Tweaking TDS norms will be counterproductive

Govt is considering raising the threshold levels for earnings on which taxes are to be deducted at source

Finance Minister Arun Jaitley told industry representatives at a conference last Saturday that the Budget for 2016-17 would avoid populism and rely on sound policies to help the Indian economy achieve higher growth. As an indication of what those sound policies could be, Mr Jaitley said steps would be taken to ensure adequate investments in important sectors such as infrastructure and irrigation. These statements are reassuring, coming just a few weeks before the Budget is due to be presented later this month. They perhaps indicate that the government is conscious of the enormity of the twin challenges arising out of policy imperatives for domestic growth on the one hand, and turbulence in financial markets across the world on the other. The promise of sound policies should, therefore, imply that even as more investments in infrastructure are committed, there is no deviation from the path of fiscal consolidation. At a time when global financial turmoil has increased uncertainties, it would make sense for the government to keep the fundamentals of the economy in good shape, without announcing more tax exemptions or unduly risking a higher fiscal deficit than what was promised in the medium-term fiscal consolidation road map. An increase in public investments does not have to be achieved at the cost of a higher fiscal deficit; it could be achieved by reducing wasteful expenditure, phasing out tax exemptions even while bringing down the corporation tax rates and undertaking expenditure reforms like those for subsidies.

However, the message of pursuing sound policies in the coming Budget is somewhat contradicted by a few of the recommendations that seem to be under the ministry's consideration. In the name of rationalising the tax system, the ministry is considering raising the threshold levels for earnings on which taxes are to be deducted at source. Additionally, the amount of tax that is to be deducted on earnings from certain transactions is proposed to be reduced from 20 per cent to 10 per cent in some cases and from 10 per cent to five per cent in some others. Both the moves are being justified on grounds of rationalisation of the tax system and providing relief to small depositors and taxpayers including pensioners. Claiming refunds of taxes deducted at sources can be troublesome and entails long delays, it has been argued. And the proposed relaxation will make the tax system less onerous for such taxpayers. Another reason cited in favour of the proposal is that in spite of the relaxations, there would be no real revenue loss as the taxes due to the government would have to be paid in any case, albeit at the end of the year.

Such arguments, however, are deeply flawed. The principle of tax deduction at source is a well-established practice followed in many countries with mature and prudent tax policies. It helps track taxable transactions and prevents revenue leakages. The rates at which the taxes are deducted at source are already low at ten per cent-the lowest slab of individual income-tax rates. If refund delays and procedural problems have been complicating the system of tax deduction at source, a more sensible approach would be to fix those problems. That would be considered more effective and useful tax reform. Halving the tax deduction rate or raising the threshold levels for such tax deduction will be tantamount to barking up the wrong tree.