Budget 2022: Rationalise TDS regime to boost ease of doing business

The ongoing pandemic has been challenging for all the stakeholders in the economy - the government, businesses, and the households.  

Thus, there are multiple expectations from different sections of the economy from this year's Budget.  This article focuses on one largely revenue neutral measure that could add significantly to the ease of doing business in India and also cut down on disputes and litigation. 

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Tax Deduction at Source (TDS) is an important revenue collection tool for the government. As per the government's statistics available on the income-tax website and various press releases issued by the Ministry of Finance, TDS contributes over one-third of the total gross direct tax receipts, and its share is rising with few tax years in the recent past witnessing this contribution to be as high as 45% of the total direct tax receipts. 

As the saying goes that devil is in the details, a detailed analysis of the data available from Ministry of Statistics and Programme Implementation suggests that major contribution comes only from a handful of TDS provisions and there are several other TDS provisions that contribute even less than 1% to the total contribution. 

The TDS provisions were introduced primarily to tax the income at very source and to ensure that transactions trail (audit trail) is available, so that there is no tax leakage.   

Over the years the TDS regime has become quite complicated. Today the Act contains over three dozen substantive provisions relating to TDS. 

There are several rules and forms which a taxpayer needs to be aware of, for proper compliance. There are different rates ranging from 0.1% to 40% and different thresholds for different payments and for different set of taxpayers. To add to this complexity, there are several interpretational challenges as well.  

Thus, the result is that taxpayers have to spend considerable time and resources in meeting their compliance obligations, assessments and litigations. 

Non-compliance leads to stringent penal consequences, disallowances and even prosecution in certain cases. As far as payees are concerned, they face a lot of practical challenges in claiming TDS credit and seeking TDS refunds etc. resulting in cash flow issues in many cases.  

In the past few decades, India has taken massive steps in digitisation of the economy like GST regime, e-invoicing, exchange of information between direct tax and indirect tax authorities, deployment of data analytics tools in the tax department, widening the scope of information to be furnished by financial institutions etc.  

This has created different avenues for the government to track transactions and widen the tax net. Thus, even the argument that TDS is the primary source of information to establish transactions trail is gradually losing ground with each such progressive move. 

Therefore, businesses feel that it is time to take a fresh look at the TDS regime from a holistic perspective, keeping in view the following key considerations:-

• With the expansion of GST ecosystem, data already available with the government could be used to establish transactions trail. Reliance can also be placed on data generated by banking and financial institutions, Statement of Financial Transaction (SFT) and data collated from other government agencies like Ministry of Corporate Affairs, Enforcement Directorate etc. Expanding the quoting of PAN and Aadhar in significant transactions can also help solve the purpose.  
• Key provisions like TDS of salary, contractor payments, fees for professional and technical services etc., that contribute major amount of TDS could be retained and sections that contribute insignificant sum could be repealed.
• The number of rates in the TDS framework could be reduced to one or two rates. Further, the thresholds should be increased to keep small transactions outside the compliance burden. 
• MSMEs consider TDS regime as a major compliance burden and adding to their administrative cost. A simplified regime could be evolved for the MSMEs, in case they cannot be completely exempted otherwise. We have some precedence on this in the GST regime for small businesses. 
• The advance tax installments for large taxpayers could be increased that will serve as equaliser and address the impact on any reduction in TDS collections as result of TDS rationalisation measures. 
• TDS credits in ledger mode, akin to a passbook, could be introduced to resolve the issue of TDS re-conciliation on year-on-year basis. This yearly exercise adds to the administrative burden and often leads to unnecessary disputes and litigation 
• Over-stepping of TDS and TCS provisions could be avoided to remove interpretational ambiguities and implementation challenges. 
• The need for TDS certificates should be done away with, as it has outlived its utility with all the information available online. 

A combination of these measures would help reduce compliance burden on the taxpayers without significantly impacting revenue collections.  

Moreover, taxpayers are only acting in their fiduciary capacity on behalf of the government to deduct, collect and deposit TDS.  So why not have a re-look at the entire TDS regime. 

(The author is National Managing Partner Tax, Grant Thornton Bharat.) 

(CA Richa Sawhney and Sameer Shah contributed to this article) 

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