Tax Deduction at Source (TDS): Understanding the System, Challenges, and a Call for Reform

Tax Deduction at Source (TDS): Understanding the System, Challenges, and a Call for Reform


Tax Deduction at Source (TDS) is a system under Indian tax laws where the payer deducts tax before making payments to the recipient. It ensures that the government collects taxes in advance, rather than waiting for individuals to pay their dues at the end of the year.

While TDS helps in preventing tax evasion and ensuring regular revenue flow for the government, it has sparked debates due to its complexity and the burden it imposes on taxpayers. Recently, a Public Interest Litigation (PIL) has been filed in the Supreme Court seeking a review of this system, claiming it violates fundamental rights and disproportionately affects smaller earners.


What is TDS?

Under TDS, tax is deducted at the time of making payments such as salaries, contractual fees, rents, commissions, and other taxable income. The deducted amount is then deposited with the government and adjusted against the recipient’s total tax liability.

TDS is governed by the Income Tax Act, 1961, with key sections such as:

  • Section 192: TDS on salaries.
  • Section 194C: TDS on payments to contractors.
  • Section 194I: TDS on rents.
  • Section 194J: TDS on professional fees.


Benefits of TDS

  1. Prevents Tax Evasion: Taxes are collected at the source, reducing chances of income underreporting.
  2. Steady Revenue for the Government: Ensures regular inflow of funds for public welfare programs.
  3. Convenience for Salaried Employees: Employers handle TDS, making it easier for employees to comply.
  4. Transparency: Online platforms like Form 26AS help individuals track their TDS deductions.


Challenges of the TDS System

Despite its benefits, TDS poses several challenges, especially for small businesses and individuals:

  1. Complex Procedures: Calculating TDS rates, filing returns, and issuing certificates involve technical processes that can confuse taxpayers.
  2. High Administrative Costs: Many individuals and businesses need professional help, increasing compliance costs.
  3. Time-Consuming: Filing returns, keeping track of deadlines, and reconciling errors take significant effort.
  4. Penalties for Errors: Mistakes in deduction or delays in depositing TDS can lead to heavy fines.
  5. Impact on Cash Flow: For recipients, income is received after tax deductions, which can disrupt cash flow.


Why is TDS a Problem for Individuals?

For many, the TDS system is difficult to navigate. Small earners and economically weaker sections often lack the expertise or resources to comply with its technical requirements. Hiring tax consultants or accountants adds to their financial burden, making the system inequitable.

The PIL also highlights that TDS shifts the government’s responsibility for tax collection onto private individuals without adequate compensation, making it unfair for taxpayers.


The PIL in the Supreme Court

The PIL, filed by advocate Ashwini Kumar Upadhyay, has raised serious concerns about the TDS system. It argues that TDS violates the Constitution by:

  1. Discrimination: Violating Article 14 (Right to Equality) by placing an unequal burden on smaller earners.
  2. Freedom to Profession: Affecting businesses’ ability to operate freely under Article 19.
  3. Right to Life: Overburdening individuals under Article 21, as they lack resources to handle such complex requirements.
  4. Forced Labour: Referring to Article 23, the PIL states that requiring private citizens to perform tax collection duties amounts to forced labour.


What Does the PIL Seek?

The petition has urged the Supreme Court to:

  1. Review and Reform TDS: Direct the government to simplify TDS procedures and reduce its technical and financial burden on individuals.
  2. Involve Key Authorities: Suggest that the NITI Aayog and Law Commission evaluate the TDS system and propose necessary changes.
  3. Prepare a Report: Ask the Law Commission to present a report on TDS within three months.


Conclusion

While TDS plays a crucial role in tax collection, it has its drawbacks, especially for small taxpayers. The current system’s complexity and administrative demands make it burdensome for individuals and small businesses.

The PIL in the Supreme Court is a step toward ensuring fairness in the taxation system. By addressing the concerns raised, the government can strike a balance between revenue collection and taxpayer convenience, making the system more equitable and efficient.

Location: Pune, Maharashtra, India

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