Instant tax credit: An idea whose time has come for better compliance

A system that allows buyers to pay taxes directly to the government while paying would enhance trust, improve tax compliance, and accelerate tax collection

Imagine paying for a movie on an OTT (over the top) platform but being told you must wait a day before watching it—just so the bank can confirm the payment. Such a platform wouldn’t survive. Instant access to online payments is now the norm. But when it comes to taxes, businesses still struggle with getting instant confirmation. This creates inefficiencies that weigh them down.

 

Take my friend Amarjeet, who runs a startup selling digital tools to businesses. For transactions under ₹30,000, the process is seamless. Buyers pay online and instantly download the tools. However, for amounts exceeding ₹30,000, buyers must deduct tax at source (TDS) before making payments. Since there is no provision for buyers to pay TDS online at the time of payment, they connect offline. Amarjeet gets the net amount and lets buyers download the tools. He trusts them to pay the deducted TDS by the due date.

 

This delay causes significant challenges. If a buyer fails to deposit the TDS or file their TDS return, Amarjeet doesn’t receive credit for the tax deducted. While most buyers comply, reconciliation is costly and time-consuming, and in some cases, Amarjeet has to write off the TDS amount. Amarjeet wished he could bargain like some big online platforms. They ask for full payment upfront. They only credit back the TDS once it shows in their account.

 

Amarjeet runs a digital business, but this issue isn’t just his. It impacts companies in every sector. Any business that gets payments with TDS deduction has similar risks. It applies to those selling physical goods, services, or doing consultancy work. The challenge is systemic, stemming from the lack of a mechanism for instant tax credit reconciliation. A system that allowed instant reflection of credit would eliminate this issue altogether.

 

The issue is even more pronounced in GST input tax credit (ITC), where far larger amounts are involved. Consider a buyer paying ₹11.80 lakh for a ₹10 lakh invoice (including ₹1.80 lakh GST). The buyer cannot claim ITC immediately—they must wait until the seller deposits the GST and files a return. If the seller defaults, the buyer loses the credit, effectively extending an interest-free loan to the seller for the GST amount. This issue is common. Big buyers often wait to pay until ITC shows in their records. Other buyers may need to spend time and effort checking that suppliers are tax compliant. Both scenarios restrict business growth and increase costs.

 

Truth be told, a system allowing buyers to pay taxes directly to the government at the time of payment, with instant credit for both parties, would be a game-changer. It would enhance trust in transactions, improve tax compliance, and accelerate tax collection. Additionally, it would increase tax revenue by improving the economy’s transactional efficiency. More importantly, it would make the economy more dynamic by ensuring that businesses no longer need to be dominant buyers or sellers to secure proper tax credits and operate smoothly.

 

Of course, implementing such a system won’t be easy. Many businesses don’t use an invoice-by-invoice payment model. Instead, payments are often grouped together, adjusted against advances, or made on credit terms. Sometimes, goods are returned or rejected. This makes real-time tax deductions complicated.

 

Any system that allows instant tax credits should be optional. This way, it can fit different and complex business situations. Only those comfortable with shifting to the instant credit model should do so. Others can continue with the existing tax model.

 

But with instant payments now a reality, our tax systems must also evolve. A system enabling real-time tax payments and credits could transform India’s economy. It would make things fairer for smaller businesses. They could take part in transactions without worrying about delayed tax credits impacting their cash flow. That is a goal worth pursuing despite all its difficulties.

 

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta