By Sunil D. Shah and Meena Khivasara
Budget 2024 expectations: In the complicated nature of the tax law, clarity is paramount. The current landscape of tax collection at source (TCS) and tax deduction at source (TDS) is far from straightforward. With different thresholds and various rates ranging from 0.1% to 40%, navigating these provisions has become akin to navigating a labyrinth, full of complexities and pitfalls. This complexity not only creates confusion but also causes disputes, which culminate in lockdown. from working capital, hindering growth and development. Given these challenges, there is a need to streamline and simplify provisions to improve clarity and efficiency.
It should be kept in mind withholding tax is a vicarious tax collection and the tax authority can always have recourse to the primary taxpayer. Even in the case of non-resident taxpayers, the tax authorities may have recourse to treaty provisions for assistance in tax collection. There is also a comprehensive information collection system in place to capture data on income and transactions such as Annual Information Statements, returns submitted for certain Financial Transactions, remittance declarations in Forms 15CA and 15CB, etc. Apart from the income tax system, the government collects information on transactions under other laws such as GST. So, the government can consider the following measures:
Also Check | Budget 2024 Live Update: Income Tax changes, record capex for roads and railways expected from FM Nirmala Sitharaman
Rationalization of Provisions and Rates
The current proliferation of TDS rates and provisions has led to a complex system that needs simplification. For this purpose, the government can formulate a comprehensive road map to reduce the gap in TDS provisions and rates. By consolidating payments into two or three categories, the TDS framework can be simplified, giving rise to a more cohesive and comprehensible system. Some disputes arise not because of the absence of deductions but simply because of differences of opinion on tax rates. The dispute can be minimized if the number of tariffs is rationalized.
Removal or rationalization of TCS Terms
The essence of income tax lies in the taxation of income, rather than expenses. Since GST is already applicable on most expenses, the imposition of TCS seems redundant. A prudent course of action would entail the abolition or rationalization of TCS provisions, removing unnecessary tax layers and improving efficiency in the tax regime.
More about the decision of TCS on the sale of goods and TDS on the purchase of goods. This poses a daunting challenge characterized by the ambiguity of compliance. While in theory only one provision will apply, in some practical situations such a determination is difficult and time-consuming. To reduce these challenges, a harmonized approach is essential, i.e. one of the two provisions (preferably TCS) is removed. Alternatively, regular taxpayers can be given the flexibility to opt for lower or nil tax deduction/collection certificates.
These pragmatic steps will not only simplify compliance but also increase the ease of doing business, promoting an environment conducive to economic growth.
Clarification of the Definition
Ambiguity surrounding the definition of critical terms such as “goods” undermines the efficacy of the tax framework, leading to discrepancies in interpretation and disputes. To solve this problem, a precise definition should be formulated, harmonized with the related statutes to eliminate confusion and facilitate compliance.
Foreign Tax Credit (FTC) Considerations in payroll deduction taxes
The absence of an explicit provision on credit for taxes paid outside India has resulted in an element of rigidity in the tax framework, hindering the facilitation of foreign tax credit (FTC). To overcome this lacuna, employers should be allowed to give credit for taxes paid abroad while withholding taxes on salaries, with the necessary amendments to facilitate FTC disclosures in the appropriate forms.
Adjustment of TCS under Liberalized Remittance Scheme (LRS):
Multinational employees are often given the option to participate in employee stock option plans from overseas parents. The acquisition of such shares by the employee is treated as payment under LRS subject to TCS levy. The taxpayer has already paid tax on the income arising from the stock option as a prerequisite deducted by the employer. TDS and TCS levy affects the cash flow for employees because stock options are perquisites and not cash and they will be able to claim TCS credit only after filing return of income. To lighten the burden, an amendment can be implemented, so as to adjust the TCS collected on such remittances against the TDS on salary.
