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The System of Tax Deduction at Source (Tds) : Coverage, Functioning and Suggestions for Reform

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The System of Tax Deduction at Source (Tds) : Coverage, Functioning and Suggestions for Reform THE SYSTEM OF TAX DEDUCTION AT SOURCE (TDS) : COVERAGE, FUNCTIONING AND SUGGESTIONS FOR REFORM Parthasarathi Shome Pawan K. Aggarwal Kanvvarjit Singh December 1996 NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY 18/2 Satsang Vihar Marg, Special Institutional Area New Delhi 110067. Preface This report forms a part of a series of reports being prepared at the National Institute of Public Finance and Policy (NIPFP) under the sponsorship of the United Nations Development Programme (UNDP) on tax administration at the Central, State and local government levels. This particular study on the scheme of tax deduction at source (TDS) of selected incomes at the Central government level examines the TDS structure in India, draws conclusions and makes apporpriate recommendations. A review of the relevant literature was undertaken. However, the study is based primarily on field visits to TDS offices of the Income Tax Department in Bangalore, Calcutta, Mumbai and New Delhi. Lessons from international experience were also drawn from meetings with Indonesian, Malaysian, and United States tax officials. The Governing Body of the Institute does not bear any responsibility for the contents or views expressed in the Report. That responsibility lies mainly with the authors. New Delhi, Parthasarathi Shome December 1996 Director Acknowledgements The study team has had the benefit of discussions on the operation of the scheme of tax deduction at source (TDS) in India, Indonesia, Malaysia and the United States with selected income tax officials of the respective countries. In India, the study team visited income tax offices at Bangalore, Calcutta, New Delhi, Mumbai, and interacted with various officials including: Mr. D. Lakshminarayana, Chief Commissioner of Income Tax, Bangalore Smt. Vijaya Mohanram, Commissioner of Income Tax, Bangalore Mr. Shekhar Reddy, Deputy Commissioner of Income Tax, Bangalore Mr. Sanjay Verma, Computer In-charge, Bangalore Mr. Samarpan Banerjee, Commissioner of Income Tax, Calcutta Mr. K. Dehia, Commissioner of Income Tax, Calcutta Mr. G. S. Sidhu, Chief Commissioner of Income Tax, Mumbai Mr Damodar Agarwala, Commissioner of Income Tax, Mumbai Mr. C. M. Betgiri, Commissioner of Income Tax, Mumbai Mr. D. P. Panta, Commissioner of Income Tax, Mumbai Mr. S.K. Goyal, Commissioner of Income Tax, New Delhi Mr. S. Zafar Mehmood, Deputy Commissioner of Income Tax, New Delhi In Indonesia, meetings were held with the following officers from the Inland Revenue Department: Dr. Fuad Bawazier, Director General of Taxation, Jakarta Dr. Sakli Anggoro, Director Taxation, Jakarta Dr. Nuryadi, Director Information, Jakarta Dr. Made Gde Rata, Director Tax Planning, Jakarta Dr. Rahmanto Surahmat, Director International Taxation, Jakarta Dr. Achmad Sjarifuddin Alsah, Deputy Director Corporate Income Taxation, Jakarta Dr. Amri Laman, Deputy Director of Corporate Auditing, Jakarta Dr. Zulfikar Thahar, Deputy Director of Corporate Auditing, Jakarta Dr. Mayun Winangun, Deputy Director of International Affairs, Jakarta In Malaysia, group meetings were held with the officers of different divisions of the Inland Revenue Department headed by: Encik (Mr.) M. Selveindran, Assistant Director General, Operations Division, Kuala Lumpur Encik (Mr.) K. Arul Jothi, In-charge Assessment Division, Kuala Lumpur Encik (Mr.) Ganeshan, In-charge Quality Control Division, Kuala Lumpur Mrs. Aisha Dewi, In-charge Tax Collection Division, Kuala Lumpur Mrs. K. Wing, Kuala Lumpur In the United States discussions were held with the following Internal Revenue Service (IRS) officials and Fiscal Affairs Department (FAD), International Monetary Fund (IMF) staff members: Mr. Dee Ann C. Martiner, International Visitors Program, Tax Administration Advisory Services, IRS Mr. Dee Indovina, Collection Department, Back-up Withholding, IRS Mr. David Levine, Computer - Unreported Income and Back-up Withholding, IRS Mr. Gail S. Libin, Program Analyst, Compliance, Collection, Accuracy and Perfection Program, IRS Mr. Peggy Pierson, Compliance Department, IRS Mr. Nancy Wilson, Program Analyst, Compliance, Exim, Speciality Taxes, Employment Tax Program, IRS Mr. Clearance Wallser, Program Analyst, Collection Department, IRS Mrs. Milka Casanegra, Assistant Director, Tax Administration Division, FAD, IMF Mr. Carlos Silvani, Advisor, FAD, IMF Mr. Emil Sunley, Assistant Director, FAD, IMF Mr. Koenraad van der Heeden, Senior Economist, TAD, IMF We are grateful to all these officials for their cooperation and useful discussions which provided valuable input for the study. We also acknowledge detailed comments provided by Dr. A. Bagchi, Emeritus Professor, NIPFP