A representation is been made to CBDT Chairman by leading accounting and CA Organisations of India and it is been requested that current rate of 10% under section 194J of the Act should be reduced to 2% and to Prioritise issue of lower/ nil withholding tax certificates under section 197 of the Act. Full text of the representation is as follows:-
Dated:- May 1, 2020
Shri Pramod Chandra Mody
Chairman,
Central Board of Direct Taxes
Ministry of Finance, Government of India
North Block
New Delhi – 110 001.
Respected Sir,
Sub: Dealing with COVID-19 impact on working capital and cash flows of consulting and professional firms – soliciting immediate intervention
At the outset, we appreciate the efforts being taken by the government in dealing with the economic crisis through various policy interventions. We jointly represent thousands of Chartered Accountants across India and, through them, we also speak for various professionals in the country.
While several representations have been made to provide impetus to the industries and various sectors, it is equally crucial to take into consideration the significant adverse impact of COVID-19 on the consulting and professional firms, which are primarily service-driven entities and therefore, may be missed while providing impetus to various industries.
Consulting and professional firms are largely dependent on client service revenue and owing to the flailing economic conditions, their revenue for the next couple of years will be severely impacted. Moreover, since the costs are bound to remain the same, the profit margins of these firms will be significantly squeezed. In light of this, the important issue to be dealt with is that significant cash flows of these firms will be clogged on account of tax deducted at source (TDS) @ 10%, thereby impacting working capital movement in these testing times.
Given the dire economic conditions, majority of the consulting and professional firms are likely to incur losses during the next couple of years or will have a very low profitability. As a result, these entities are bound to have nil or minimal tax liability for these years and therefore, the taxes deducted at source from the receipts of such entities will be unduly accumulated throughout the year, without being utilised eventually.
The impact of the above can be better understood based on a high-level working provided below, after considering a range of profitability for these entities (assumed to be partnership firm/ LLP):
| Particulars | 20% PBT | 25% PBT | 30% PBT |
| Gross receipts | 100 | 100 | 100 |
| Taxable Profit | 20 | 25 | 30 |
| Tax liability (@ 35%) | 7 | 8.75 | 10.50 |
| TDS (@ 10%) | 10 | 10 | 10 |
| (Refund)/ tax payable | (3) | (1.25) | 0.50 |
As can be comprehended from the above table, even if it is assumed that the consulting and professional firms will be profitable, it is only at a margin of 30% that the entire TDS will be utilised. Realistically, as already mentioned above, majority of the firms will be struggling to make any profit in the next couple of years and even if they do, profitability may be much below 20%-25%. Further, these firms will continue to bear high salary costs, which is likely to reduce the profits even further. In any case, these entities continue to be in the purview of the tax department and will continue to meet their tax liability by way of advance tax through the year and therefore, in case of a possibility of profits, there will anyway be no loss or delay for the revenue department in collecting the taxes.
In view of the above, we have provided below some recommendations to deal with the above situation and provide support to the consulting and professional firms in these times.
1. Reduction of TDS rate under section 194J of the Income-tax Act, 1961 (‘Act’)
Keeping in mind the serious issues that businesses are going to face, the challenges of managing the business with high people costs and other fixed overheads, and the need for all available funds, it is recommended that the TDS on professional fees should be completely removed for a period of one year at least. Without prejudice, in any case, the current rate of 10% under section 194J of the Act should be reduced to 2% to bring it in line with the recent amendment made vide Finance Act 2020 for technical fees.
2. Prioritise issue of lower/ nil withholding tax certificates under section 197 of the Act
Without prejudice to the above recommendation, section 197 of the Act facilitates application for certificate for lower/ nil withholding tax from tax officers. However, considering the urgency of the matter, it is recommended that directives be issued to the tax officers to consider applications for lower/ nil withholding tax certificates under section 197 read with section 194J of the Act on priority and to process such applications (on an automatic basis) and issue the certificates in a compressed time frame (maximum period or 1 month). At this juncture, when even survival of a business is at stake, it would be virtually impossible to predict with accuracy the gross income or profit for the year. Therefore, a more pragmatic and lenient approach to processing applications is the need of the hour.
Further, given the nature of services provided by the consulting and professional firms, it may be difficult to identify the deductors at the time of make an application under section 197 of the Act. While proviso to Rule 28AA(4) permits the issue of the certificate to the person making the application, it is applicable only in cases where the number of persons responsible for deducting tax is likely to exceed 100. In view of the current situation, it is recommended that this requirement be eased and certificates be issued in favour of the applicant where the details of persons liable to deduct tax is not available, irrespective of the numbers of such person.
We humbly request you to resolve the above issues at the earliest in order to avoid unnecessary hardship being caused to the multitude of consulting and professional firms.
Thanking you
Yours sincerely,
| Manish Sampat
President, Bombay Chartered Accountants’ Society |
Anand Sharma
President, Chartered Accountants Association, Ahmedabad |
| Rasesh Shah
President, Chartered Accountants Association, Surat
Anshul Agarwal |
Chandrashekara Shetty
President, Karnataka State Chartered Accountants’ Association |
CC to:
1. Shri Narendra Modi – Prime Minister of India,
2. Nirmala Sitharaman – Union Finance Minister.
3. Shri Anurag Thakur – MOS, Finance,
4. Shri Kamlesh Varshney – Joint Secretary, TPL
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