A wide variety of tax deduction at source (TDS) provisions applicable to payments to residents with different rates and different thresholds have given rise to unwarranted characterisation disputes, industry stakeholders point out.
The TDS related disputes continue in spite of several attempts by the government to find a solution. The most problematic area is the TDS applicable on fees on technical services (FTS) and fees on professional services (FPS). While TDS on FTS is 2%, it is 10% for FPS.
“Currently, there are 31 sections dealing with different types of payments to residents where the TDS rates vary from 0.1% to 30%. In some sections, there are varying rates of TDS depending upon status of payees or nature of payments. The wide variety of TDS rates creates confusion for the taxpayers, increases compliance burden and gives rise to characterisation disputes. For instance, there is ambiguity on bright line test to distinguish between FTS and FPS, says industry chamber CII.
Incidentally, The Finance Act, 2020 had reduced the TDS rate under section 194J to 2% (from 10%) in case of FTS payments. The Explanatory memorandum to the Finance Bill, 2020 stated that the amendment is proposed since there are large number of litigations on the issue of short deduction arising out of characterization dispute between section 194C and section 194J of the Act.
However, it resulted in a new litigation in the form of distinction between professional services and technical service. Industry chamber Ficci says that “such selective amendment for providing lower rate only for FTS payments is in direct conflict with the rationale in the Explanatory Memorandum that it is intended to avoid litigation on short deduction issues”. Ficci also points out that the issue persists in case of individual and HUF (Hindu Undivided Family) as TDS rate for individual and HUF under section 194C of the Act is 1% while the rate of TDS under section 194J of the Act is 2%.
The industry chambers are hoping that the forthcoming Union Budget will reduce the number of TDS categories and also bring in uniform rates for FTS and FPS.
“With all TDS information getting captured in Form 26AS/AIS of the deductees, it is easier for the government to collect the balance taxes from the resident taxpayers. Hence, the government may consider laying down a roadmap for reducing the disparity in TDS rates by having only two or three categories of payments and a small “negative list” of payments which will not be liable to TDS”, CII suggests.