The Budget season is upon us and the wish lists are ready. We have also heard all the right noises from the government, about how it wants to change the tax laws to make these simpler, stable and business-friendly.
I'd like to draw their attention to the area of income tax (I-T) refunds. On a gross tax collection of Rs 4.82 lakh crore for the nine months ending December 31, 2013, the tax refunds were Rs 66,000 crore, which brought the net collections to Rs 4.16 lakh crore (source: Government statement). Delay in I-T refund causes much heartburn among small businesses and individuals, and has led to much dissatisfaction for legitimate payers. Besides, the machinery to refund such large amounts imposes a cost on the government itself, apart from the interest payment required to be made to the tax payer.
One big reason for delay is the manner in which the finance ministry fixes revenue collection targets for officials, based on net tax collections. As a result, the assessing officers are incentivised to actually delay refunds, as they scramble to meet their net revenue collection targets. Clearly, the ministry needs to make sure the performance indicators for its officers are so fixed that it does not rate those who delay tax refunds as good performers.
The other issue, root cause of such large refunds, is the high rate of Tax Deducted at Source (TDS). For instance, all businesses in the services sector whose customers are other businesses are levied 10 per cent TDS. This rate assumes the business will earn a net profit of 33 per cent on gross fees. Here's how that works. On a gross fee of Rs 100, if the net profit after all expenses is Rs 33, then the tax payable at 31 per cent comes to Rs 10, the TDS. We all know very few businesses can hope to earn a net margin of 33 per cent.
The 10 per cent TDS was fixed in 1995 when business margins were much fatter than now. As a result, a lot of businesses have huge refunds pending with the I-T department. Things have improved a bit after electronic returns filing; now, refunds come faster. Still for many businesses, a major requirement for capital is to fund the TDS refund, which on an average takes two years to come. This acts as a big dampener for the smaller and loss-making businesses which don't have this capital.
Taxpayers have an option to approach the department for getting a certificate for deduction at source at a lower rate but the process is cumbersome and the certificate is granted based on the subjective opinion of officials, who anyway are instructed not to encourage such certificates. It is very difficult to get the certificate and leads to many opportunities for graft. Quite a few businesses are not even aware of such a provision for getting a certificate for lower TDS.
If the government is serious about making things easier for businesses, it should automate this existing process and allow taxpayers to choose the TDS rate based on their own estimation of the gross receipts and their tax liability, subject to a minimum rate of 0.1 per cent. The necessary certificate for a lower TDS should be granted automatically through the Tax Information Network (TIN), based on an online request from taxpayers.
The government will not lose revenue as no taxpayer will choose a lower TDS rate than what his profitability dictates, as it will lead to a significant interest payment when he files his tax returns. The TIN keeps track of the gross receipts payable to the taxpayer, and it will be easy for the government to keep track of any misuse of such a lower deduction of tax at source. All legitimate taxpayers will be delighted, as it will considerably ease their cost of doing business. The government will save the costs incurred on processing such large refunds, as well as interest payments on these, besides the enormous goodwill it will earn.
Of course, this will result in a lower net tax collection in the first year in which the scheme is introduced but it will stop having an impact in the later years, as refunds will come down proportionately. It is said a new chief executive has the best chance to show the real picture just when he has taken over. Similarly, Mr Jaitley can perhaps bite this bullet when he presents his maiden Budget in July and actually implement this taxpayer-friendly measure, without losing any revenue in the process.
The writer is chief executive officer, Apnapaisa.com
