A high level panel on income tax laws' simplification today recommended an across-the-board raising of threshold limits for deduction of tax at source (TDS) and halving of the withholding tax in most cases.
The Justice (rtd) R V Easwar Committee in a 78-page draft also suggested levying lower short-term capital gains tax on annual earning of less than Rs 5 lakh from trading of shares and not treating it as business income, so as to attract small investors to capital market and cut litigations.
It also recommended timely refund with interest and also payment of higher interest in case of delayed refund.
Nearly 65 per cent of the personal income-tax collection was through TDS, provisions of which need to be made more tax friendly and not as 'tedious' as they have remained over the years, the 10-member panel said in the report.
It recommended "enhancement and rationalisation of the threshold limits and reduction of the rates of TDS" to 5 per cent from 10 per cent at currently.
Presently, TDS is applicable on "such tiny annual limits" of Rs 2,500 in case of payment of interest on securities and on interest on NSS accounts, Rs 5,000 for payment of interest on private deposits and commission or brokerage and Rs 10,000 for payment of bank interest.
"Considering the importance of the long overdue revision of these puny limits, the Committee has recommended suitable hikes in such threshold limits," the report said.
For interest on securities, it proposed raising the threshold for TDS to Rs 15,000 from Rs 2,500 annually and halving the tax rate to 5 per cent.
Similarly, for other interest earnings, the limit is recommended to be raised to Rs 15,000 from current Rs 10,000 for bank deposits and Rs 5,000 for others.
The panel recommended raising TDS limit for payments to contractors from current limits of 30,000 for single transaction and 75,000 annually to Rs 1 lakh annual limit.
The limit on rent income threshold for TDS is proposed to be raised from Rs 1.8 lakh annually to Rs 2.4 lakh. The threshold for fees for professional or technical services is recommended to be raised to Rs 50,000 from Rs 30,000 but TDS rate is proposed to be retained at 10 per cent.
The draft report of the 10-member committee contains 27 suggestions for amendments under the I-T Act and eight for reform through administrative instructions.
As regards refunds, the Committee recommended that
monthly interest on refunds should be payable at the rate of 1 per cent if the return is processed after six months or issued anytime after the end of the six month period.
It also suggested monthly interest of 1.5 per cent if the return is processed after 12 months from the end of the month in which the return is filed or issued anytime after the end of the said 12 month period.
"This will also prompt the tax administration to put its house in order to expeditiously settle payment mismatches, if any," it said.
However, one member was of the view that a penal interest rate of 18 per cent coming at cost of public exchequer is too high and not justified, the report noted.
The panel said that refund due should be issued to him within maximum six months from the month of filing tax return. But it gets delayed when a scrutiny notice is issued.
However, the Section 143(1D) of I-T Act says that processing of a return is not necessary, where a scrutiny notice has been issued to the assessee.
"It is, therefore, recommended that Section 143(1D) should be deleted with effect from June 1, 2016," the report said, adding that this delays refunds unnecessarily,
The committee further said that in some cases when an expenditure or deduction claim is not filed in I-T return, the Assessing Officer does not entertain such claims during the assessment proceedings.
It suggested amendment to I-T Act to provide an opportunity to the assessee to make a fresh claim during the assessment proceedings.
"However, such a claim should also be verified and any wrong claim made by the assessee should also be subject to penal provisions," it added.
The Committee suggested that non-residents not having PAN be allowed furnish tax identification number from the country of residence.
It also suggested doing away with the discretion given to tax assessing officer to classify equity trading income as business income or short/long term capital gains.
The move to make annual income of less than Rs 5 lakh made on equity trading as short-term capital gains would help reduce litigations and bring in more retail money into the stock markets, it said.
Tax on short term capital gains is levied at 15 per cent plus surcharge, while business incomes are taxed at maximum rate of 30 per cent plus cess.
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The committee further said that in case the shares are held for a period more than one year and shown as capital assets in I-T returns, then the surplus should be taxed as long-term capital gains. Long term gain on sale of shares is fully exempt from tax.
Addressing the vexed issue of Sec 14A disallowance, it has proposed that dividend received after suffering dividend- distribution tax as also share income from firm suffering tax in the firm's hands will not be treated as exempt income and no expenditure will be disallowed as relatable to them.
It also suggested that expenditure disallowed under Section 14A should not exceed the amount claimed as exempt.
The committee recommended introduction of a presumptive income scheme for professionals whereby the income from profession will be estimated to be 33.33 per cent of the total receipts in the previous year. In such cases total receipts should not exceed Rs 1 crore during a fiscal.
It suggested an increase in turnover limit for tax audit applicability from Rs 1 crore to Rs 2 crore for business and Rs 1 crore for professionals.
The panel has also recommended deferment of Income Computation and Disclosure Standards (ICDS) to provide more time to taxpayers grappling with regulatory changes such as Companies Act 2013, Ind-AS and the proposed GST.
Besides, it suggested that re-opening or revision of assessments under sections 147 and 263 respectively should not be made merely on the basis of audit objections.
Commenting on the move to levy short-term capital gains tax on income from share trading, Vikas Vasal of KPMG (India) said: "It would help avoid litigation in classification of gains, whether as business income or capital gains, arising from a transfer of securities".
Nangia & Co Managing Partner Rakesh Nangia said this will resolve the difficulty of taxpayers being required to prove their intention in acquiring shares before the tax officer.
Vasal said the recommendations seek to address many of the ground level issues being faced by the tax payers.
"Some of the procedural reforms on tax deduction at source and e-governance initiatives in the report, if implemented, will help improve the business sentiment in the country," he said.
The Committee was constituted on October 27 last year to study and identify the provisions/phrases in the Income Tax Act which have given rise to litigation on account of interpretative differences.
It was also meant to study and identify the provisions which impact the ease of doing business and identify the provisions of the Act for simplification in light of the existing jurisprudence.
The Committee was given a term of one year and the first batch of recommendations were to be submitted by January 31, 2016. The first draft report focuses on simpler issues that need immediate attention.
The feedback comments on the report have been invited till January 23, following which the committee will finalise the first part of the report by January 31.
