• Notification Date: 13-01-2024
• Notification No: N/A

Interim Budget 2024: Government may Simplify withholding Tax Math

Union Budget 2024: India is reviewing the entire gamut of withholding tax provisions in line with the country's overall thrust to simplify the tax structure to make it easier for businesses and reduce disputes. 
 
There are some tax deducted at source (TDS) provisions with different thresholds and multiple rates. This has created a TDS maze that leads to frequent disputes as well as the blocking of working capital at businesses. 

"There is a need to simplify the regime in view of the complexities that have crept in over time," said a government official, explaining the need for the review. 
 
The cleanup of the withholding tax regime could take place in the February 1 interim budget if the review is completed in time. 

There are about 33 sections in the Income Tax Act dealing with TDS rates that range from 0.1% to 30%. 
 
For example, before 2020, fees for technical services (FTS) and fees for professional services (FPS) were subject to 10% TDS. The rate was reduced to 2% for FTS. This has led to classification issues between FTS and FPS, sparking litigation. 

These issues have been flagged by industry over past few years. 
 
"Whilst in the pre-digital era of tax administration there was some merit in this approach, in current times, some of these elevated rates have put undue working capital pressure, especially on MSMEs (micro, small and medium enterprises) besides increasing compliance burden," said EY senior partner Sudhir Kapadia. 
 
With the digitisation of payments and advanced data analytics available with the tax department, there is considerable merit in moving toward lower TDS rates of 1-5% across fewer categories, Kapadia said. The tracking of transactions can still be achieved without putting undue pressure on compliance and working capital, he said. 

The concept of TDS was introduced to collect tax from the income source. The idea was to widen the tax base as TDS provisions help the government capture additional information, helping to plug revenue leakage. Over the years, the TDS and TCS (tax collected at source) net has widened, and rates have also risen. 

Under TDS, a person liable to make a payment of a specified nature to another person will deduct tax at source and remit this into the central government's account. The person from whom income tax has been deducted at source is entitled to get credit for the amount and can adjust it against final tax liability. 
 
A higher TDS rate means greater outgo at the time of receiving income, which increases the working capital requirement as credit for the deduction can only be claimed later.