The Hindu Business Line : Expanding the scope of TDS

THE Taxation Laws Amendment Bill 2005, now pending consideration before the Standing Committee of Parliament, has proposed significant changes to the law, which, among others, include a more stringent tax deduction at source regime.

The Finance (No. 2) Act, 2004 had amended Section 40(a) of the Income-Tax Act, 1961 in order to widen the scope for disallowance of payments outside India and payments to a non-resident in India wherever tax is not deducted at source. Such amounts included interest, royalty, fees for technical services or other sums chargeable under the Act.

Sub-clause (ia) of Section 40(a) provided for disallowance in the hands of assessees in respect of interest, commission/brokerage, fess for professional services or fees for technical services payable to a resident or a resident contractor/sub-contractor on which tax has not been properly deducted nor paid into government account.

The amending Bill expands the scope for such disallowance by roping in rent and royalty. Hitherto, rent meant payments for use of building with furniture and fittings and the land appurtenant thereto. Payment of rent to anyone other than individual or a Hindu undivided family (HUF) in excess of Rs 10,000 per month will have to suffer TDS under Section 194(I) of the I-T Act.

It is common practice among landlords to lease out buildings with two documents, one covering the building and the other furniture and fittings. It has often been argued that if the leasing of the furniture and equipment is not covered in the main document, there can be no question of taxing the rent portion for furniture and fittings separately covered by a document. These arguments may not always cut ice.

The latest amending Bill lays down that `rent' means payment by whatever name called, under any tenancy or other arrangement for the use of any land, building (including factory), land appurtenant to the building, machinery, plant, equipment, furniture or fittings, whether or not any or all of these are owned by the payee.

The same treatment is proposed to be extended to royalty or other sums included in Section 28(va). Non-compete fees were made taxable earlier and now such payment will also be subject to TDS.

In all these categories, the person failing to deduct tax at source will suffer double jeopardy. The amount will be disallowed in the assessment, but that will not exonerate the person from the consequences of the failure to deduct tax at source.

The law, at present, requires payments towards business expenditure to be made by crossed cheque or crossed bank draft if the amount exceeds Rs 25,000. Purchases are covered as expenditure. The amending Bill requires that the payment be by account-payee cheque or account-payee bank draft. This will bring Section 40 A(3) on a par with Sections 269SS and 269T.

The Finance (No. 2) Act, 2004 treats gifts from non-relatives exceeding Rs 25,000 as income in the hands of the recipient under Section 56(1)(v). This law is already in operation.

From assessment year 2007-08, the exemption limit for gifts from non-relatives will be doubled to Rs 50,000. There will be a further exemption in respect of gifts from charitable institutions. Only recognised charities are covered for exemption. Individual donations may probably be taxed as income in the hands of the recipient. There were also amendments with reference to institutions and charitable funds falling under Section 10(23C). All these institutions will have to file their returns every year by an amendment made to Section 139(4C) if their income without exemption exceeded Rs 1,00,000.

Tax law, the world over, is getting more complicated. The Economist describes how the Inland Revenue in Latin America works:

"In many Latin American countries, governments are too poor to provide basic services. Not in Brazil: its tax revenues now account for 37 per cent of GDP, a figure similar to that in the United States and twice as high as in Chile. Even so, evaded taxes are estimated to amount to a further 11per cent of GDP. Brazilians refer to the tax authority as the "Lion": its voracious feeding habits can be observed in the wilds of Sao Paulo's financial district, where a giant screen keeps track of how much money taxpayers have fed it this year (over $165 billion so far).

"With more than 55,000 articles and 63 separate levies, the Brazilian tax code is a monster. CPMF, ICMS, PIS, COFINS — the acronyms of different taxes scroll across the newspapers like cryptograms. Armies of lawyers are deployed to decipher them. There are taxes on top of taxes, a fiscal "waterfall" that can drown business or flush it underground. Some three million Brazilian businesses are currently in tax arrears."

Robert Fendt, a Brazilian economist, suggests that if the Inland Revenue is a lion, it is the time for the lion to go on a diet.

(The author is a former Chief Commissioner of Income-Tax)

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