Budget suggestions for benefit of revenue: Prefer more advance tax in comparison to TDS REDUCE T.D.S. RATES WITH LOWER EFFECTIVE TAX RATES.

[C.A. DEV KUMAR KOTHARI]

Reduced effective tax rates:

During last 20 years effective tax rates have been lowered considerably. However, rate for TDS as well as exempted amount from TDS has remained more or less stagnant. This causes un-necessarily excessive TDS and the Government has to grant refund with interest to persons from whom tax has been deducted. It is high time to tune rates of TDS with lower effective tax rates so that un-productive work for TDS and refund can be avoided for the assessee’s as well as revenue authorities. Rational TDS will also give clear picture about tax collections.

Harmony between TDS and TCS and effective tax rates is desirable:

TDS and TCS are effective ways to collect tax, reduce tax avoidance, and improve tax base. However, for a better administration of process involved in tax collection, assessment and refund it is desirable that there should be harmony in rates applicable for different purposes. If tax rates changes, it is desirable that rates for TDS and TCS should also be changed to keep proper balance. 

1) Tax deduction at source (TDS):

Tax at the time of accrual of income or receipt of income or advance of income in some cases by the recipient is collected by way of tax deduction at source. The purposes of TDS are inter alia: -

Easy collection before the recipient receives income, tax payment by the actually affected person pinch more than to the person who is paying income after deduction of tax. Thus a psychologically soothing measure is TDS as against advance tax.

Timely collection over a period of time of the previous year, improving tax payers base, a check on tax evasion,

Payment of TDS is a payment of tax on behalf of the person who has earned income and it is deemed to be paid on his account accordingly it is credited against advance tax payable and self-assessment tax payable by the recipient.

Tax collected at source (TCS)

TCS is also similar to TDS so far collection, credit etc are concerned. However, TCS is in relation to certain type of transactions, which are considered to be more prone to tax avoidance.

The scope of TDS and TCS is not necessary to elaborate because the readers are well known of the same and also because it is not necessary in the context of the theme of the article. 

Tax Rates

We have seen falling effective tax rates during last about twenty years due to higher basic exemptions, lower tax rates and increased deductions by way of incentives in some cases, higher amortizations allowed etc. Tax rates have come down from as high as 65% to maximum marginal rate of tax to 30%. In case of individuals and HUF’s effective rates have come down considerably due to increasing basic exemption, and higher deductions under Chapter VIA.

3) No change in rate of TDS

As noted in earlier paragraph effective tax rates have been reduced considerably. However, rate of TDS (barring TDS from salary) have not been adjusted in tune with decline in effective tax rate. For example, we may consider the following instances.

Nature of Income	Section	Old Limit	New Limit	Old rate*	New Rate*
Interest on Securities	193	Rs.1000 up to 31.5.89	Rs.2500 (w.e.f.01.6.89)	10% and 20%	10% and 20%
Dividends	194	Rs.1000 Up to 31.7. 02	Rs.2500 (w.e.f.1.8.2002)	20%	Now exempt.
Other interest	194A	Rs.1000 Up to 31.5.87 Rs.2500 Up to 31.5.2K	Rs. 5000 w.e.f.1.6.2000	10% and 20%	10% and 20%
Lottery & Cross Word Puzzle	194B	Rs.1000/- Up to 31.5.86	Rs.5000 w.e.f.1.6.86	30%	30%
Winning from Horse Races	194BB	Rs.5000 Up to 30.9.91	Rs.2500 w.e.f.1.10.91	30%	30%
Payment to Contractors and sub-contractors	194C	Rs.5000 Up to 31.5.82   Rs. 10000 Up to 30.6.95	Rs.20000 w.e.f. 1.7.95	2% and 1%	2% and 1%
Insurance Commission	194D	Rs.5000 w.e.f.1.6.87	Rs.20000	10%	10%
Payment of NSS	194EE	Rs.2500 w.e.f.1.10.91	Rs.2500 continuing	20%	20%
Repurchase of mutual fund units	194F	Nil	Nil	20%	20%
Commission on sale of Lottery Tickets	194G	Rs.1000 w.e.f.1.10.91	R.1000 continuing	10%	10%
Commission on brokerage	194H	Rs.2500	Rs.5000	10%	5%
Rent	194I	Rs.120000 w.e.f.1.6.94	Rs.180000	15% in case of individual & HUF and 20% in other cases	2% from rent of machinery etc. 10 from rent of land and buildings
Fees for professional or technical services	194J	Rs.20000 w.e.f.1.7.95	Rs.30000	5%	10%
Income in respect of units	194K	Rs.1000 Upto 31.7.02	Rs.2500	10%	10%

* Broadly stated rates surcharge will be extra wherever applicable.

From the above table, it can be easily observed that there have not been significant changes in the amount of limits up to which no tax is deductible and rate of TDS have also remained more or less same.

TDS on Salary is on regular basisi:

TDS on salary is an exception because in case of TDS from salary, total income from salary is computed and net tax payable is worked out for the previous year after taking into account basic exemption, deductions available as per provisions applicable for the relevant year to the concerned employee. Therefore the tax actually payable on salary income is deducted. Therefore in this case all relevant factors are taken into account. However, such is not case in respect of other TDS.

Need to harmonise TDS with effective tax rates

Substantial tax is deducted at source and thereafter the Revenue refunds tax with interest. Exemption limits for no TDS and rate of TDS having been  fixed, long ago at abysmally low and relatively higher rate respectively and no revision has been made. Though it may not be possible to tune rates of TDS with actual tax liability specifically for all assessee’s, as is case in respect of TDS from salary. However, general alignment of rates can be made by sample studies and general calculations.

Advance tax is better option than TDS:

No doubt TDS is a measure to widen taxpayers base. However, now the government has already sufficient data base which is increasing by various compulsory PAN and TAN requirements, AIR information, other financial reporting system etc. Therefore, now benefit of revenue need to be looked upon from the point of early collection, proper collection, and reduced refunds.

We find that large amount of tax deducted at source become refundable Due to higher rate of TDS.

In case of advance tax, in case of delay in payment of installment, it is easy to levy interest for delay in deposit of advance tax.

Monitoring of TDS is difficult in comparison to monitoring of advance tax.

A substantial part of TDS takes place in last month of previous year and also on last day of previous year that is 31^st March. In such cases TDS can be deposited after end of the previous year by 7^th April or 31^st May as the case may be. However, when tax is deductible at any time during the year, assessee can adjust it to workout installments of advance tax which starts falling due from 15^th of June of the previous year.  

Even if TDS is deposited after previous year (say on 7^th April or on 31^st May) the person from whose income tax is deducted will be entitled to get interest w.e.f. 1^st April, if there is refund. He can adjust such TDS against advance tax payable.

Therefore, it is suggested that rates of TDS should be brought down and payment of advance tax should be preferred for benefit of revenue.

6) Conclusion -un necessary work for TDS and refund can be avoided:

Due to higher TDS, in many cases, tax is deducted unnecessarily. Although there are provisions to get certificates from the Assessing Officer for payment without TDS or at lower TDS. However, such provisions are not practical for small assessees and only in case of big tax payers, having necessary set-up to tackle revenue authorities, the benefits of such provision are availed. To reduce unnecessary un-productive work it is desirable that basic exemption limit as well as rate of TDS should be revised from time to time to keep them in tune with effective tax rates. There is no use in FIRST COLLECT AND THEN REFUND WITH INTEREST.