Withholding tax – Boon or nightmare? 

Taxpayers and business houses are willing to take on the responsibilities of collecting and depositing tax and undertake necessary compliances. However, generation of artificial demand and treating honest and innocent taxpayers at par is certainly something that needs to be addressed by the government. Rajeshree Sabnavis / Alpesh Gandhi The government’s focus on “Ease of doing business” and its tax agenda of having non-adverersial tax regime with specific emphasis on certainty and clarity in tax laws and reduce tax litigation is well known now. The government has taken numerous positive steps towards this agenda, which has been welcome by the business houses. Though withholding tax provisions has been an effective mode of recovery of tax, the complexity of the withholding tax laws and the compliance burden, which the business houses are facing, there is an immediate need for rationalisation and simplification of the withholding tax provisions in the Income-tax Act, 1961 (‘ITA’). Tax Deductor’s agony As the great Shri Nani Palkhivala rightly remarked “What is wrong with India is the pathological obsession displayed by the law makers who frame laws only with the tax evader in mind, regardless of the enormous inconvenience and harassment to the far larger section of honest taxpayers

A departmental store which is wholly preoccupied with prevention of shoplifting is a sure candidate for stagnation” The taxpayers and business houses are willing to take on the responsibilities of collecting and depositing tax and undertake necessary compliances. However, generation of artificial demand and treating honest and innocent taxpayers at par and in the same category as that of tax evaders, merely if certain procedural or administerial related nuances are missed, is certainly something that needs to be addressed by the government. Not only does the deductor step into the shoes of the payee and is required to make good the amount of tax which otherwise the payee is liable to pay, they are also required to compensate the government for the time delay by paying interest at exorbitant rates. Additionally, the deductors are not only partially denied of the claim of deduction of their otherwise eligible business expenditure, they are also fastened with various rigorous penalties and even prosecutions in few cases. 

 The withholding provisions, which are embodied in Chapter XVII-B of the ITA, itself are complex to apply. The deductors are often struggling with the interpretation of the tax laws as to whether a particular payment is subject to withholding or not or which provision should apply for a particular payment, especially considering the fact that the definitions in the withholding tax laws are widely defined, there have been amendments to the withholding tax laws on a frequent basis, especially to the definitions itself, some with retrospective effect, compelling the deductors to dance on a tight rope. This complexities increases manifold when the question of applicability of withholding on overseas payment gets involved, wherein apart from the interpreting complex sets of domestic tax rules, due cognizance of the international tax treaty provisions and their interplay with the domestic tax rules, also needs to be taken into account. In addition to above, the prevalent withholding provisions not only covers corporate taxpayers and business transactions but also personal transactions as well like payments made to non-residents for personal purposes, purchase of immovable property exceeding a certain threshold etc, which creates unnecessary stress and financial burdens on individuals and small taxpayers. Procedural bottlenecks

The government should ensure that tax deductors, as an agent, should not be burdened with such onerous penalties and administrative inconveniences. As regards withholding positions on various payments, the government should come out with comprehensive circular clarifying various withholding tax positions especially those which are litigative in nature, so that there is clarity on the withholding position that needs to be taken. Simplification of TDS rules like uniform moderate tax rates, rationalization of interest, penalty/ fee, TDS procedures like easy filing and correction of TDS statements would certainly help. Any procedural bottlenecks faced should be removed in 48 hours of the taxpayers informing the same on TRACES website. Such measures by the Government would go a long way in achieving its tax agenda of creating non-adversarial tax regime, certainty and clarity in tax laws and substantial reduction in tax litigation, apart from supplementing its “Ease of doing business” agenda

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