Impact of TDS Rationalization on Taxpayer Liquidity

Summary: The rationalization of Tax Deducted at Source (TDS) provisions aims to improve liquidity for taxpayers by increasing threshold limits and reducing tax deduction rates. Historically, TDS has been a primary method for the government to collect taxes in advance, ensuring compliance and steady revenue flow. However, with the evolving tax landscape, the government is now shifting focus from revenue collection to using TDS as a reporting mechanism. While reduced TDS rates and higher thresholds provide temporary liquidity relief, taxpayers must still fulfill their tax obligations through advance tax payments. Data indicates that when TDS collections decrease, advance tax payments increase, sometimes leading to additional interest liabilities under sections 234B and 234C. Additionally, the government bears a rising refund cost due to excess tax collections. In FY 2024-25, refunds grew significantly, highlighting the inefficiency of excessive tax deductions. The recent adjustments in TDS thresholds and rates aim to reduce refund obligations and associated interest costs for the government. However, this does not necessarily lead to sustained liquidity benefits for taxpayers, as the advance tax system ensures that the total tax liability remains unchanged. Therefore, while these changes may ease immediate cash flow constraints, they do not fundamentally increase long-term liquidity for taxpayers.

WILL RELAXING THE THRESHOLD LIMIT AND RATES OF TDS, ACTUALY PASSES MORE CASH LIQUIDITY IN THE HANDS OF TAXPAYER?

Provision in Income Tax Act 1922

The concept of TDS (Tax Deducted at Source) is coming from erstwhile law i.e. Income Tax Act 1922. The section 18 under Chapter IV, (Deduction and Assessment), of Income Tax Act 1922, was described the provisions of “Payment by deduction at source”.

It was implemented for the purpose of collecting tax & super tax against certain income earned by assessee during the financial year itself. This help the Govt. in collecting revenue during the financial year instead of with filing of Income Tax Returns. But subsequently the word “super tax” was omitted by Indian Income Tax Amendment Act, 1939.

In those days applicability of TDS was on few sources of income only i.e.

Income from salary (Sec.18(2) Income Tax 1922)

Interest income from securities (Sec.18(3) Income Tax 1922)

Dividend (Sec.18(3)(D) Income Tax 1922).

Provision in Income Tax Act 1961

On enactment Income Tax Act 1961, (applicable w.e.f. 01-04-1962) all above provisions of TDS became the part of this new act also. As the Indian and global economic environment has changed in many folds hence no doubt, as need of hour, many amendments by finance bills has been incorporated in provisions of TDS also. The law makers realized that ‘tax deducted at source’ is not only the mean of collecting the tax but also, it’s a driving force for the people to become more tax compliant. As the technology evolved and integrated with taxation mechanism all the stakeholders be it Tax Department or persons earning income, knows that various income related information are available on the click of buttons, and its’ hard to escape the income or non-payment of taxes. In consequences more and more persons are becoming tax compliant and the revenue of Govt. in increasing year to year. As we know the prime role of TDS was to collect the revenue and the law makers started selecting different-different source of income to brought into TDS net.

By imposing TDS provisions Govt. is collecting tax before end of financial year, but when we look at the other side of coin the Govt. in bound to bear interest cost at the time of refund of excess tax collected from assessee. Hence in recent past years we’ve seen, the amendments in TDS provisions for raising the TDS threshold limit or reducing the rates of TDS in different sections.

Examples of change in threshold and rates of TDS:

The above table depicts that now a days, Govt. is inclined to use TDS mechanism more as reporting measures than to collection of revenue. Because out of the gross tax collection approximately 15%-18% goes out as refund and interest thereon. Hence to reduce the cost of refund and interest Govt. is either reducing the rate of TDS or increasing the threshold in various section of TDS.

In the budget 2025 it was announced that threshold of TDS had been increased to give more liquidity in the hand of taxpayer but is it true in complete sense?

Analytical Information

The analysis of below given data show whenever TDS collection is less, the assessee had to pay advance tax/self-assessment to bridge the gap of shortfall of taxes. The short payment of taxes costs tax payer to pay interest u/s 234B & u/s 234C. Other the other hand department is collects due taxes only and their obligation to pay tax refunds and interest will be reduced in future.

Sources of Tax collected by Govt.

The net outcome of above information:

A)  Yr. 2021-2022 collections from TDS was 6.34 Crore and the corresponding advance tax was Rs. 7.09 Crore, in this financial year due to COVID-19, Govt. slashed all the TDS rates by 25% of applicable rates and thus net TDS collection is in downside and advance taxes are at higher side.

B) In the F Yr. 2022-2023 collections from TDS was Rs. 8.18 Crore and corresponding advance tax is Rs. 7.28 crore i.e. TDS collect was 41.47% and Advance Tax was 36.91%.

C) In the F Yr. 2023-2024 collections from TDS was Rs. 6.51 Crore and corresponding advance tax is Rs. 12.77 crore i.e. TDS collect was 27.88% and Advance Tax was 54.65%.

Direct Tax Collections for F.Y. 2024-25 as on 10.11.2024

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The inference of above table shows that in financial year 2023-2024 total income tax refunds were Rs. 2,87,531 Crore i.e. 15.64% of gross collection and in the F Yr 2024-2025 the refunds were of Rs. 4,10,105 Crore i.e. 18.67% for gross collection of tax. It means it means quantum of refunds is increased and the cost to refund to Govt. is also raised. Hence rationalization of TDS provisions are being taken by Govt.

Conclusion

In conclusion we can say that change in threshold and TDS rates will help to retain cash liquidity in the hands of tax payer to shorter duration only, because the assessee are liable to make payment their ultimate tax liability through advance tax according to their income during the financial year itself. Due to liability to advance tax the net impact will not give big boost in liquidity for taxpayer.