Budget 2014 - Letting loose TDS compliance requirements
CA. V.K. Subramani
There was a great expectation that the new Government would present a Super Budget 2014 which would uplift the economy in all fronts from sluggishness. The Finance Minister of UK who visited India recently, added to the hype / optimism by saying that the new Government is firing the cylinders for the past seven weeks and there is a great scope for increased co-operation by way of British investment in India.
A commoner who witnessed the budget presentation by Hon'ble Finance Minister Arun Jaitely would draw courage to compare the present incumbent and his illustrious predecessor. The presentation was contrasting on two accounts viz. (i) an interval while presenting the budget; and (ii) presenting the budget in sitting posture, contrary to the past practice.
A prima facie comparison would also show that the Finance Minister (perhaps not keeping well) did not evince great interest in his economic program nor did he present a blue print as claimed by the media to convince the close followers of budget presentation over the years. This is without prejudice to the fact that the expenditure outgo presentation was balanced and not populist, indicating the priority areas for over all economic development.
In the realm of income-tax, the Budget 2014 has virtually plugged many loopholes used by the taxpayers either originally or in view of its backing by the judiciary/ appellate authorities. Though it was expected that the tax administration would harp on plugging the loopholes regardless of the party in dispensation, the changes shows the singular pursuit of amending the law to make the Revenue - always a winner, at times unjustified.
TDS compliance in retrospect
The Income-tax law contains provisions for collecting taxes on income and also creating a trail to identify persons who may have income chargeable to tax but are remaining the outside the tax net. One of the mechanisms providing the trail was the requirement of tax deduction at source known as TDS or the tax collection at source known as TCS.
These provisions meant for tax deduction or collection were toothless for many years until the Finance (No.2), Act 2004 provided the bite to the tax law and administration by inserting a proviso for disallowance of expenditure when the tax ought to be deducted at source was not deducted by the payer.
This provision time and again underwent amendments viz. (i) Finance Act, 2008 extended the time limit for remittance of tax deducted at source in respect of expenditures booked in the last month of the financial year ; (ii) Finance Act, 2010 which extended the time limit for remittance of tax deducted at source if the tax was deducted at any time during the previous year; and (iii) Finance Act, 2012 which bailed out the payer from disallowance if the payee admitted the income, paid tax, filed return of income and furnished a declaration from his 'accountant' (as per section 288(2)).
TDS provisions liberalized now:
In the Budget 2014, section 40(a)(i) and section 40(a)(ia) have been amended. The scope of amendment is given below in simple terms.
(i) In respect of payments to non-residents, if the tax deducted at source is remitted before the 'due date' specified for filing the return under section 139(1), such expenditure will not be liable for disallowance. Thus the expenditure liable for tax deduction both for residents and non-residents would become allowable if the amount of tax deducted at source is remitted before the 'due date' specified in section 139(1).
(ii) With regard to resident payees, the coverage of expenditure has been enlarged. The section 40(a)(ia) proposed to be amended reads as under :
"any interest, commission or brokerage, rent, royalty, fees for professional services or fee for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident for carrying out any work including supply of labour for carrying out any work, thirty percent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. (the struck out portion belong to present provision and the words in italics represent the proposal in the Finance Bill, 2014).
(iii) Even expenditures such as salary, winning from lottery or crossword puzzle, winning from horse race, transfer of immovable property exceeding Rs.50 lakhs which are presently not hit by section 40(a)(ia) disallowance would get disallowed in the hands of the payer, if there is failure to deduct tax at source.
(iv) The quantum of disallowance is 100 percent presently for the failure to deduct tax at source (ignoring delayed compliance or the payee complying with the requirement to bailout the payer). The Finance Bill, 2014 however proposes disallowance to the extent of 30 percent only.
(v) The effective tax liability on the tax payer due to disallowance of 30 percent would be at the most 10.20 percent (at the maximum marginal rate) of the expenditure. Thus 70 percent of the expenditure would get allowed.
(vi) The first proviso now says that if the taxpayer deducts tax in any subsequent year or what was deducted originally, is remitted beyond the due date, what was disallowed would become allowable. In other words, on compliance what was disallowed earlier would become allowable.
(vii) The proposal in the Finance Bill, 2014 is the same to allow what was disallowed i.e. 30 percent when the payer complies with the requirements of section 40(a)(ia) in the subsequent year.
Conclusion
The change proposed in section 40(a)(ia) to limit the disallowance to 30 percent may be a breather to the taxpayers at large. When the law has undergone changes from time to time providing some laxity to the payers, the need for partial disallowance of expenditure proposed in the Bill is debatable.
Where it is disallowed at 30 percent in the first instance and subsequently the taxpayer complies with the requirements, he becomes eligible for deduction. When such is the law proposed then the natural question is, what is the necessity for retaining the second proviso to section 40(a)(ia) which gives a complete relief to the payer upon payee complying with the procedural requirements prescribed therein.
It would have been a better proposition to apply flat rate of tax at 30 percent on the expenditure disallowed under section 40(a)(ia) by making reference to section 69/69A/69C which is applicable for unexplained cash credit, investments and unexplained expenditure. It would have paved the way better compliance by the taxpayers by complying with the TDS requirements.
The amendments proposed to be inserted in section 40(a)(ia) is reminiscent to the Finance Act, 1995 which provided for section 40A(3) disallowance to 20 percent of the expenditure w.e.f. 01.04.1996 and the Finance (No.2) Act, 1996 subsequently restored the earlier position of 100 percent disallowance. The history may repeat itself and the lawmakers may roll back this partial disallowance in the next budget.
Regards
Prarthana Jalan
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