The farce of TDS and advance tax exposed through huge refunds

Income tax refunds are running at 40% of the collections, which shows that advance tax and TDS rules have turned into a farce. Amazingly, not following TDS and advance tax rules attracts draconian penalty

Corporate tax refunds as of 15 September 2011 have reached an all-time high of Rs48,426.20 crore defeating the purpose of tax deduction at source (TDS). The gross collection of corporate tax for this period stood at Rs118,489 crore and net collection after refunds at Rs70,062.80 crore. This means that as much as 44% of the money collected as income-tax was wrong!

Now we know where the collections are mainly coming from - advance tax and tax deducted at source. The government has ruled that businessmen, employers and corporate entities and even individuals doing business should do the work of tax collectors by getting them to pay in advance (advance tax) and also deduct tax at source (TDS) and pay it into the government account.

But, clearly, the government is not able to hold on to a lot of the tax collected through this means. And since the refunds are made on a large scale, the administrative cost and effort put in by the private sector tax collectors are a total waste. Clearly, the whole conept of advance tax and TDS are a farce and must be addressed immediately.

Corporate tax collection as of 15 September 2011 (in Rs crore)

  Gross collection*      1,18,489.00
  Less refunds**      48,426.20
  Net collection      70,062.80

* Collection for 1 April 2011 to 15 September 2011
** The refunds given in the 1 April 2011 to 15 September 2011 period relate to collections of the previous year.
Source: I-T Department

If this problem is allowed to grow unchecked, it will be found that the income in the previous year for the government is inflated on the high tax collections, extracted through midless provisions of advance tax and TDS, but when the tax refund is made the government has a large outflow - throwing budegetary calculations out of gear.

Remember, this senseless tax collection and refund activity entails considerable administrative expense - something that ought be government expenses but has been put on the shoulders of the citizens and corporations.

Astonshingly, these the punishment for such senseless rules (violation of TDS rules and advance tax) is draconian.

The failure to deduct tax at source can entail a penalty equal to the tax amount deductible that has not been deducted. The interest penalty in case of delay is 1% per month of tax deductible.

The failure to deposit tax deducted at source can invite a penalty equal to the tax amount not deposited. If the individual responsible for deposit of TDS is prosecuted, the punishment is rigorous imprisonment for a period not less than three months and which can be extended up to seven years with a fine.

Failure to apply for the tax deduction at source account number has a penalty of Rs10,000. The severity of the punishment is defeated by the extent of refunds.

Advance tax is payable by every corporate assessee in the course of the year as 15% of the tax by June 15, 45 % by September 15, 75% by December 15, and the total 100% by March 15. If advance tax paid by an assessee is less than 90 per cent of the total tax payable by 31st March or no advance tax is paid, then interest u/s 234B is calculated on the amount of difference between the assessed tax and the advance tax paid and it is charged @1% per month or part of the month from 1st April of assessment year (for the relevant previous year) till the date of payment of tax.

Clearly, it is high time that the rules of TDS and advance tax are amended to make them realistic.

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COMMENTS

K B Patil

5 years ago

Basically, Indian governments are anti middle class. That can be the only reason why people who use two wheelers for their daily work pay through their nose for petrol while fat cats use diesel for their Mercs and other such cars. Similarly, middle class retired people depend on bank deposits to augment their earnings and which faces TDS. The rich tend to invest in equities. In equities, the long term capital gains is zero. Of course, our inventive genius PC (now HM but earlier FM) introduced Securities Transaction Tax apart from service tax on the brokerage. So, throughout a bad year, the hapless investor will pay the government, tax for the privilege of trading though he himself may not earn a paisa. Our FM also introduced service tax on many items but not on lawyers though he and his wife are lawyers. The government is openly immoral in it's taxation policies. Just mention the word HASAN ALI and any honest tax paying Indian's blood will boil.

REPLY

mary

In Reply to K B Patil 5 years ago

i agree with you, brother kbPatil. however, kindly permit me to add that the govt is incompetent too.

Rajesh Kothari

5 years ago

In fact, it would be interesting to find out how much of TDS collected by Govt has not been claimed for refund by the deductee.

