Amidst the distress caused by the coronavirus pandemic, the finance minister announced a Rs 20 lakh crore stimulus package containing several fiscal and liquidity measures in order to revive Indian businesses. Forming part of this relief package, TDS and TCS rates on certain non-salary payments were reduced by 25% of the original TDS rate effective from May 14, 2020 to March 31, 2021.
Let us see, how this reduction in rates of TDS will affect taxpayers. TDS (tax deducted at source) is a “pay as you earn” measure, introduced to prepone the payment of tax in advance and to bring maximum transactions under the income tax net, by collecting tax from the very source of income. The deductee from whose income tax has been deducted at source, is entitled to get credit of the amount so deducted from his final tax liability, on the basis of Form 26AS or TDS certificate issued by the deductor. TCS is based on similar concept; however, here, the seller or the receiver of payment is liable to collect tax while receiving payment.
Benefit for taxpayers
The announcement shall prove to be beneficial for self-employed professionals, individuals earning interest or having rental income and for those receiving contractual payments, dividend, commission, brokerage, etc. Similarly, transactions such as the sale of tendu leaves, scrap, and purchase of motor vehicle above Rs 10 lakh shall now be subject to the new, lower TCS rates.
However, the salaried class and non-residents have been kept outside the ambit of this emergency relief measure. Therefore, salaried individuals and non-residents shall receive payments after TDS at old rates.
No bearing on final tax liability
Taxpayers shall have to self-assess their final tax liability after taking into account, income from all sources and thereafter reducing any TDS or advance tax already paid. Thus, lower TDS rates may simply mean that individuals shall be left with more disposable income to consume during the financial year. Further, in cases where due to losses or lower profit margins, total amount deducted as TDS is more than actual tax liability, lower rates of TDS would result in lesser amount being locked in tax refunds claimed. However, in cases where actual tax liability is more than TDS deducted on revenues, reduction in rates of TDS may eventually result in requirement to pay higher amount as advance tax/ self-assessment tax later.
No relief if PAN/ Aadhaar not given
As per provisions of Income Tax Act, it is mandatory for the deductee to furnish his correct Permanent Account Number (PAN) to the deductor and if this is not done, the deductor is liable to deduct TDS at 20% or the prevailing rate, whichever is higher.
In the notification prescribing the new rates, it has been clarified that there shall be no reduction in rates of TDS or TCS where tax is required to be deducted or collected at higher rates due to non-furnishing of PAN/ Aadhar.
Resultantly, if the tax is required to be deducted at 20%, due to non-furnishing of PAN/ Aadhaar, it shall be deducted at the rate of 20% and not at the rate of 15%.
Deduction and collection of tax at reduced rates till the end of the financial year 2020-21 shall leave more disposable income in the hands of recipients and shall have the desired impact of enhancing the cash flows and liquidity in the economy. However, taxpayers must be careful to pay advance tax, if their estimated tax liability is more than estimated TDS.