Increase in TDS revenue is a sign that compliance strategy is working

The department’s data shows that the share of TDS in gross direct tax receipts has increased from 32% in FY2015 to around 39% in FY22.

The government’s latest moves to widen the reach of the TDS regime include abolition of TDS exemption on interest payments for listed debentures and levy on online game winnings without a minimum threshold. Additionally, the FY24 budget has called for raising the rate of tax collected at source (TCS) on certain foreign remittances, such as the purchase of foreign tour programs, from 5% to 20%. Last year, the government also introduced 1% TDS on cryptocurrency trading. The data shows that the government collected 6.34 trillion through TDS in FY22, about 39% of gross direct tax receipts, almost as much 7 trillion collected through advance tax payments. a significant increase from 2.59 trillion was collected through TDS in FY 2015, which was 32% of gross direct tax receipts.

The comprehensive TDS net has also proved to be a one-shot for the tax authority in increasing monitoring 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 rationalised.

“Tax deduction at source, undoubtedly, goes a long way in establishing the 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, this leads to an adverse cash flow position. It may be a good idea to keep the TDS rate moderate to establish an audit trail without cash flow or working capital pressure on individuals or businesses, said Sudhir Kapadia, partner, tax and regulatory services at EY.

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

Apart from TDS, the department also uses third party information 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 the total tax receipts in FY2012, after trailing indirect taxes in FY2011.