Budget 2024: Tax deduction at source (TDS) by the payer has been prevalent since the era of the Income Tax Act, 1922. TDS serves dual purposes – to ensure that the exchequer receives its due share of the taxes over the course of the year and, to record and track payments of taxable income. There has been an increased focus on TDS compliances by the deductor lately, with non-compliances attracting steep penal consequences. However, operationally, TDS compliances can be time consuming and complex with interpretational challenges, leading to additional burden on the deductor. In this article, we analyse opportunities to ease TDS compliances for the deductor and to enable smoother credits for the deductee.Our full Budget 2024 coverage
1. TDS compliances involving payments to Non-Resident Individuals (NRIs):
Parity in the TDS compliances:
A buyer of a house property exceeding Rs 50 lakh is required to deduct tax from the sale consideration payable to a resident seller, at the rate of 1%, under a simplified compliance process involving a PAN (Permanent Account Number)-based tax challan cum return form. However, if the seller is a non-resident, the buyer is required to obtain a Tax Deduction Account Number (TAN) and file a TDS return, which is a much more onerous process, even if the buyer is an individual, having no business income and even if he may not use the TAN for any other transactions, rendering the TAN inactive in due course. To address this issue, the TDS process applicable for cases where the seller is an NRI, may be eased by introducing a process similar to that of a resident seller.Also Read| India’s budget may lay red carpet for the world to shift supply chain from China
Simplification of the process to obtain lower withholding certificates in case of NRIs:
A NRI can apply for a lower TDS certificate to the tax officer if the tax rate applicable in his case is lower than the prescribed rate. The application process involves an online application and may require multiple submissions to address queries raised by the tax officer. There is no specific timeline to issue the certificate and it could take a few months before the certificate is actually issued. Strict timelines to issue the certificate are required to ensure timely disposal of applications. Further, often, the application could be rejected without giving the taxpayer an opportunity of being heard. Provisions for a virtual hearing in such cases would be welcome.
2. Ease of process to file TDS returns and make TDS payment:
Currently, TDS returns can be verified using either Digital Signature Certificate (DSC) of the authorized signatory or by submitting Forms physically. DSC has a fixed validity and needs to be compatible to the income tax requirements. Online filing is not possible without a compatible DSC which poses a challenge for non-resident deductors. Alternate means for verification of online TDS returns should be introduced for ease of filing TDS returns for example, generating verification code using a foreign mobile number.
Moreover, non-resident deductors often hold bank accounts with foreign banks, which makes online tax payment a challenge as foreign banks are not ‘designated banks’ for the purpose of online tax payments. There is a need for alternate means for online tax payments using bank accounts with foreign banks, to facilitate online tax payment by NRIs.
3. Double Tax Avoidance Agreement (DTAA) benefits to considered for TDS:
Judicial precedents support considering DTAA benefits by the employer while determining TDS on salaries, whether by way of foreign tax credit or tax exemption. However, suitable amendments in the law to allow such claims at the time of TDS, as were proposed in the Draft Direct Tax Code, 2013, are still awaited. Further, where an employer allows such benefits based on judicial precedents, there is no provision in TDS returns to report DTAA benefits. The TDS return Form needs to be modified to incorporate treaty benefits to eliminate ‘defective return’ notices to employees from the tax office, due to mismatch in salary reporting.
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4. Enhance AIS / TIS:
Over the years, TDS has helped the tax department track transactions and increase the taxbase, going beyond the primary purpose of collection of taxes. In recent times, the Annual Information Statement (AIS) and the Taxpayer Information Statement (TIS) have been capturing taxpayer transactions. With continued enhancement, the AIS and TIS will steadily become the primary source of taxpayer information, reducing the need for TDS as a lever to widen the tax base. Enhancements to AIS / TIS on the following aspects, amongst others, are recommended:
- Focus on AIS as a ‘single source of truth’ for a taxpayer as against multiple sources such as 26AS, AIS and TIS, to minimise reconciliations; avoid additional queries from the tax office which can be an adminstrative burden on the taxpayer as well as on the tax office.
- Expand the scope of transactions to be covered under Specified Financial Transactions reporting, to make it more comprehensive, e.g. dates of purchase of assets for capital gains transactions.
- Introduce additional data points in AIS such as details of directorships, holdings of unlisted shares, details of cryptocurrency transactions, intra-day transactions, unclaimed TDS credits, pending demands and refunds.
- Tax saving investments such as those for deductions under section 80G, 80C, 80D, etc. to be mandatorily linked to PAN of the taxpayer so that the deductions can reflect in the taxpayers AIS.
- Strict timeline to update AIS / TIS so that the same is not updated after the tax return is filed by the taxpayer. Any update in AIS / TIS after the filing of tax return would make AIS / TIS redundant.
- Ensure accuracy of data captured in the AIS to facilitate rather than complicate taxpayers’ tax filing processes – for example, rent paid to landlord to be captured instead of the HRA exemption claimed by the tenant, dates of sale of securities to be actual sale date rather than settlement date which could be 2-3 days subsequently, correct reporting in case of joint holders for capital gains.
Ease in compliance encourages voluntary compliance. While simplifying the TDS compliance process will go a long way in enhancing compliance and widening the tax base, the upcoming Budget will be a vote-on-account through an interim budget, rather than a full-fledged budget. Therefore, any significant changes may be unlikely, given that an interim budget is typically restricted in its scope and tends to avoid significant policy changes.
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Budget FAQs:
What happens in cases of non-compliance with TDS?
Non-compliances with TDS attract steep penal consequences.
What are the challenges faced by deductors in TDS compliances?
TDS compliances can be time consuming and complex with interpretational challenges, leading to additional burden on the deductor.
What is the process for TDS compliances involving payments to NRIs?
Currently, if the seller is a non-resident, the buyer needs to obtain a Tax Deduction Account Number (TAN) and file a TDS return.
The authors are Partner, Deloitte Touche Tohmatsu India LLP.