on an earlier draft of the study. Excellent secretarial assistance was provided by Smt. Rekha Manral and Shri R. Parameswaran. c:\tds\semi-fnl\tds-ack.wp\30.12.96 Contents Page Preface Aknowledgements Executive Summary : Findings and Recommendations i Main Findings ii ■ Revenue significance of TDS ii ■ Structure of the scheme of TDS iii ■ Coverage of the scheme of TDS iii ■ Implementation iii Recommendations iv ■ Identification of non-filer deductors v ■ Detection of non-filer taxpayers v ■ Identification of bogus exemption claims v ■ Checking of annual returns of TDS vi ■ Verification of TDS claims of individual taxpayers vi ■ Computerisation of TDS work vi ■ Refunds vii ■ Internal reporting system vii ■ Legal provisions viii ■ Extending the coverage of TDS viii Chapter 1: Introduction 10 Chapter 2: TDS: General Principles and Evidence from the Literature 12 2.1 Links to Tax Evasion 12 2.2 TDS: Advantages and Disadvantages 13 2.3 Evidence from Cross-country Literature 15 Chapter 3: Tax Deduction at Source in India 17 3.1 Overview 17 3.2 Salient Features of the Scheme of TDS and A Critical Evaluation 18 3.2.1 Depositing the tax deducted/collected with the government 19 3.2.2 Issuing of Certificates of TDS 19 3.2.3 Tax returns/statements to be filed by tax deductors 20 3.2.4 TDS at lower rates or no TDS in certain cases 21 3.2.5 Penalties on and prosecution of deductors in default 21 Page 3.3 Revenue Significance of TDS 22 3.3.1 Impact of refunds 27 3.3.2 Coverage of the scheme of TDS: a comparison 28 3.4 Past Experience 29 3.4.1 Salaries 29 3.4.2 Interest on securities 31 3.4.3 Dividends 32 3.4.4 Interest other than interest on securities 33 3.4.5 Winnings from lottery, crossword puzzles or horse racing 35 3.4.6 Payments to contractors and sub-contractors 35 3.4.7 Commissions, payments to non-resident sportsmen or sports associations and certain withdrawals 39 3.4.8 Commission or brokerage relating to sale of goods 40 3.4.9 Rental income 40 3.4.10 Fees for professional or technical services 41 3.4.11 Income of non-residents 41 3.4.12 Collection of tax from purchasers of specified goods 42 3.4.13 Common problems in implementation 43 Table 3.1: Collections of Income Tax and Tax Deduction at Source 23 Table 3.2: Collections of Income Tax and Tax Deduction at Source from Companies 24 Table 3.3: Collections of Income Tax and Tax Deduction at Source from Non-Companies 25 Table 3.4: Tax Deduction at Source by Sources of Income 26 References 46 Appendix I: Income Tax System of India With Special Reference to Tax Withholding at Source 47 1.1 Coverage of the Scheme of TDS 47 1.2 Characteristics of the Scheme of TDS 54 1.2.1 Depositing the tax deducted/collected with the government 55 1.2.2 Issuing Certificates of TDS 56 1.2.3 Tax returns to be filed by tax deductors 57 1.2.4 TDS at lower rates or no TDS in certain cases 58 1.2.5 Penalties on deductors in default 62 1.3 Experience with Prevailing Scheme of TDS 64 1.3.1 Salaries 64 1.3.2 Interest on securities 68 1.3.3 Dividends 69 1.3.4 Interest other than interest on securities 70 Page 1.3.5 Winnings from lottery, crossword puzzles or horse racing 73 1.3.6 Payments to contractors and sub-contractors 74 1.3.7 Commission on insurance and sale of lottery tickets 78 1.3.8 Payment to non-resident sportsmen or sports associations 78 1.3.9 Certain withdrawals and repurchase of units 78 1.3.10 Commission or brokerage relating to sale of goods 79 1.3.11 Rental income 80 1.3.12 Fees for professional or technical services 80 1.3.13 Income in respect of units of Mutual Funds 81 1.3.14 Income of non-residents 81 1.3.15 Income of overseas financial organisations 82 1.3.16 Income of non-residents from bonds or shares 83 1.3.17 Income of foreign institutional investors 83 1.3.18 Collection-of tax from purchasers of specified goods 83 Box 1.1 Structure of Income Tax Deduction at Source in India (Financial Year 1996-97) . 48 Box 1.2 Time and Mode of Payment of TDS to the Government 55 Box 1.3 Form Numbers and Time Limites for Issuing Certificates of TDS 57 Box 1.4 Schedule of Filing Returns of TDS 59 Box 1.5 Application Forms for Obtaining Certificates for TDS at Lower Rates 60 Box 1.6 Declarations for Receiving Payments without TDS 61 Box 1.7 Penalty/Prosecution Structure for Defaulters 63 Appendix II: Income Tax System of Indonesia With Special Reference to Tax Withholding at Source 85 II. 1 Introduction 85 11.2 Salient Features of the Income Tax System of Indonesia 87 11.3 Tax Withholding at Source 88 11.4 Audit Process in Indonesia 93 11.5 Information System in the Department of Inland Revenue 95 11.5.1 Identification of non-filers 99 11.5.2 Cross verification of information 99 II.6 Concluding Remarks 99 Box II. 1 Structure of Tax Withholding at Source in Indonesia 89 Chart II. 1 : Audit Process in Indonesia 94 Chart II.2 : Information System of Indonesia 96 Chart II.3: Flow of Information 97 Page Appendix III
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