News Analysis

Atmanirbhar Package : Clarity emerges on the applicability of TDS/TCS rate cut

Keerthi Sanagasetti | Updated on May 15, 2020 Published on May 15, 2020

BL Research Bureau

In the first tranche of announcements made under the Aatma Nirbhar Bharat Abhiyan—an economic relief package doled out by the Centre- the Finance Minister announced a 25 per cent cut in prevailing rates of tax deduction at source (TDS) and tax collected at source (TCS).

While the Finance Minister did make it clear that the cut in TDS rates shall be applicable for certain non-salaried payments only, the CBDT circular ( https://pib.gov.in/PressReleasePage.aspx?PRID=1623745) that was released later during the day, clearly specifies the payments and receipts for which the revised rates would apply. The reduced rate of TDS and TCS shall be applicable only from May 14, 2020 to March 31, 2021.

 

As per the circular, payments for contractors, insurance commissions, commissions or prizes on sale of lotteries, rent, professional fees, and other commissions or brokerages, which are subject to TDS, shall now be deducted at a 25 per cent lower rate.

Self-employed taxpayers, whose income falls in the categories mentioned above stand to benefit from this TDS rate cut, as they get more cash in hand for the interim period.

For pensioners and salaried class, though this measure will not impact their main source of income (salary), they stand to gain on other sources of income. This is because the 25 per cent cut in TDS rates, also applies to rental receipts, interest income (both on securities and otherwise) and dividend income (including those paid by trusts and mutual funds).

Even payments received under a life insurance policy, including bonus payments, if received during the said period, shall be subject to lower rates of tax deduction.

Certain receipts such as the proceeds of the sale of a vehicle, if exceeded ₹10 lakh, attracted TCS at the rate of 1 per cent. Henceforth, per the announcement made by the Finance Minister, the TCS shall be at the rate of 0.75 per cent only, until March 31, 2021.

In the latest budget also, to facilitate compliance and tax collection efficiencies, the Centre included several payments and receipts under the ambit of TDS and TCS. Among the recently added ones, the 25 per cent reduction in rates shall apply only to, the TDS on payments made to e-commerce participants and the TCS on sale of goods above ₹50 lakh (under section 206 C (1H)).

Though both these provisions would be effective from October 1, 2020, the relaxation in TDS/TCS rates, for these, shall only applicable till March 31, 2020.

Non-applicability

Taxpayers should also note that the reduced rates of TDS and TCS only apply for payments made to residents. That is, if the above-mentioned payments are made to a non-resident or a foreign national, the tax shall be deducted or collected at the prevailing rates only.

Also, if the person, to whom such an income is paid, does not furnish his PAN or Aadhar, TDS/TCS is deductible at higher rates under section 206 AA or 206 CC (respectively). The said cut of 25 per cent shall not apply to those higher rates, as well.

Word of caution

However, taxpayers have to note that, juxtaposed to a regular cut in tax rates, the reduction in TDS/TCS rates, is nothing but a temporary relief in cash flows. This is because of the decrease in TDS rates, do not alter your ultimate tax liability.

Thus, any deficit in tax liability, due to reduced rate of TDS/TCS, should be payable through advance-tax instalments.

The first instalment for advance tax for FY21 is due on June 15, 2020, by when you are required to pay up to 15 per cent of your tax liability for FY21. Failure to pay such an amount can attract interest at the rate of 1 per cent per month each under section 234 B and 234 C.

In a recent ordinance, promulgated on March 31, 2020, the Centre, provided an additional window of 15 days for payment of the first instalment of advance tax. During this additional window, the rate of interest (under section 234 B and C) shall be 0.75 per cent per month. For delay beyond June 30, (after the expiry of the additional window) interest shall be levied at the rate of 1 per cent per month.

How big a relief?

The reduction in TDS and TCS rates was brought in to ease the liquidity in the country, by increasing cash in hand available for public (due to reduced taxes deducted upfront on their income).

However, Archit Gupta, Founder and CEO, ClearTax believes that, “its impact may be limited because persons making such payments—predominantly small business owners-- will have a tight rein on their expenditures and payments, given the current scenario.”

“Hence with reduced payments, the cut in TDS and TCS rates may not significantly impact the prevailing liquidity conditions. This is also because, ultimately, there is no change in the tax liability of these individuals” he added.

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Published on May 15, 2020
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