Income Tax 02 Feb,2020
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Budget, 2020: Enlarging the scope of TDS provisions
V. K. SubramaniCA


As in any other Budget, the Finance Bill, 2020 also has host of amendments to the income-tax law but it is a glaring fact that none of the amendments are so enticing or game changers for the stakeholders. The Government has done a thorough homework and given the sluggishness of the economy, there was a huge expectation from the public that the Government will work on some novel program to infuse confidence among the taxpayers and enthuse the business community in particular. It is a harsh reality that the Government did not take any radical measures to provide the necessary impetus to the macro economy.

The Hon'ble Finance Minister spoke about Vivad Se Vishwas to provide relief from interest and immunity from penalty for disputed tax cases pending before appellate forums. It would have been a wise measure if the Government took note of the fact that while completing the assessment under section 143(3) of the cases relating to assessment year 2017-18 popularly known as demonetization cases there were more than 100 cases with every filed officer of the Income-tax Department and in which invariably the assessments were high pitched by invoking section 69 in respect of deposit of SBNs and levying tax at 77.25% besides interest under sections 234A and 234B. The Vivad Se Vishwas Scheme on the basis of the Hon'ble Finance Minister's speech does seem to provide any relief to those taxpayers only to the extent of interest and penalty. It would have been a very welcome measure if the scheme covers those assessees also by prescribing tax payment @ 30% of the tax. In which case so many pending appeals flooded with the appellate commissioners in January, 2020 would fine light at this stage itself.

This refresher takes a snapshot of amendments proposed with regard to TDS provisions:

Sweaty Equity Shares:

Presently, when ESOPs are provided by the employer to the employee it is taxable in two stages. Firstly, as perquisite at the time of exercise of option by the employee. Subsequently, when the ESOPs are transferred by the employee it is liable to capital gains. In order to reduce the burden of payment of taxes by the employees who obtain ESOPS from start-ups (who are eligible for deduction under section 80-IAC), the Finance Bill, 2020 proposes that the employer may deduct or pay tax on such perquisite value within 14 days after the expiry of 48 months from the end of the relevant assessment year in which the ESOPs were given and employees have exercised the option. In case, the ESOPs are sold by the employee then tax has to be paid within 14 days from the date of sale of such shares. In case, the employee ceases to be in employment, within 14 days from the date of such exit from employment. The taxability is thus deferred to the date on which the employee has sale proceeds or ceases to be in employment. Also, in case the employee continues in employment a breather is given by prescribing 48 months from the end of the relevant assessment year in which it was allotted originally. This amendment is realistic and praiseworthy.

TDS on interest other than interest on securities:

Presently, interest credited or paid by a co-operative society to a member or to any other co-operative society is not liable for tax deduction at source in view of section 194A(3)(v). Similarly, interest credited or paid in respect of deposits with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or co-operative land development bank is not liable for tax deduction in view of section 194A(3)(viia).

The Finance Bill, 2020 proposes to enlarge the scope of the section by providing that the co-operative societies are liable to deduct tax at source as given below:

 (i) Where the total sales, gross receipts or turnover exceeds Rs.50 crores during the financial year immediately preceding the financial year in which the interest is credited or paid; and

(ii) The amount of interest or the aggregate amount of interest credited or paid is more than Rs.50,000 to a senior citizen and Rs.40,000 to any other person,

 -  tax shall be deducted at source at 10%. This amount is effective from 01.04.2020.

Clarity in respect of other TDS provisions:

The Finance Bill, 2020 has brought in an important amendment in section 44AB by prescribing higher threshold limit for tax audit in certain cases. Where the taxpayer has received all the amounts including amount received for sales, turnover or gross receipts in cash which does not exceed 5% of the total amount and all payments including payments incurred for expenditure in cash does not exceed 5% of the total amount, the books of account are not required to be audited under section 44AB if the turnover does not exceed Rs.5 crores for the previous year.

In other words, if a business entity has turnover below Rs.500 lakhs it need not get the books of account audited under section 44AB if the aggregate amount of cash outflows and inflows are less than 5% of the aggregate outflows and inflows. Also, the taxpayer is not compelled to pay tax on presumptive basis under section 44AD since there is no corresponding amendment in that section. Thus the taxpayers falling in this category can admit the income as per books of account and the entire expenditure towards compliance cost towards tax audit is saving in expenditure to the taxpayer.

