The government has introduced several measures to improve its tax delivery system and make it more business-friendly. Regular reviews of the delivery system and improvements to processes to reduce turnaround time demonstrate its commitment.
One aspect of the journey towards ‘Tax 2.0’, however, that requires immediate attention is the process of granting lower withholding tax certificates. Businesses depend upon the Income Tax department to obtain a withholding tax certificate before making or receiving a payment.
As per the law, wherever there is a doubt on the taxability of a foreign payment, either the payer or the recipient must to make an application for the issuing of a certificate determining the rate at which tax needs to be deducted by the payer. Likewise, for domestic payments, recipients sometimes seek a lower withholding tax certificate keeping in mind their estimated tax liability for the year, which appears to be less than the estimated tax outflow on account of deduction of tax by the payer.
For example, if a taxpayer estimates his tax liability for the year as ₹100, and as per the TDS rate of 10 per cent on estimated receipts of ₹2,000 for the full year, the total tax outflow appears to be ₹200. In that case, the recipient may seek a lower withholding tax certificate at 5 per cent. In the absence of this certificate, payers face difficulties in releasing the payment with lower deduction of tax, as they may be subject to penal consequences later. So, they insist that the recipient obtain the withholding tax certificate even before recording the transaction in their books.
The I-T Department is making attempts to automate the process of obtaining withholding tax certificates by limiting the physical interface. Recipient applicants are already using the e-filing process, whereas payer applicants will switch to e-filing from November 2019. Currently, the I-T Department issues the certificate within 30 days (sometimes even longer), and the tax rate depends upon several subjective factors, leading to uncertainty. Taxpayers suffer as the uncertainty around the rate delays payments. No one wants to receive a payment with a tax deduction at an excessive rate, which can vary from 10-40 per cent, as that could disturb the recipient’s cash flow. The resultant delay in the payment process has an obvious side effect on the government’s tax collection as well.
The government seems to have greater dependence on the tax withholding process for collection of revenues. Hence, I-T officers are investing time in determining a rate that is not prejudicial to revenue collection.
Taxpayers expect the I-T Department to work towards reducing the lead time for issuing withholding tax certificates and also bring in certainty on the rates to be granted.
Let’s look at this pragmatically: If the withholding tax rate is ‘appropriate’, it protects the interests of both sides. Taxpayers would prefer a withholding tax rate that sufficiently takes care of tax liability for the full year, so that they do not have to pay penal interest. On the other hand, the government would prefer a withholding tax rate that is not excessive, as that would lead to payment of interest on tax refunds, an additional burden on the government. Furthermore, typically, tax refunds take around one year, but that time can get longer if the tax return goes for tax assessment, which affects the cashflow of the taxpayer’s business.
Protecting all parties
With this in mind, the I-T department should attempt to leverage technology for data analytics, and automate the entire process of applying, determining and granting the withholding tax rate. For instance, the I-T department can put in place an automated process that leverages existing taxpayer data to determine the withholding tax rate.
When a taxpayer applies for the rate, the calculation should be checked and verified based on the ‘rule engine’ applied in the system. The rule engine should have an escalation matrix based on the defined threshold or nature of payment, etc. The automated process should determine a preliminary rate at the time of application itself. If the taxpayer agrees with the rate and accepts it, a final withholding tax certificate is generated instantly. If the taxpayer is not satisfied, then a provisional certificate can be generated, which goes to the escalated authority for review. The escalated authority should get 3-5 working days to dispose off the review requisition. If that does not happen, the rate sought by the taxpayer is treated as final and a final certificate is generated. This would help in cutting down the lead time and bring in certainty.
The embedded rule engine should also protect the government’s interest. For example, if no action is taken on the provisional rate due to paucity of time, the resultant certificate may have a limited tenure (say three months). After two months, an alert should go to the escalated authority to review and determine a new rate for the next quarter or period. The taxpayer should also get an appeal remedy if he does not agree with the revised rate.
The government and the I-T department should consider a pilot project where advanced technology is introduced to make the tax framework more efficient.
The writer is Partner, Corporate and International Tax, PwC India