INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

TDS NORMS SET TO BE TIGHTENED

 THE income-tax department is all set to tighten norms for deducting tax at source. The department, which had found laxity in filing of TDS returns, is moving to tighten the loopholes. The move could end the party for non-salaried tax payers like contractors, traders, small businessmen whose tax gets deducted at source when they receive payments from various sources and have refunds to claim. These tax payers for whom working capital is a problem will have their money locked up as they would have to wait for the refunds.

   Sources said the idea behind the move is to establish a trail and keep a tab on the flow of money. Unlike the quarterly instalments in which advance tax is paid by this category of assesses, TDS is a monthly pay out. The latter ensures a regular cash flow for the government, as against advance tax which comes only once in three months. They said compared with advance tax, TDS has the advantage of producing a paper trail. In any case, about 50% of the total direct tax collections come through the TDS route at present.

   With this in mind, the department is soon expected to send instruction to its field formations to stick to the formula given in the rule 28A(A) of the Income Tax Act, 1961. For example, a government contractor does some work for which he receives a payment. This payment would be made after deducting tax. But if the contractor gets a certificate from his assessing officer that he does not have a tax liability, then his TDS would not be deducted.

   The real problem is that assessing officers were found to be issuing certificates with zero or lower TDS rates. With such a certificate in hand, tax payers could escape from TDS net or get away with lower deduction. With the norms being tightened, non-salaried tax payers will have to shell out TDS as per the formula and this could result in their money remaining with the department longer as refund takes about 16 months.

   The issue had been highlighted at the conference of chief commissioners and director generals of income tax. The central board of direct taxes had also discussed it at its recent meeting after which it was decided to issue instruction for assessing officers.