A re-look at TDS mechanism

IN MOST countries compliance with tax laws is the responsibility of the taxpayer. In India there is resistance to this principle because of fear of non-compliance and the voluminous work. Hence, there is heavy reliance on the TDS mechanism, leading to unnecessary paperwork for the taxpayers, the disbursing offices and the collecting banks. The Income Tax department itself has to collect data, certificates and reconcile the small, but numerous deductions. The numbers simply get multiplied with the increasing number of transactions in the economy.

Since PAN has been introduced, reference to which is mandatory for a wide variety of transactions, including opening of bank accounts, investments, money transfers, etc.; and simplification of tax laws and computerisation of tax collection is on, the department can monitor tax compliance effectively. The time is ripe for a change from TDS to taxpayers' compliance.

An offshoot of the prevalent tax rules is the complicated wage structures adopted by employers to circumvent the tax laws. It is time to streamline the IT rules governing payments to employees, for a simple and easily administered wage structure. Treatment of perks also needs better clarity.

A case in point is the cumbersome wage structure in banks. Bankers are front-runners in wage negotiations and settlements. Since the banking system bears the brunt of TDS work including the TDS on deposits, the lead for a change, to inspire confidence in the IT department, also should come from the bankers.

Looking from a different perspective there is also a need to bring down the cost of transactions, cutting down on all un-productive work. The administrative costs of making payments to employees are high both in terms of time and money. There are a host of allowances and reimbursements. There are allowances attached to various posts in supervisory cadre, cash department and to those working as computer operators, stenos, security staff, drivers, machine operators, cooks, electricians, care-takers, etc.

The most cumbersome part of the payments is the `reimbursements' — so named to escape the tax net. Reimbursement of petrol charges and conveyance expenses incurred for official duties, for clearing duties, split-hours/staggered duties, expenditure for entertaining customers, cost of newspapers, wages paid to domestic help, wages of personal drivers, cost of cleaning materials, supply of uniforms, shoes, socks, polish, etc., with different periodicities, are examples.

The burden of these payments is not the amount but the workload of scrutiny, processing, accounting and record keeping and the volumes of paper generated. Each and every payment has a supporting voucher or a certificate even for small amounts.

The plethora of provisions and the element of discretion that goes with them right down to a branch level, have led to their misuse, if not abuse, over the years. These have become instruments for dispensing favours or buying peace or for bargaining in negotiations on trivial matters, at various levels. These also have led to disputes and strained industrial relations. All such ad hoc payments should be abolished. As the objective is not to deny benefits to the employees but to rationalise the method of payment, a consolidated pay package including all the allowances and reimbursements should be evolved. But the main argument of the trade unions would be that tax burden would go up leading to erosion of real income.

Assuming the payouts to be of the order of 15 to 20 per cent of the salary outgo, the tax component, at an average rate of 20 per cent for different categories of staff, would mean 3 to 5 per cent increase in the wage bill, which can easily be a part of the salary package being negotiated. The benefits far outweigh the costs. The administrative costs and the workload will come down, not to speak of the benefits by way of removal of irritants in day-to-day functioning.

Employees should also welcome this measure, as, sooner than later, all such payments will be subjected to tax, when the tax reforms are fully in place.


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