The Hon’ble FM has announced that the rate of Tax Deducted at Source (“TDS”) has been reduced by 25% for payments made (other than salary) till 31.03.2021. The claimed objective is to aid liquidity in the hands of the recipient as she will now be able to receive more in her bank account than what she was getting earlier (accretion in bank balance). Prima facie, purely from a liquidity perspective, this is a welcome measure which has been welcomed by the taxpayer community. However, as is the case with every tax provision, one needs to dig deeper to understand the benefits (or lack thereof!) derived from the proposed changes.
The tax collection machinery operates through various modes. One of such modes is collection of tax from the taxpayer as an advance tax at regular intervals throughout the year. This has received statutory recognition u/s 208 of the Income Tax Act, 1961. The provision states that advance tax shall be payable during a financial year in every case where the amount of such tax payable during that year, is Rs. 10,000 or more. Such advance tax is collected in instalments at regular intervals i.e. 15% by 15th June, 45% by 15th September, 75% by 15th December and 100% by 15th March. There are several variations of the above timeline and quantum, but for present purposes, the above basic understanding would suffice.
Practically speaking, in order to ascertain whether a person is liable to pay advance tax the taxpayer is required to take into consideration the probable income and then reduce whatever TDS has been deducted or is expected to be deducted. If after this exercise, the balance remains above Rs. 10,000/-, then such a person is liable to deposit advance tax through a banking transaction i.e. an upfront debit from her bank account (decrease in bank balance).
Now let’s come to the meat of the matter and compare the advance tax liability in view of the reduced TDS rate regime:
(Assumption – taxpayer is a professional who doesn’t avail of the presumptive tax regime. Rate of TDS on profession payments @ 10% and 7.5%. Assessment Year 2021-22)
Total receipts 20,00,000 20,00,000
TDS (A) 2,00,000 1,50,000
Net Taxable Income 12,50,000 12,50,000
Tax Liability (B) 1,95,000 1,95,000
Tax Payable (B) – (A) -5,000 45,000
Advance Tax No Yes
As you can see, with the reduction in rate of TDS, there is an origination of liability to pay advance tax. A professional who for the past many years was not depositing advance tax will now have to deposit the same.
This simple act of reduction in the rate of TDS has the following implications:
A taxpayer in appropriate cases will now have to incur the liability of paying advance tax upfront at regular prescribed intervals.
Contrary to the claimed objective of infusing liquidity in the hands of the taxpayer, this measure instead takes away the precious cash out of hand. The benefit given by reduction is partially taken away.
An innocent taxpayer, in a habit of filing tax returns at the end of the financial year (because TDS would take care of the tax) will now have to be vigilant enough so as not to miss the prescribed intervals for payment of advance tax throughout the year.
The consequences of not paying advance tax or delaying the same are very onerous – penal interest of 1% per month (not per annum, mind you) for 3 months is charged separately u/s 234C, 234B and 234A, if the conditions are satisfied.
The example given is of a taxpayer who earlier didn’t have any liability to pay advance tax. There are many taxpayers who are already liable to pay advance tax. In such cases, the cash outgo will be higher.
Necessarily, this exercise would involve professionals like chartered accountants, advocates, etc. and hence an additional burden/cost of compliance.
This, to me at least, appears to be a very shrewd move on behalf of the tax department. The Government is already cash strapped and has increased its borrowing agenda for the year by a record amount. Tax collections are already dwindling. In such a scenario, it benefits the Government if it receives advance tax in its kitty. There is no compulsion on the tax department to issue refunds till at least the filing of returns next year. Any additional collection in the present year will indeed provide a much needed lifeline/liquidity to the Government itself.
Hence, though the taxpayers have been made happy for the time being, on a deeper analysis, it appears that the Government has much more to gain from this exercise.
Tax Tip:
It is advisable that you get in touch with your tax advisor/chartered accountant/advocate well in advance to plan your taxes for the year. They will undergo some changes for sure. The imminent need for a consultation arises from the fact that the first instalment of advance tax is due on 15.06.2020 and you won’t want to be categorised in the list of defaulting taxpayers incurring a penal interest of 1% per month for 3 months. Even if in final analysis you are not liable to deposit the advance tax, it is always better to be safe than sorry.
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