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Why Mr Jaitley Should Reconsider The TDS Rate? - Outside View by PersonalFN

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Why Mr Jaitley Should Reconsider The TDS Rate?
Feb 29, 2016

Direct taxes are a vital source of revenue for the Government. It forms around 20%-25% of the total tax collection. To make an efficient and timely recovery of tax dues, the concept of Tax Deducted of Source (TDS) was introduced. In simple words, TDS is nothing but the mandatory deduction of tax from your income, if your income from a particular source exceeds amount specified by the tax laws.

Applicability of TDS provisions:

  • Salary (when it exceeds the tax-free limit)-TDS rate is 10%.
  • Interest on securities (such as debentures, bonds etc.) and Fixed Deposits (FDs) excluding the ones from banks, a 10% TDS applies when the income from interest exceeds Rs 5,000.
  • For interest on bank FDs, 10% TDS applies when the income from interest exceeds Rs 10,000; while for NRI the TDS rate is 30.9%.
  • For Professional fees a 10% TDS applies when the payment exceeds Rs 30,000 in a year.
  • In case of Contractual earnings, when the amount from a single contract exceeds Rs 30,000 or from all contracts exceeds Rs 75,000 in a year; a TDS rate of 2% applies for non-individual and non-HUFs and 1% for individual and HUFs.
  • Rent-When the rent amount exceeds Rs 1.8 lakh in a year, TDS is payable at 10%.
  • Commissions and brokerages-when the amount of commission or brokerage exceeds Rs 5,000, TDS at 10% applies.

As you must have noticed, the threshold limits for TDS becoming applicable on your income are pretty low and the rates at which tax is deducted is relatively high. The fact is, over the last one decade inflation has risen significantly making TDS provisions archaic.

TDS provisions are troubling the common man, here's an example:

Mr. C. Varadhrajan (name changed) is a retired private sector employee. He is 66 years old and has only two sources of income-Income from house property and Income from Other Sources. He has let out his old house, located in a prime area in the city. This fetches him Rs 17,000 a month (Rs 2.04 lakh in a year). Additionally, he earns Rs 2,88,750 as interest income from his deposits worth Rs 35 lakh. His total income, therefore, is Rs 4, 92,750.

Mr Vardhrajan does not spend all his earnings, and invests Rs 1.5 lakh every year in PPF and pays health insurance premium of Rs 10,000. Therefore, his net taxable income falls to Rs 3,32,750. His total tax liability is just Rs 3,373. As against that, TDS on his income amounts to Rs 49, 275 (@10% of his income). The procedure for claiming tax refund is time consuming and often painful for thousands of senior citizens as Mr. Varadhrajan.

Similarly, income of a professional would be subject to the TDS as soon as he earns Rs 30,000 from the single entity or individual. Those who have incomes below 10 lakh, suffer the most because of existing TDS provisions.

For companies and professionals, the cost of complying with TDS guidelines often runs high. When the company (as a payer) fails to deduct TDS and recover it from the receiver (of income); it has to shell out the money from its own pocket. If it misses the deadline to make the payment on the tax collected, it becomes liable to pay penalties.

Therefore, what initially started off as a mechanism of effective tax collection, has been largely disserving the corporate as well as individuals.

What is the solution?

Eswar Committee, recently submitted its report on income tax simplification, made some vital recommendations. Some of the findings of the commission are worth pondering upon:

"With nearly 65% of the personal income-tax collection in India being raised through tax deducted at source (TDS), the onerous task of which has been cast on tax deductors, the TDS provisions need to be made more tax friendly and not as 'tedious' as they have remained over the years. It is a matter of record that a number of annual threshold limits in respect of TDS have just not come to be revised over the years. With the liability of TDS being attracted on such tiny annual limits of Rs 2,500 in respect of payment of interest on securities and on interest on NSS accounts, Rs 5,000 for payment of interest on private deposits and commission or brokerage and Rs 10,000 for payment of bank interest, one can just imagine the enormous work that goes into compliance of these provisions. Considering the importance of the long overdue revision of these puny limits, the Committee has recommended suitable hikes in such threshold limits. The Committee has also felt the dire need for rationalization of TDS rates, more particularly on account of the lowering down of the average tax rates in case of majority taxpayers in the Individual and HUF 28 categories, keeping in view the restructuring of the Income-tax rates over the past decade".

The committee further suggested that, the threshold limits and the rates of TDS should be rationalised. As per its suggestion, the rates for individuals and HUFs should be reduced to 5% as against the present 10%.

But will the Finance Ministry act?

Individual tax payers have expectations from the Finance Minister. They want higher threshold on tax slabs and lower tax rates. If they expect anything else, it's seamless compliance procedures. That's it. Let's wait and watch if our Finance Minister, Mr Arun Jaitley acts upon Eswar Committee's recommendations.

To improve the ease of doing business in India and giving a push to programmes such as "Make In India", it is important to simplify the tax structure, making it friendlier for taxpayers - this too can contribute to Acche Din.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

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