Withholding of Year-End Provisions:
Ambiguities regarding withholding tax in year-end provisions require resolution to ensure fairness and certainty. Detention should be based on the crystallization of real costs, instead of estimating and avoiding a hyper-technical approach in favor of a pragmatic approach that facilitates compliance.
Resolution of Overlapping Terms:
There are certain overlapping provisions, such as whether a particular service is a ‘technical service’ or a ‘contract for works’ (194J v. 194C) or whether it is a ‘professional service’ or a ‘technical service’ (194 J(a) v 194J (b) ), payment for rent or use of plant and machinery (194-I v. 194J). This overlap leads to confusion and inefficiency. In order to correct these anomalies, efforts should be made to clarify and clarify existing provisions, fostering coherence and consistency.
Harmonization of TDS Penalty Provisions:
Under section 201, if a person who is required to deduct TDS fails to do so, or after deducting TDS fails to deposit the money with the government, he will be treated as an assessee in default. This can lead to penalty under section 221. Also, no deduction can lead to penalty under section 271C. This represents a potential double burden for taxpayers. By shortening the penalty provisions, the framework can be implemented fairly to avoid double jeopardy.
Disallowance under section 40(a)(i) /(ia) and claim under section 201(1):
Disallowance can occur when tax is not withheld under section 40(a)(i) or (ia), and a separate claim can be raised under section 201(1) for this disallowance. Eliminating this duplication can be achieved by eliminating sanctions under section 40(a)(i) or (ia) because section 201(1) is sufficient to offset the loss of income. Alternatively, a clarification may be included that only one of the two provisions will apply.
Conclusion
The measures proposed above have the potential to speed up the withholding provisions and ease the administrative burden on deductors. It may be recalled that a tax collector performs the duty of tax collection on behalf of the government. It is reasonable to expect that the deductors are adequately compensated to carry out their responsibilities. This can be done by paying a fee commensurate with the workload or income collected.
(Sunil D. Shah is Partner, Deloitte India and Meena Khivasara of Deloitte Haskins & Sells LLP)
Budget 2024 expectations: In the complicated nature of the tax law, clarity is paramount. The current landscape of tax collection at source (TCS) and tax deduction at source (TDS) is far from straightforward. With different thresholds and various rates ranging from 0.1% to 40%, navigating these provisions has become akin to navigating a labyrinth, full of complexities and pitfalls. This complexity not only creates confusion but also causes disputes, which culminate in lockdown. from working capital, hindering growth and development. Given these challenges, there is a need to streamline and simplify provisions to improve clarity and efficiency.
It should be kept in mind withholding tax is a vicarious tax collection and the tax authority can always have recourse to the primary taxpayer. Even in the case of non-resident taxpayers, the tax authorities may have recourse to treaty provisions for assistance in tax collection. There is also a comprehensive information collection system in place to capture data on income and transactions such as Annual Information Statements, returns submitted for certain Financial Transactions, remittance declarations in Forms 15CA and 15CB, etc. Apart from the income tax system, the government collects information on transactions under other laws such as GST. So, the government can consider the following measures:
Also Check | Budget 2024 Live Update: Income Tax changes, record capex for roads and railways expected from FM Nirmala Sitharaman
Rationalization of Provisions and Rates
The current proliferation of TDS rates and provisions has led to a complex system that needs simplification. For this purpose, the government can formulate a comprehensive road map to reduce the gap in TDS provisions and rates. By consolidating payments into two or three categories, the TDS framework can be simplified, giving rise to a more cohesive and comprehensible system. Some disputes arise not because of the absence of deductions but simply because of differences of opinion on tax rates. The dispute can be minimized if the number of tariffs is rationalized.
Removal or rationalization of TCS Terms
The essence of income tax lies in the taxation of income, rather than expenses. Since GST is already applicable on most expenses, the imposition of TCS seems redundant. A prudent course of action would entail the abolition or rationalization of TCS provisions, removing unnecessary tax layers and improving efficiency in the tax regime.
