Union Budget 2024: Need to rationalise contours of TDS provisions

By Rakesh Nangia & Sandeep Jhunjhunwala

Anticipation is growing as India awaits unveiling of full budget for fiscal year 2024-25 on July 23. As the government navigates towards shaping India’s future trajectory, taxpayers are voicing a multitude of recommendations they hope could shape the upcoming budget session. Among these suggestions, rationalisation of withholding tax (TDS) provisions stands prominently.

Since introduction, TDS provisions have endeavoured to achieve objectives of advancing and ensuring consistent tax collection alongside serving as an efficient income tracking mechanism. Overtime, these measures have significantly broadened horizons to include transactions which were already taken under the wings of parallel taxing provisions such as GST to discharge goals of minimising tax evasion.

Overlapping TDS provisions

For instance, levy of 0.1% TDS under Section 194Q of Income Tax Act on high-value purchases duplicates data already collected by GST filings to help tax revenue streams of taxpayers. With heightened integration and information exchange between the government departments, eliminating such overlapping TDS provisions could streamline tax administration and alleviate compliance burden on taxpayers.

In fact, TDS under Sections 194, 194C, and 194J of Income Tax Act apply to the entire transaction amount once stipulated thresholds are exceeded, causing compliance hassles especially when dealing with numerous low-value transactions. The upcoming budget could consider softening these provisions by providing for deduction of TDS only on amounts exceeding thresholds. Another area of anomaly doing rounds at courts is the classification of expense under Section 194J of Income Tax Act between technical and professional service necessitating standardisation by considering application of 2% TDS rate across both categories thereby reducing litigation costs.

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TDS mismatches

One of the common variances reported by income tax authorities processing income tax returns are TDS credit mismatches from that appearing in Form 26AS. These reconciliation paradoxes normally stem from, either deductors’ failure to report transactions in TDS returns or revisions in TDS returns after income tax return filing due date. With such incongruencies in Form 26AS, taxpayers miss the opportunity to claim their rightful TDS credit.

Taxpayers often witness a thumbs down on rectification applications made under Section 154 of the Income Tax Act, for claim of TDS credit appearing in Form 26AS after income tax return has been filed, as tax authorities are guided by protocols of declining claims which are not made in the return of income.

This situation creates distressed financial pits for taxpayers who face higher income tax liabilities due to unclaimed, yet valid, TDS credits. To ensure that taxpayers are not unfairly disadvantaged and can promptly claim their rightful TDS credits, synchronising TDS return revision timelines with those for filing income tax returns could be considered.

Minimising hiccups

Minimising hiccups around claim of TDS credits is also critical from the viewpoint of fences built around grant of interest on refunds which inter alia spring from TDS credits. Income tax authorities, while processing tax returns, determine interest only upto date of intimation of such refund, resulting in involuntary forfeiture of due interest for period between such intimation and date on which refund actually reaches taxpayers’ bank account.

Such loss of interest reinforces the merits for reforms to enable claim of full entitlement of TDS credits and consequently claim refunds at return filing stage. Without prejudice, it would be prudent to consider amending Section 244A of Income Tax Act to facilitate receipt of interest on refunds until the date of refund credit vis-à-vis date of refund determination, provided that the delay is not demonstrably attributable to taxpayers’ default such as non-updation or validation of bank account information on the tax portal.

Such a revision would align the provisions with attributes of fairness and transparency, strengthening confidence in taxmen and remedying prejudice caused due to administrative delays in processing tax refunds, which are clearly beyond taxpayers’ control.

In summary, evolving complexities around TDS provisions demands a return to simplicity and alignment with their original purpose. As the Government prepares to present the budget, streamlining administrative and compliance concerns around the TDS institution would not only foster a more conducive business environment but also ensure fair treatment for taxpayers.

(Nangia is non-executive chairman and Jhunjhunwala is partner, Nangia Andersen LLP)

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