable that any refund due to a taxpayer under the income tax return filed him is processed and the refund issued to him within a stipulated time frame, maximum six month from the end of the month in which the tax return is filed.  even 40 months, respectively from the filing of the tax return.”

Accordingly, it was recommended that section 143 (1D) should have been deleted with effect from 1st July 2016 but this was not accepted by the Govt. and it resulted in the backlog and delays in refunds, continuing irritating the assessee.
We have seen that the Government has disbursed the refunds to the tune of Rs. 4,250 Crore (approx.) from 1st, April 2020 to 14th, April 2020 to increase the liquidity in the hands of taxpayers, however, this was only in respect of the cases where the refund was less than five lakhs only. Now the announcement has been made for immediate refund in respect of all the assessee except the corporate assessed.  Obviously, there is no reason to exclude them for the immediate issue of refund which would have added major relief and availability of liquidity.

 There is hardly any justification in the rate of interest allowed on the refund which is six per cent while the interest charged on the tax demand is twelve per cent.  In order to achieve more ease of doing business, we should encourage the payment through advance tax rather than TDS. Corrective measures on TDS and the refunds front would bring relief to trade and industry while enhancing their competitiveness in the international market.