TDS, explaining the rise and rise of a safe-bet tax collection method

The I-T department's cost of collection has been reduced as a share of the total direct taxes collected

The Income Tax Act of 1922 is said to have been the first to introduce the concept of tax deducted at source (TDS).

“Any person responsible for paying any income chargeable under the head, ‘salaries’ shall, at the time of payment, deduct income-tax,” said the Act which applied to “the whole of British India, including British Baluchistan and the Sonathal Parganas”, as well as the princely states.

An increasing share of tax collections are through the TDS route in India now. At 41 per cent of the total gross direct tax receipts, the share of TDS in Financial Year 2022-23 (FY23) was the highest in at least 23 years, shows an analysis of recently released Income Tax data. It has increased 68 per cent since FY19 to Rs 8.2 trillion as of FY23 (chart 1).

The Income Tax department’s cost of collection has been reduced as a share of the total direct taxes collected. It spent less than Rs 1,000 crore to collect Rs 68,305 crore in FY01. Expenditure increased to Rs 8,452 crore in FY23, but the total amount collected was Rs 16.6 trillion. This meant that the cost of collection is down to 0.51 per cent of the taxes garnered. This is the lowest it has been since the turn of the millennium (chart 2).

The cost of collection varies widely in key Asian economies, shows data available from 2019. The cost as a share of tax collections was 1.24 per cent in Japan and 0.48 per cent in Indonesia. Agencies collecting various taxes vary, but the numbers can be seen to be broadly indicative of the costs involved in each country (chart 3).

As the cost of collection reduces, wealthier states continue to lead in revenue generation. Maharashtra was the largest source of direct taxes (Rs 6.1 trillion) shows the latest 2022-23 data. It was followed by Delhi (Rs 2.2 trillion), Karnataka (Rs 2.1 trillion), Tamil Nadu (Rs 1.1 trillion) and Gujarat (Rs 0.9 trillion). The five states account for 73.75 per cent of the total tax collected in FY23. It was 73.38 per cent before Covid-19.