TDS: The Cash Sucker

Every day on my way to work, I cross the Income Tax office and the advert outside: TDS is not Tedious. Indeed, it is not and the tax department has over years perfected the art of collecting money before it is due to them. There is a plethora of rates on TDS and the only justifiable rate is 0%.

The tax dept is fed up of running behind people for taxes though and has taken revenge by making people run behind them for recovery of excessive tax taken without any consent. TDS also serves as a trail of transactions and allows the tax dept to catch pilferage. If a company doesn’t deduct TDS, that particular payment is not deemed a valid expense hence resulting in higher tax liability for the payer. This keeps all the parties honest and the tax dept has to just develop skills in returning tax money rather than in collective tax.

That now brings us to the matter of the TDS rate. In the myriad rates mentioned above, the services sector is besotted with the rate of 10% (as are many other). Let’s understand what does 10% mean: If my invoice amount was Rs 100, then my receipt would be only Rs 90 since Rs 10 will be submitted in my tax account by the client directly. I can later claim it against my tax liability. But what is a typical service company’s liability? At a 30% tax rate the liability would be Rs 8 if the profitability was 24% (100*24%=24 and 30% of 24 = 8). This leads to a claim of Rs 2 from the tax dept. No wonder record claims are happening every year.

The service sector is 60% of our economy and one of the fastest growing. The best of the companies make 25% of profit. The more humble one’s make 15% to 20%. The strugglers – 10%. The struggler has the unenvious position of trying to make monthly payroll while 10% of his revenue is siphoned by a govt for a full 16 months before he sets eyes on it. His tax liability is Rs 3 on a Rs 10 profit but the TDS Rs 10. Rs 7 which could be a welcome investment into the business or in many cases a cashflow lifeline has been deducted at source. This coupled with the fact that a services company can’t easily get a loan (due to absence of any collaterals) is a double whammy.

If the govt wants to take the easiest step to give a small but significant fillip to the growth in an entirely non-inflationary manner. It would be to reduce TDS rates to 2% across the board.

Would be too easy perhaps.

 

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