In terms of number of people, I'm sure it would be very large number. And in terms of amount, it may a moderate amount. But these figures would represent number of people who have paid Income tax by way of TDS and have not claimed/got refund of same.

Corporates have got tax machinery at their disposal to get back the TDS paid; but what about small time investors? They are hapless people, looted of their hard earned money by the mind-less machinery of Income tax dept. by dubious means of TDS.

Another point is that Income tax dept has publically admitted in June 2010 through a press release that TDS data is in a mess. TDS returns in Paper and Challan data submitted by Banks are just not possible to reconcile, leading to total confusion.

It's high time a movement is started to abolish TDS along with its draconian interest and penalty provisions.

REPLY

Nagesh Kini

In Reply to Rajesh Kothari 5 years ago

You are absolutely right.
The amounts of taxes deducted from incomes of a large number of small earners like elders, pensioners,middle class in value may not be so large but in terms of numbers, it is substantial. They find it not worth their while to file a return to obtain the refund that takes ages to come about. A tax practioner ha to be be appointed to file the return and the person who comes with the refund order will not hand it over unless he is bribed which is not less than 10%. I know of demands from Charitable trusts with no taxable incomes having to beg for refunds.
It is true that all corporates have a separate taxation department to chase the refunds.
The babu has the audacity to ask you why you have come 'so late, you file is not traceable', so much so I had to apply to the Income Tax Ombudsman when normal channels didn't work.
There is a very strong case to totally do away with the tedious TDS on interest income that is more of a nuisance both for the tax payer and the banks who as unpaid tax collectors merrily prefer to err on the safer side by deducting tax and asking you to claim refund.
They are also harassed for not filing the quarterly and annual TDS returns in time.A penalty for doing a free task!

mukesh

5 years ago

SYSTEM OF TDS & ADVANCE TAX - AS PER HUMAN CONCEPTUAL THINKING IS A GROSSLY WRONG PRACTICE, ESPECIALLY FOR AN INDIVIDUAL!

WHEN NOBODY KNOWS IF THE PERSON IS EVEN GOING TO BE ALIVE AT THE TIME OF FILING RETURNS, TO COLLECT TAX IN ADVANCE IS A RIDICULOUS IDEA ITSELF! IF AT ALL, FOR COMPANIES, ADVANCE TAX MAY BE TAKEN AS THEY WONT DIE / DISAPPEAR IN A YEAR!

COLLECTING TONS OF MONEY OVER THE YEAR & THEN REFUNDING IT IS A STUPID PRACTICE CAUSING ENORMOUS NATIONAL WASTAGE OF EFFORT, MAN-HOURS, ALL RESOURCES INCLUDING PAPER, POWER, TIME & ABOVE ALL, MONEY ITSELF!

ABOLISH THE PRACTICE OF TDS & ADVANCE TAX.

OUT OF ABOUT 65 ODD TAXES INDIAN GOVT. GOBBLES UP IN VARIOUS FORMS, ALL OF THEM MAY BE GOTTEN RID OFF & ONLY A 2% TRANSACTION TAX FOR ANYTHING & EVERYTHING IN ALL CITIES / STATES WILL GET MORE REVENUE THAN ALL THESE TAXES WHICH GET SWALLOWED BY THE MONSTEROUS GOVT. SYSTEM!

pantulu

5 years ago

It is not clear why the meagre interest on Bank Deposits is taxed at source. Only Retired people and people who do not get any pension save in Banks because they have atleast some security. Many of them will not have any other income which qualifies for tax deduction. People who have abnormal incomes do not save in banks. It is high time this deduction is discontinued to facilitate both the Bank and the customer.

Nagesh Kini FCA

5 years ago

Both advance tax and TDS provisions need to be revisited either in the DTC and/or Finance Bill 2012. The CBDT needs to review de novo the large refunds as well as shortfall in collections. I really wonder how the minds work - the mandarins in the North Block that houses the MOF.

FM refuses to comment on letter to PM on 2G scam

A finance ministry document submitted to the Supreme Court said the telecom ministry could have gone in for auction of 2G spectrum licenses had the then finance minister P Chidambaram insisted on this

New York: finance minister Pranab Mukherjee on Thursday refused to comment on a letter sent by his ministry to prime minister Manmohan Singh on the second generation (2G) spectrum scam, saying he cannot make any remark on the matter as it is 'sub-judice', reports PTI.

