25% reduction in the existing TDS/TCS rate slabs: a taxing contribution?

In the wake of the global pandemic COVID-19 crisis, which has not only lead to months of nation-wide lockdown and curfew, it has also ‘almost’ crippled the economy and needless to say, this will go down in the world history as a rather tragic and an unprecedented situation the 21st century had to face. The Modi led Indian Government has announced 25% reduction in the TDS/TCS slabs on nonsalaried specified persons, to improve liquidity/disposable finances in the hands of the people. Before we dwell into this further, let us understand what are the TDS provisions as per the Tax Regime and then we can attempt to understand the effect, if any, of the 25% reduction in the TDS/TCS rates.

Tax Deducted at Source (TDS) provisions

 TDS is only an alternative method of collection of taxes. The purpose of deduction of tax at source is not to collect a sum which is not a taxable in law, it is to facilitate the collection of tax lawfully leviable. The law of TDS is merely a machinery and a collection provision and is not related to chargeability of income. In other words, it has nothing to do with determination of the tax liability of a person. The TDS provisions ensures collection of taxes payable by a payee (recipient of income) by directly imposing upon the payer an obligation to withhold the tax due from his income and deposit it with the Government at the time of making the payment to the payee/ recipient of the income. Such tax is deposited to the credit of the payee and not the payer.

Hence, TDS is only part of the existing tax liability arising from the income of a person and the burden of paying it is shifted onto the payer, who directly deducts a certain % from the payment made to the payee/ recipient of the income and directly deposits it to the Government. At the year end, the payee is entitled to get the benefit of the TDS already deducted, towards calculation of its final/net tax liability. Thus, while TDS contributes by merely giving a credit/benefit of the TDS already deducted, it has nothing to do with the determination of the taxability of a receipt or tax rates leviable or the tax liability of a person.

Need for TDS provisions in law

To my mind, there are many benefits of the TDS provisions. It ensures transparency, reporting of all transactions by the payers, increases accountability, reduces distortions, increases collection of revenue at regular intervals rather than revenues flowing in only at the year end and the tax collection base is also widened. It enables authorities to bring within their fold all such persons who are liable to come within the network of tax payers. It may even work as a measure of ‘checks and balances’ in some given situations. From the perspective of the payee/recipient of the income, a certain % of the income is deducted at the very source and is already contributed towards its final tax liability and hence makes it convenient.

COVID-19 tax measures

Now, it is important to understand that by reducing the TDS/TCS rates, the Government has not reduced the tax rates. It has merely recasted an obligation on the payer, to deduct a lower % as TDS from the payments being made to the payee/recipient. As a natural corollary, when a lower % as TDS is deducted, at the year-end a lower credit/benefit of the TDS deducted will be available to the taxpayer towards calculation of its final/net tax liability, and apart from those who would still be entitled to refunds on filing of Tax Returns, the taxpayer will now at the time of filing of its Tax Returns, be liable to make good this lower % of TDS deducted, by paying more tax from their own pockets at that point to eventually meet their yearly tax liabilities. Hence, ultimately the tax liability remains the same

Accordingly, this TDS/ TCS rate relaxation effective 14.05.2020 is a short-term cash flow measure which enables more liquidity in the hands of the payee/recipient. It is not a reduction in the tax rates and there is no tax benefit granted, however, it temporarily increases liquidity and facilities to resolve the cash crunch problem in the midst of the COVID-19 crisis. Hence, one may at best refer to it as a ‘timing issue’ wherein taxpayer is now entitled to have lesser TDS deducted while receiving any payment, thereby leading to more disposable funds in its hands. However, this is a temporary benefit and ultimately, at the year end, taxes will be paid as per the prevalent/existing tax rates and there is no benefit as regards the overall tax liability. It only defers payment of taxes deductible as TDS for a temporary period and hence to that limited extent allows more cash flow in the hands of the payee/recipient. This may, in many cases, also get negated by the advance tax installments payable by the taxpayers, to which there has been no corresponding change.

Unresolved territory

This reduction in the TDS/ TCS rates aims to boost liquidity, however in terms of quantum it is extremely insignificant for many, as if one is entitled to 2% TDS deduction, now it is reduced by 25% of 2% i.e., new rate of 1.5%, which is a mere 0.5% reduction. Even if we take 10% TDS deduction, now reduced by 25% of 10% i.e., new rate is 7.5%, it is a 2.5% reduction and this 0.5% and 2.5% reduction respectively is only temporary as there is no ultimate reduction in the tax liability and in the existing tax slabs and the taxpayer will eventually pay tax equivalent to this 0.5% or 2.5% also, when the taxpayer files its Tax Return at the year end.

Though cash fluidity measure may be a welcoming step, it is far from being the medicine one needs to resolve the issues of both the payer and the payee/recipient. The payer gets no relief and no benefit whatsoever since whatever is deductible under TDS gets deposited to the Government and the remaining goes to the payee/recipient. The payer’s liquidity/cash crunch issues remain unaddressed (specially in cases of employers, business houses, tenants, professionals etc.) and the payee/recipient only gets the benefit of holding ‘a rather small amount’ of ‘its own money’ in ‘its own hands’ for a longer duration. Does it really attempt to provide any relief? Perhaps not, because problems of the payers remain unaddressed. How will the payers meet the COVID-19 crisis and contribute towards kickstarting the economy again, remains unaddressed from a pure tax perspective. Legitimate expectation lead people to hope that the Modi led Government will announce more effective tax measures to address the current financial incapacity of the people, however, the announcements over the past few days, didn’t pave the way for this hope.

As regards the payee, the current disposable funds, may meet immediate needs of some, however, it does not address the ‘elephant in the room’, i.e., the larger problem in terms of meeting these unforeseeable circumstances created during the COVID-19 crisis. Unfortunately, this 25% TDS/TCS reduction is not available to the salaried class as, for reasons because known to the Government, this notification is not made applicable to salaried payments.

While it understandable that the Government also its own limitations and fiscal debt, the point is the businessman/the employer/the employee/the payer/ the payee/the recipient, all are squeezed at the moment and some tax reforms, tax measures, tax concessions are required to allow normalcy.

One can only hope that in the weeks to come, the Government realizes tax measures to be an important aspect, which more likely than not will act as a catalyst in revenue generation and boosting the economy, helping all stakeholders to eventually face and recover from the unprecedented COVID-19 crisis and sail and swim through these challenging days.

Ananya Kapoor is an Advocate, Delhi High Court and specializes in tax litigation and tax advisory. She has completed her Masters in Law (BCL) from University of Oxford, UK on a full scholarship and graduated with a Distinction

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