INTRODUCTION: With effect from 14th May 2020, government has reduced Tax deduction at source (TDS) and tax collection rates (TCS) rates for interest, dividend, professional fees, rent payments and other non-salaried payments by 25%. These rates shall be effective from May 14th, 2020 and remain effective till the end of financial year i.e. March 2021. This step taken by the government will surely increase liquidity in the hands of an individual who is already battling the financial distress due to this pandemic. Deduction and collection of tax at lower rates shall leave more disposable income in the hands of recipient and shall have the desired impact of increased cash flows and liquidity in the economy.
The impact and benefits of reduction in TDS rates can be understood as follows:
NO subsequent reduction in Tax Liability:
Reduction in TDS/TCS rates does not mean reduction in the tax liability of the receiver of these incomes. An individual has to pay tax on the entire payment as per the income tax slab rate applicable to him/her. This implies that a lower TDS/TCS may just mean that the receiver has to compensate for the same by paying higher self-assessment tax at the end. Taxpayers must be careful to pay advance tax, if their estimated tax liability is more than estimated Tax deducted at source.
Better Fund Management:
The relief provided by the government in the form of lower TDS/TCS rates shall help in addressing the liquidity issues and would help in better fund management by avoiding blockage of funds and shall have more disposable income to consume during the financial year.
Benefit for a specific section of Tax payers:
The reduction in TDS rate shall prove beneficial for self-employed professionals, individuals who are earning interest or rental income and receiving contractual payments, dividend, commission, brokerage etc. However, salaried people and non-residents shall receive payment after deduction of TDS at older rates.
Higher rates in case of Non furnishing of PAN:
The benefit of no reduction in rates of TDS shall not be bestowed in case of Non-furnishing of PAN/Aadhaar. For e.g. If a TDS is required to be deducted at 20% under section 206AA under Income Tax Act, 1961, the due to non-furnishing of PAN/Aadhaar it shall be deducted at 20% only and not 15%.
No TDS relief for expenses booked prior to 14th May 2020:
As under relevant sections of income tax act, it is provided that TDS is deducted either on the due date of payment or credit in the Books of accounts whichever is earlier. Therefore, any expenses which have been provided in books of accounts prior to 14th May 2020 and on which TDS has been accrued in the books the earlier rates of TDS before deduction shall prevail notwithstanding the date of payment.
Conclusion: It is important for every taxpayer to note that the reduction in TDS rates is for this financial year only and will result in payment of higher advance tax or self-assessment tax later even though reduce blockage of funds in this financial distress of pandemic. This relief may leave more disposable income for this financial year but taxpayers will have to be vigilant to ensure that they pay their advance tax in case their estimated tax liability is more than the estimated TDS.