Seven reasons why TDS provisions are draconian & flawed

If the Modi government wants to offer a fair deal to taxpayers, it will have to reform the draconian practices under TDS

The citizens of this country are punished due to some draconian provisions in the Income Tax (I-T) Act, Rules and notifications. They could even be taken for a ride about the constitutional legality of tax deducted at source (TDS). Harassment because of TDS provisions began under the Congress-led government but nobody has bothered to listen to the woes of lakhs of taxpayers. Here are some thoughts on behalf of tortured taxpayers, for consideration by a government that has promised Achche Din for all of us.

1. TDS is not a Direct Tax mechanism: TDS is a regressive provision in the direct tax administration even though it has contributed to higher tax collection. A direct tax is one where the incidence and impact of the tax is on the same person. However, for TDS, incidence is on the payer of the amount to the assessee and the impact is on the assessee. Thus, the very fundamental premise of direct tax faills apart due to this provision. Higher emphasis on TDS underlines lower administrative ability (or utter failure) of the revenue to collect tax using its own mechanism.

2. TDS deduction is a biased contract: The payers, who act on behalf of the Tax Department in good faith, to collect the Tax and deposit the same, are put to a lot of hardship - by way of deducting the tax, depositing the tax, monitoring the payment of tax in time, filing of return, ensuring that the return filed is accurately recorded on the Income Tax Department site, downloading of TDS certificates and so on. What is the reward for the deductor for doing all these jobs, which the I-T department is supposed to do? Indeed with the provisions becoming more and more draconian, the deductor is taken to task rather than the assesse. Is it not against the Constitution that you are asked to do something and penalised for it, which in the first place somebody else was supposed to do?

I feel that the Income Tax department should first reward the deductors for complying with TDS provisions. Reward should be a combination of the number of entries and amount deducted. The contract is valid only when there is consideration. Further, in the entire process, the National Securities Depository Ltd (NSDL) and its network makes money. Their value addition is really questionable for the reasons discussed later.

3. Draconian Provisions: The interest for delayed payment starts from the date of deduction and not from the due date for payment of tax deducted. Even when the deductor has the intention of paying it on the due date, many a times he may miss the bus due to factors beyond his control. I appeal to the authorities that the interest should only be levied for the delay from the due date. The intention of the legislature may be what is written in the law, but technology has interpreted it another way. Before the advent of technology, the department was asking for interest from the due date.

If this TDS interest provision is not challenged now, tomorrow the department may start collecting interest from the date of capital gains, if the advance tax is delayed.

4. Redundant Provisions: There are many judgements which specify, the deductor will not be considered an assessee in default, in case the deductee has declared such income on which the TDS was to be deducted. Going by the intention of the legislature, the TDS should be considered as a mechanism to collect the tax. And, if the tax has been paid by the assessee, then the person who was responsible for deducting should not be penalised. However, the penal provisions of Rs 100/- penalty per day and the prosecution drive initiated by the department to attract compounding, are being utilised as methods of extortion. This should be stopped and most of the penalty and prosecution proceedings would become redundant if a careful analysis is done as to whether the deductee has paid his taxes or not.

5. Technology and limits of technology: There are many cases of mismatch of TDS. This puts the genuine assesses to great hardship. This only highlights the fact that the NSDL / I-T department has failed miserably, in effectively implementing technology. Technology cannot make mistakes - it is the logic with which the technology is put to use which is ridden with problems. This is precisely the reason for many of the catastrophes in tax cases, especially of individual assessees.

6. Simple technology is the best technology: We have witnessed a smooth transition of payment of taxes from the manual method to the electronic method. Even for TDS we could have had a similar system. There was no need for NSDL to come into the picture at all, except to make money at our expense. We could have had a deductor simply paying the challan 280 or a similar one with additional information of the deductee. This would ensure that the 26AS of the deductor and deductee would show the TDS paid/TDS credit received. Who ensured that NSDL gets into this business and why?

7. Lop-sided use technology: TDS return mechanism is a deductor-centric mechanism. Gullible deductees are left with no technology tools to recover the TDS deducted or even to get tax credit. The plight of the deductees is miserable, where unscrupulous deductors have not paid /filed the return etc. I urge the Government, that the deductee should have an option/right to update the details of the transactions where their TDS has been deducted, and this should be uploaded with the PAN and TAN of the deductor. This will help the Assessing Officer recover the TDS and help the deductees get their due tax credit.

It is not difficult for this government to fix these issues. But for this, it has to listen to impartial voices and be bold. Will it?