The focus of the government over the past few years has been to simplify business initiations in India. The government has been successful in reducing human intervention by computerising and automating the processing of income tax returns. But even after doing so much, the substantial energy of the income tax department is going into issuance of refunds and assessees are suffering.
The same was observed by the task force on Direct Taxes under the Kelkar Committee. The task force noted, "the failure of the tax administration to issue refunds continues to be a major source of public grievance."
According to the report of the Comptroller and Auditor General (CAG) of India, the government refunded Rs 1,51,639 crore including interest of Rs 17,063 crore (11.3 per cent) in 2017-18. In order to achieve the ease of doing business, tax deducted at source (TDS) rates must be rationalised once and for all rather than up to March 31, 2021.
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Why is there a need to rationalise TDS rates for good? As per the income tax law, every person whose estimated tax liability for the year is Rs 10,000 or more should pay his tax in advance during the financial year. Once you have an obligation to pay tax in advance, there is no justification for such higher TDS rates.
In the last few years, the government has reduced Income tax rates, but TDS has been the same for a long time. Now that the government has decided to reduce the TDS, it is only for a limited period till March 31, 2021.
The TDS rate on rental income, professional income, interest income and dividend is 10%. This leads to an increase in the number of recipients of refunds, thereby enhancing the effort of the government causing hardships to taxpayers by locking up money as TDS refunds may take, in many cases, 20-30 months. This is akin to the taxpayer lending to the government at 6%.
It is heartening to note that this issue has been partially addressed by allowing TDS at a reduced rate of 75% of the applicable rate till March 31, 2021. However, there is a strong case for bringing down the TDS rates by half once and for all.
Though there are provisions under the Income Tax Act for issuing certificates of TDS at a reduced rate by the assessing authority, however, it is often neither practical nor feasible for those whose tax liability is less than the amount they are subjected to for TDS.
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Even the Easwar Committee on simplification of tax laws has recommended reducing the TDS rates as well as enhancement and rationalisation of the threshold limits of TDS. However, this recommendation of the committee was not accepted by the government.
The committee has also recommended the deletion of an Income Tax Act provision that delays refund of TDS by even up to 40 months. This provision was also not accepted by the government, and it resulted in continuous delays in refunds.
Though the government has disbursed the refunds to the tune of Rs 4,250 crore from April 1, 2020, to April 14, 2020, in order to put more money in the hands of the taxpayers, this was only for cases where the refund was less than Rs 5 lakh.
The latest announcement by Finance Minister Nirmala Sitharaman has been made for an immediate refund in respect of all assesses except the corporate assesses. Obviously, there is no reason to exclude them for the immediate issue of refunds, which would have added major relief and availability of liquidity. There is hardly any justification in paying 6% interest on refunds but charging 12% on the tax demand.
In order to improve ease of doing business, the tax department should encourage payment of advance tax rather than TDS. Corrective measures on the TDS and refunds front would bring relief to trade and industry while enhancing their competitiveness in the international market.
(The author is CEO of KGS Advisors, a chartered accountancy firm)