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:
