Addressing the liquidity issue of many micro, small and medium enterprises (MSMEs), the government has decided to reduce the rates of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) by 25 per cent of their existing rates.
This will release Rs 50,000 crore additional liquidity for businesses, says Finance Minister Nirmala Sitharaman while announcing the first tranche of the Rs 20 lakh-crore stimulus package on Wednesday.
According to the announcement made by the finance minister, payment for contract, professional fees, interest, rent, dividend, commission, brokerage, etc. will be eligible for this reduced rate of TDS. This reduction comes into effect immediately and will be applicable for the remaining part of the 2020-21 that is from tomorrow to 31 March, 2021.
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TDS is an advance tax paid by the receiver of payments like rent, commission, professional fees, salary, interest etc. TDS is collected by the person making such payments on behalf of receivers and then submitted to the government. TDS is charged as a percentage of the total payment and it varies between 10 per cent and 20 per cent.
On the other hand, tax collected at source (TCS) is an additional amount collected as tax by a seller of specified goods from the buyer at the time of sale over and above the sale amount and is paid to the government. TCS is levied on sales of goods like jewellery, motor vehicles, coal lignite, bullion, etc.
Tax experts have questioned the need for high TDS rates since a large part of it is refunded increasing the efforts of both taxpayers as well as that of the government. Apart from this, it also creates liquidity crunch for many professionals and small businesses.
Tripti Somani, CEO of Chartered Accountancy firm KGS Advisors, says over the last few years, government has reduced Income tax rates, but TDS rates have not been reduced in tandem. "As witnessed in the case of MSME/start-up space, where they have lack of profits, high TDS rate has resulted in most businesses and Start Ups staring at huge income tax refunds, which keep piling up over time," she says.
Though this is a temporary relief, tax experts have welcomed the move saying this will leave more money in the hands of taxpayers.
Archit Gupta, founder and CEO, ClearTax, says: "While reduction in TDS rates will put some money in the hands of taxpayers, they will have to exercise more caution at the time of payment of self-assessment tax and compute it accurately. Ultimately, they will pay tax at the rates applicable to them, only a short-term reduction in tax deducted at source."