TDS revenue rises in a sign compliance strategy works Apextalk


New Delhi: The income tax department is increasingly collecting a higher share of tax revenue from taxes deducted at source (TDS), suggesting that holding one party in a transaction accountable for tax collection and its deposit to the exchequer has ensured compliance.

The share of TDS in gross direct tax receipts has risen from 32% in FY15 to nearly 39% in FY22, data from the department showed.

The government’s latest steps in widening the reach of the TDS system include eliminating TDS exemptions on interest payments for listed debentures and imposing a levy on online game winnings without a minimum threshold. Additionally, the FY24 budget called for an increase in the rate of tax collected at source (TCS) rate from 5% to 20% on certain foreign remittances, such as the purchase of overseas tour programmes. The previous year, the government had also introduced a 1% TDS on cryptocurrency trading. Data reveals that the government collected 6.34 trillion via TDS in FY22, accounting for almost 39% of gross direct tax receipts, nearly as much as the 7 trillion collected through advance tax payments. This is a significant increase from the 2.59 trillion collected through TDS in FY15, which accounted for 32% of gross direct tax receipts.

Graphic: Mint

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Graphic: Mint

The widening TDS net has also proved to be a shot in the arm of the tax authority in stepping up its oversight of economic transactions and enhancing compliance.

Experts acknowledge the role played by TDS in tax compliance but believe that fewer transactions should be subjected to TDS and the rate rationalized.

“Tax deducted at source, no doubt, goes a long way in establishing an audit trail of transactions. To that extent, it is a good tool in the hands of the tax department. The challenge is that, in many cases, it leads to an adverse cash flow situation. It may be a good idea to keep the TDS rate moderate to establish an audit trail without causing a cash flow or working capital pressure on individuals or businesses,” said Sudhir Kapadia, partner at tax and regulatory services at EY.

Kapadia also said it might be a good idea not to have TDS where transactions are already tracked by other means, as in transactions between two GST-registered enterprises. Also, he said it may make sense to keep TDS moderate and have fewer categories.

Besides TDS, the department also uses information from third parties to map economic activity, which is shared with the taxpayer in the annual information statement (AIS) to enhance compliance.

Data from the tax department also showed that direct taxes accounted for more than half of overall tax receipts in FY22 after falling behind indirect taxes in FY21.

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