"The matter is sub-judice. I cannot make any comment on it. The whole matter is under the scrutiny of the Supreme Court of India. We cannot make any comment on any matter that is sub-judice," Mr Mukherjee, who is here to attend an India-US investor forum, told reporters here.

Separately, while addressing Indian and American business leaders at a high-profile USIBC roundtable, Mr Mukherjee said the finance ministry's letter to the Prime Minister's secretariat is out in the open only due to the Right to Information (RTI) Act, which is one of the many steps the government has taken to flush out corruption and make governance transparent and accountable.

He said in the recent years, lot of authority has been given to the people of India through the RTI.

"In fact today a sensational news item has come and it is through the exercise of the RTI. A note was sent by minister of finance to the prime minister. Somebody demanded through the use of RTI to have the copy of that note from the Prime Minister's secretariat and... fact of the matter is somebody has produced that as a piece of evidence in a particular case," Mr Mukherjee commented.

He said whether the letter can be used in such a manner or not "is a different story".

A finance ministry document submitted to the Supreme Court in India says the telecom ministry could have gone in for auction of 2G spectrum licenses had the then finance minister P Chidambaram insisted on this.

"The point I am trying to make is these are rights of the citizens. Today even an individual citizen can demand what is being written in the file of the government, what notes or instructions the minister is giving or departmental secretary is giving," barring cases involving defence and national security.

"But in all other areas, this right is being very frequently exercised," Mr Mukherjee said.

Mr Mukherjee gave an extensive overview to his audience that comprised corporate honchos from India and the US, of the steps the Indian government has taken to tackle corruption, in the wake of the recent spurt in scams that have launched citizen movements across the country.

He said the Indian government has been putting into place a number of legislations to "strengthen the system of accountability and transparency both at the legislative and executive level."

He was quick to add that the government has not initiated these measures merely in response to the 'agitation' that had engulfed the country but that these were in the works for quiet some time.

"It is not because of the agitation we have initiated these legislations. They were under the domain and under consideration of the government for quiet some time," he said, adding that one of such legislation is the Lokpal Bill which is to create an independent ombudsman having high authority to deal with all cases of allegations of corruption against civil servants, politicians, members of Parliament, ministers and the prime minister.

"That legislation is being worked out and is under the consideration of the standing committee. I hope we will get their recommendation in the next session."

Mr Mukherjee said the demand that the judiciary be brought within the purview of the Lokpal bill to tackle misdemeanour in the judicial system is being addressed.

The government is making a judicial accountability bill as well as establishing a National Judicial Commission in regard to the appointment of judges of the high court and Supreme Court and second in regard to misdemeanour in the judiciary.

"I would like to very frankly admit that this is a new dimension in our multi-party democratic system. For the first time in India we were confronted with a situation where a section of the civil society demanded that a particular bill of legislation is drafted by the government in consultation with them."

He said this was an exception to a rule whereby traditionally any legislation in the country was first initiated by the executive, followed by inter-ministerial consultations and once it got Cabinet approval it was sent to the Parliament. If the Parliament considered it necessary, it then sought opinion of the people at large.

Mr Mukherjee said the government responded to the legislation that the civil society group drafted. He himself was appointed chairman of the group, which had equal representation from civil society and government. The parties had a series of meetings and agreed on 34 out of 40 basic principles for the legislation.

"But apart from that engagement of the civil society, in an unprecedented manner, the government itself has taken initiative both administratively and legislatively to tackle the problem of corruption at high places," he said.

Listing the administrative measures taken by the government, Mr Mukherjee said a PM-appointed group had recommended that to deal with corruption allegations against government officials, 71 fast track courts should be established all over the country.

In respect of the sanctioning prosecution, sanction will have to be given within a specific time frame of not more than three months by the superior authority.

Further all cases pending now have to be regularly monitored and clearances have to be given so that appropriate disciplinary actions can be taken.

He added that along with the Lokpal Bill, five other legislations are being drafted. Other legislations to check corruption in the country include a citizen rights charter for every department and a whistle-blower legislation to protect those who detect the corruption.

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