Are taxpayers unknowingly giving interest free loans to the government?

An analysis of the causes of this trend reveals an important factor. Tax Deducted at Source (TDS) has been important for the government to collect revenue through taxation. And, in recent years, Tax Collection at Source (TCS) has complemented it. TDS and TCS account for about 40% of the gross tax collection.

Over the years, there has been a substantial increase in the scope of both TDS and TCS – sales, purchases, business perquisites, e-commerce purchases, online winnings, remittances under the Liberalized Remittance Scheme (LRS), sale of crypto-currencies. Subject to TDS/TCS. This is in addition to ordinary income previously subject to TDS such as salary, professional fees, technical fees, dividends, interest, payments to contractors, commission, payments to non-residents etc.

In this year’s Union Budget, TCS on certain foreign remittances under LRS, such as foreign tour packages, foreign investments, international transactions through debit, credit and foreign currency cards – and foreign remittances, has been raised to 5%. was raised to 20%. , The new rate of 20 per cent will be applicable from July.

It is the increased coverage of TDS/TCS that accounts for the major portion of the increase in tax collections. The substantial increase in the amount of refund is also likely to be on account of TDS/TCS in excess of the tax liability of the persons from whom such amount was collected to be refunded.

According to the government, such TDS/TCS is necessary to enable the tax department to identify tax evaders – those who do not file their tax returns. Then the question that comes to mind is whether the rate of TDS/TCS is appropriate keeping in view the purpose? Is TCS at 5% LRS not enough to detect tax evaders? Why should the TCS rate be as high as 20%? Professionals or self-employed businessmen may not be affected so much as they can adjust advance tax paid from the amount of such TCS. But a salaried employee, whose income is subject to TDS, has to pay TCS again at 20% on the expenses paid from his post-tax salary when he goes on a foreign tour. In most of the cases, his advance tax liability is not sufficient to absorb the TCS, and he claims the refund while filing his tax return.

Shouldn’t he get interest on his income tax refund? Yes, but the catch here is that he will get interest on the refund only from the beginning of the next year till the date of receipt of the refund – that too, provided he files his return of income in time. Therefore, for the period from the date of deduction till the end of the year, the taxpayer does not get any interest at all – in fact, he is giving an interest-free loan or advance to the government. Considering the size of the refund, approx. 3 trillion, which is sufficient interest free float for the Govt. Also, the interest earned from the beginning of the next year is only 6% per annum, and that too is taxable.

This year, the expansion of the scope of TDS will affect another large category of vulnerable persons – pensioners and retirees who have invested in listed debentures and bonds to earn periodic income. Till now TDS was not levied on interest on such instruments. Changing the tax treatment for market-linked debentures, the government removed the exemption from TDS not only for interest on market-linked debentures, but also for interest on plain vanilla-listed non-convertible debentures. Affected retirees will either have to ensure they file their Form 15H with each company on time, or see their monthly cash flows affected, with refunds received on average almost a year later.

Another aspect of such a wide coverage of TDS/TCS (probably the widest in the world) is the burden imposed on tax deductors – it is increasing year on year, and litigation is on the rise given the way the draft is drafted. Is. Regarding the coverage of the section. While the government releases figures on the low cost of collection of taxes (at 0.53% for 2021-22), it does not factor in the cost of the huge army of people that tax deductors have to employ to cope with these provisions. . The country is being deprived of the increased business that could have been achieved if such persons were employed in more productive work. Ultimately, a proper balance is required between TDS/TCS and the burden on the taxpayers.

Gautam Nayak is a Partner at CNK & Associates LLP.