Adam Smith in his guide titled “Wealth of Nations”, enunciated the 4 canons of taxation viz. ‘Equality, Certainty, Convenience and Economy‘, which interprets to widening the tax base, conveniently gathering taxes, and selling socio-economic progress. India’s tax coverage has largely revolved round these ideas.

One essential instrument which the federal government makes use of to place the above ideas into follow is withholding tax, popularly generally known as tax deducted at supply (TDS, Ever since its introduction, the scope of TDS has been increasing. Currently, TDS contributes almost 50 per cent to the general direct tax assortment and has almost doubled within the final three to 4 a long time.

TDS provisions are constructed on the idea of ‘pay as you earn’ ie, collection of tax on the very supply of revenue. With the latest growth of the scope of TDS, overlaying virtually each transaction together with buy of products, e-commerce transactions, buy of immovable property, dividend payouts, money withdrawals, buy of motor automobiles and so on. In addition to conventional objects, one will get a way that TDS is omnipresent and has reworked itself right into a transaction tax like Goods and Services Tax (GST). The compliance processes related to withholding necessities are additionally cumbersome and not directly add to transaction prices.

While the regulation gives for TDS credit score, there are numerous sensible challenges in availing the identical. The means to avail credit score will depend on the quantities mirrored in a taxpayer’s particular person account (known as Form 26AS maintained electronically by the Indian tax administration. The taxpayers are required to match the credit score mirrored in Form 26AS with the revenue declared for the precise tax interval. Most Often, this results in a number of mismatches on the system which require fixed reconciliation with the information of distributors/prospects. drawn litigation, leading to important unrecoverable prices.

Moreover, in sure eventualities, particularly with respect to worldwide funds like royalty, Fees for Technical Services (FTS) and so on., overseas events typically demand that TDS associated obligations are borne by the Indian celebration, due to the stringent compliance necessities related to them. Further, aggressive positions adopted by the Indian Tax Department on applicability of TDS in transactions like offshore provides in massive turnkey/ Engineering, Procurement, and Construction (EPC) contracts, software program funds, dividend funds and so on., lead to enhanced prices and protracted tax litigation for the taxpayers.

Additionally, normally TDS is relevant on the full transaction quantity and never solely on the portion of taxable revenue. The credit score for such taxes withheld can also be accessible for set-off solely on a quarterly foundation, in opposition to advance tax funds. This results in blockage of funds which amplifies working capital necessities of companies. Taxpayers with low taxable incomes/losses must bear a separate means of both acquiring nil/decrease TDS certificates or refunds, severely affecting money flows.

While increasing the TDS community has helped in widening the tax base, creating a knowledge lake of taxpayer info, and pushing the general compliance index, one can’t ignore that the aforementioned challenges have resulted in rising the compliance burden and transaction prices of companies in addition to added complexities just like the requirement to alter their inner programs and processes.

With ‘Ease of Doing Business’ being one of many major targets on the Government’s agenda, the next measures could also be thought of to offer for a extra sturdy and taxpayer-friendly TDS regime:

Introduction of a real-time, Tax Deduction Account Number (TAN) based mostly consolidated TDS ledger (much like the GST system), utilizing which credit score could also be availed by taxpayers with out the necessity to manually reconcile credit with distributors/prospects;

Thrust on self-certification of revenue for TDS in instances of taxpayers with decrease/nil taxable revenue.

Periodic overview of threshold limits for applicability of TDS provisions based mostly on trade traits;

Removal of surcharge and cess on royalty, FTS funds to non-residents shall cut back compliance obligations as home tax charge and the corresponding charge of withholding of 10 per cent shall be at par with the helpful tax charges laid out in most tax treaties;

· Issuing frequent clarifications based mostly on evolving authorized/enterprise traits by means of circulars/Frequently Asked Questions (FAQs) on contentious points to cut back litigation.

While a few of these measures can assist in assuaging liquidity points & compliance burden, it might additionally place India on the identical pedestal as different developed economies the place withholding tax is relevant on selective revenue linked transactions akin to royalty, dividend, curiosity and so on. and never on the whole gamut of transactions. As of now, India’s TDS regime is swiftly shifting extra in direction of transaction tax and if not rationalized, will quickly overlap with GST.

As India Inc prepares to attain the aspirations of a brand new, younger, and technology-driven India, a balancing act from the tax administration to widen the tax base and curb tax evasion whereas concurrently easing compliance obligations would go a great distance in encouraging cooperative compliance .

About the creator: Gaurav Mehndiratta, Partner – Tax, KPMG in India with inputs from R Venkatesan, Chartered Accountant

DISCLAIMER: The views expressed are solely of the creator and ETCFO.com doesn’t essentially subscribe to it. ETCFO.com shall not be answerable for any harm prompted to any individual/group straight or not directly.