More about the decision of TCS on the sale of goods and TDS on the purchase of goods. This poses a daunting challenge characterized by the ambiguity of compliance. While in theory only one provision will apply, in some practical situations such a determination is difficult and time-consuming. To reduce these challenges, a harmonized approach is essential, i.e. one of the two provisions (preferably TCS) is removed. Alternatively, regular taxpayers can be given the flexibility to opt for lower or nil tax deduction/collection certificates.
These pragmatic steps will not only simplify compliance but also increase the ease of doing business, promoting an environment conducive to economic growth.
Clarification of the Definition
Ambiguity surrounding the definition of critical terms such as “goods” undermines the efficacy of the tax framework, leading to discrepancies in interpretation and disputes. To solve this problem, a precise definition should be formulated, harmonized with the related statutes to eliminate confusion and facilitate compliance.
Foreign Tax Credit (FTC) Considerations in payroll deduction taxes
The absence of an explicit provision on credit for taxes paid outside India has resulted in an element of rigidity in the tax framework, hindering the facilitation of foreign tax credit (FTC). To overcome this lacuna, employers should be allowed to give credit for taxes paid abroad while withholding taxes on salaries, with the necessary amendments to facilitate FTC disclosures in the appropriate forms.
Adjustment of TCS under Liberalized Remittance Scheme (LRS):
Multinational employees are often given the option to participate in employee stock option plans from overseas parents. The acquisition of such shares by the employee is treated as payment under LRS subject to TCS levy. The taxpayer has already paid tax on the income arising from the stock option as a prerequisite deducted by the employer. TDS and TCS levy affects the cash flow for employees because stock options are perquisites and not cash and they will be able to claim TCS credit only after filing return of income. To lighten the burden, an amendment can be implemented, so as to adjust the TCS collected on such remittances against the TDS on salary.
Withholding of Year-End Provisions:
Ambiguities regarding withholding tax in year-end provisions require resolution to ensure fairness and certainty. Detention should be based on the crystallization of real costs, instead of estimating and avoiding a hyper-technical approach in favor of a pragmatic approach that facilitates compliance.
Resolution of Overlapping Terms:
There are certain overlapping provisions, such as whether a particular service is a ‘technical service’ or a ‘contract for works’ (194J v. 194C) or whether it is a ‘professional service’ or a ‘technical service’ (194 J(a) v 194J (b) ), payment for rent or use of plant and machinery (194-I v. 194J). This overlap leads to confusion and inefficiency. In order to correct these anomalies, efforts should be made to clarify and clarify existing provisions, fostering coherence and consistency.
Harmonization of TDS Penalty Provisions:
Under section 201, if a person who is required to deduct TDS fails to do so, or after deducting TDS fails to deposit the money with the government, he will be treated as an assessee in default. This can lead to penalty under section 221. Also, no deduction can lead to penalty under section 271C. This represents a potential double burden for taxpayers. By shortening the penalty provisions, the framework can be implemented fairly to avoid double jeopardy.
Disallowance under section 40(a)(i) /(ia) and claim under section 201(1):
Disallowance can occur when tax is not withheld under section 40(a)(i) or (ia), and a separate claim can be raised under section 201(1) for this disallowance. Eliminating this duplication can be achieved by eliminating sanctions under section 40(a)(i) or (ia) because section 201(1) is sufficient to offset the loss of income. Alternatively, a clarification may be included that only one of the two provisions will apply.
Conclusion
The measures proposed above have the potential to speed up the withholding provisions and ease the administrative burden on deductors. It may be recalled that a tax collector performs the duty of tax collection on behalf of the government. It is reasonable to expect that the deductors are adequately compensated to carry out their responsibilities. This can be done by paying a fee commensurate with the workload or income collected.
(Sunil D. Shah is Partner, Deloitte India and Meena Khivasara of Deloitte Haskins & Sells LLP)