This is inserted by way of proviso to section 44AB(a). Now the taxpayers have to reckon with various monetary limits for audit or relief from audit under section 44AB viz. (i) not exceeding Rs.200 lakhs (option for audit under section 44AB or presumptive income under section 44AD) ; (ii) More than Rs.200 lakhs (where compulsorily the books of account have to be audited under section 44AB); (iii) less than Rs.500 lakhs where no audit is required if 95% or more of the transactions are otherwise than by cash; and (iv) where the turnover exceeds Rs.500 lakhs and the books of account have to be audited compulsorily under section 44AB.

Sections 194A, 194C, 194H, 194-I and 194J were providing for deduction of tax at source when the aggregate turnover of the taxpayer was beyond the limits specified in section 44AB(a) or section 44AB(b) which were referring to the turnover of Rs.100 lakhs and Rs.50 lakhs respectively. In order to avoid any ambiguity in interpretation, the Finance Bill, 2020 has amended all the TDS provisions referred above to clarify that the requirement for tax deduction at source would apply when the aggregate turnover exceeds Rs.100 lakhs in the case of business or Rs.50 lakhs in the case of profession. These amendments are clarificatory in nature to avoid any litigation in future.

TDS under section 194K:

The Finance Bill, 2020 proposes to withdraw the exemption in respect of income from units of mutual fund by omitting section 10(35) w.e.f 01.04.2020. As a consequential measure it proposes to insert section 194K which was in statute book and was omitted by the Finance Act, 2003 earlier.

Section 194K proposed to be inserted provides for tax deduction at source in respect of income from units paid to resident taxpayers. Any person responsible for paying to a resident any income in respect of (i) units of a Mutual Fund specified in section 10(23D); or (ii) units from the Administrator of the specified undertaking or (iii) units from the specified company.

The tax is deductible at source @ 10% where the payment exceeds Rs.5,000. The erstwhile provision prior to its omission prescribed the threshold limit at Rs.2,500.

Other amendments to TDS provisions:

Section 194J presently provides for tax deduction at 10% without making any distinction between fees for professional service or technical service. In order to minimize the litigation where the taxpayers deduct tax at 2% in the case of technical service, the Finance Bill, 2020 proposes an amendment. Thus where any sum is paid by way of fee for technical services (not being a professional service) tax is deductible at source @ 2% instead of 10%.

The Finance Bill, 2020 also proposes to insert TDS provisions for payments made to e-commerce operators. The tax is deductible at source @ 1% of the gross amount of such sales or services or both payable to e-commerce operator by the e-commerce participant. This amendment is also in tune with the present business practices.

Conclusion

The rationalization of TDS provisions seems to be justified. The deferment of tax for ESOPs is a well thought out measure. However, with regard to contract manufacturing which is liable for tax deduction under section 194C proposed to be amended seems to be rigid. In the Memorandum explaining the amendment it is stated that presently manufacture or supply of product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer is not liable for tax deduction at source. The Memorandum goes on to explain that it has been noticed that some assessees are using escape clause of the section by getting the contract manufacturer to procure the raw materials supplied through its related parties. As a result, a substantial amount of income escapes the tax net. In order to plug the leakage, it is proposed to amend the definition of "work" under section 194C to provide that in contracting manufacturing, raw material provided by the assessee or its associate shall also fall within the purview of "work" under section 194C.

This observation of the lawmakers saying that there is leakage of revenue seems to be baffling. Making an amendment by giving such reason that there is a leakage of revenue is contrary to the basic philosophy of TDS provisions.

The TDS provisions are meant for providing only a trail. It is not tax recovery mechanism. If the taxpayers have arranged such manufacture to fall outside the clutches of the definition of the term "work" still the person who has performed the work and any person including associate of the assessee who has supplied the material if have fallen in the tax net, there is no reason to suspect leakage of income or tax. It seems that the Government is on the lookout for blocking the leakages and thus has worked tangentially to collect resources to the exchequer and in the process failed to enthuse the taxpayers by providing encouraging legal provisions by putting onus on them.

For example, in the case of charitable trusts and institutions instead of seeking all such assessees to apply afresh for registration, the Government could have taken the return filed by such institutions for the assessment year 2020-21 as the basis for granting registration for the first block of 5 assessment years. The ITR-7 could have been altered to seek the all information that the tax administration wants to capture and that would have been wiser way of preparing the summary of such institutions across the country.