TDS/TCS Rationalization: A Ray of Hope for Individual Taxpayers

The newly formed government is set to present the annual Budget on July 23 2024. Like every time, individual taxpayers are hoping for some benefits coming their way. It is also hoped that cash flow issues of individuals may be addressed by specific reforms. Myriad of existing Tax Deducted at Source (TDS) provisions has impacted the cash flow planning of the common man. In this context, rationalization of TDS/Tax Collection at Source (TCS) rates emerges as another wish list.

The government utilizes TDS and TCS as mechanisms to collect taxes at the source of income. However, the TDS/TCS rates fluctuate significantly across different financial transactions, ranging from a modest 0.5% (TCS on remittance for education loan by residents) to a hefty 30% (interest/ other income paid to non-residents). It is believed that this rate disparity is complicated to understand and also has an impact on planning financial affairs.

Relatively, higher rates of withholding tax from diverse income sources such as salary, interest income, rental income and dividend income, among others as compared to the actual tax liability of the individual, creates liquidity issues for the individual taxpayer. Such individuals are required to claim refunds in their tax returns due to the higher withholding taxes, leading to a waiting period until the tax authorities disburse the refund.

The TCS rate increases from 5% to 20% on Liberalised Remittance Scheme (LRS), also applies to resident employee contributions for the purchase of shares under a foreign group Company’s Employee Stock Incentive Plan (ESIP). These contributions are made from the employee's post-tax salary, i.e., on allotment of the stock incentive, the same may already have been subjected to tax as salary by the employer, leading to a duplicate recovery of taxes. The only recourse for employees is to claim a TCS credit in their tax return, unless they otherwise have an advance tax payment obligation.

TDS/TCS-related provisions have also triggered litigation, with many taxpayers receiving notices due to TDS mismatch, non-grant of TDS/ TCS in case of income clubbing (common for spouses), etc.

Given these issues, if the upcoming Budget makes announcements regarding TDS/TCS rate rationalization, it would undoubtedly be a welcome relief for individual taxpayers. Here are a few key measures that may be evaluated:

Introduce a uniform/fewer set of TDS/ TCS rates

There could be three or four rates of TDS (1, 5, 10 and 20 percent). The threshold quantum below which TDS is not applicable can continue to be retained. This would make it easier for individual taxpayers to understand and comply with their tax obligations even when payment is to be made to a Non-Resident individual. A more predictable and streamlined tax deduction process would reduce errors and administrative burdens.

Permit TCS credit while computing tax on salary for employees contributing to ESIP

When a resident employee buys shares of the foreign group company under an ESIP plan there is already a TDS applied at the time of allotment. In order to mitigate the duplicate taxes, the TCS on the purchase price remitted by the resident employee may be allowed as an offset while calculating TDS on salary income.

The rationalization of TDS and TCS rates represents a significant opportunity to ease the financial and administrative burdens on individual taxpayers.

A version of this article was published by The Economic Times.com on July 16 2024. The same can be read here