Tax Deducted at Source (“TDS”) and Tax Collected at Source (“TCS”) provisions under the Income Tax Act of 1961 (“Act”) have been the cornerstone of the country’s tax architecture. A taxpayer is expected to be vigilant at the time of entering into any transaction and must ensure correct tax is deducted / collected and deposited with the exchequer.
TDS provisions are continually amended to reflect the evolving business landscape, including modern-day sectors like digital platforms and online gaming. The extensive nature of TDS / TCS provisions, spread over more than 40 sections with rates ranging from 0.1% to 40%, illustrates their broad reach (covering residents as well as non-residents). With the ever-increasing amendments to the TDS / TCS provisions, it has made compliance more challenging and complex for taxpayers, especially for MSMEs having limited administrative capabilities.
The current tax regime mandates several TDS / TCS compliances to be adhered to by the taxpayer. As a first step, the deductor is required to evaluate TDS / TCS liability after interpreting the provisions of the Act and deduct or collect TDS / TCS as per relevant section. Thereafter, the taxpayer has to deposit the taxes to the credit of the Central government within the timelines provided. Following the same, the taxpayer is supposed to file TDS / TCS returns quarterly and also issue requisite TDS certificates. All these compliances are to be done within the stipulated time, and non-compliance leads to levy of interest, disallowance of expenditure, penal consequences and even prosecution in certain cases.
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Taxpayers often encounter legal disputes over payment classification, such as distinguishing between “commission” & “discount”, “works contract” from “contract of sale”, identifying “reimbursement” vs “benefit/perquisite,” and delineating fee for professional services (FPS) vs fee for technical services (FTS).
Further, over the last couple of years (especially vide the Finance Act’s of 2020, 2021 and 2022), the scope of TDS provisions has been extended to virtually cover almost all the transactions entered into by the taxpayers. This is being undertaken with the sole objective of deepening and widening the tax base (by tracking the underlying transactions). With the introduction of the new TDS and TCS provisions, taxpayers are facing difficulties in identifying which TDS or TCS provision applies to a particular transaction since there are overlaps, especially in cases of section 206C(1H) and 194Q.
Section 206C(1H) imposes an obligation on the seller to collect tax from the buyer of goods, and section 194Q requires a buyer to deduct tax from the sum paid or payable to the seller of goods. As both sections apply to one transaction (i.e., sale and purchase of goods), it is likely that a transaction might be covered under both provisions in some situations. Where it does, the buyer shall have the first obligation to deduct the tax. In other words, the seller will not have any obligation to collect tax under Section 206C(1H) in such a scenario. Applying TDS and TCS provisions on the same transaction (subject to conditions) is effectively duplicating compliance. Besides, this is onerous for a seller (to comply with TCS) since he needs to not only ensure his compliance but also keep a check on whether the buyer has done TDS or not.
Also, large taxpayers (taking the example of e-commerce operators covered under section 194-O) are required to report line-by-line humongous volume of transactions in the quarterly TDS returns. Given that, in each day for a given quarter, multiple transactions are undertaken through the e-commerce operator’s platform, it is very likely that for various sellers the transactions run in a million-line items in a quarter which creates large and voluminous amount of data for compliance. Reporting large volume of transactions in the quarterly TDS return and issuing TDS certificates complying with section 194-O is extremely challenging due to inability of the utility to allow large volumes of transactions and delays on the portal.
The above-mentioned practical challenges can be addressed if appropriate corrective actions / measures are undertaken, such as:
* Such large taxpayers could be allowed to report a consolidated monthly entry per vendor to reduce the volume of quarterly transactions for reporting and issuing TDS certificates;
* The need for issuance of separate TDS/ TCS certificates could be done away with in order to reduce compliance burden on taxpayers (as in any case the information is reported in Form 26AS);
* On a policy level, a more consultative approach could be adopted to ensure that taxpayers are receptive to the proposed amendments.
All in all, though TDS / TCS collections are vital and a faster way for government to collect tax, rationalization and simplification of the TDS / TCS provisions will be a step towards easing compliances, which would be fruitful for the taxpayers and the income-tax department.
As stakeholders look forward to the Union Budget 2024, there is a sense of optimism regarding forthcoming reforms. Additionally, the aforesaid corrective actions / measures, once implemented would foster a conducive environment for business growth, particularly benefiting the MSME sector, which is a critical driver of the economy. By addressing these needs, the government would support economic development and enhance the ease of doing business in India.
(By Sandeep Bhalla, Partner, & Asmita D’Souza, Associate Partner, Dhruva Advisors)
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