Tax revenues form a large part of government revenues. The government levies and collects taxes in various forms. One common principle that everyone expects in any taxation system is that tax has to be paid by the person who is liable to pay tax. But governments have timely enacted laws and placed the burden on persons who are already under the tax net, to collect and pay tax on behalf of another person.
TDS/TCS: Widely referred to as Tax Deducted at source and Tax collected at source, the government has enlisted some payments and collections on which the person making or collecting payment is required to deduct a specified sum and pay it to government, on behalf of another person. TDS is deducted by the person making the payment and TCS is collected by person receiving the payment. Certainly, one who earns income has to pay tax and the payer would claim it as an expense. The requirement to comply with these provisions is largely on medium and big businesses who are making payments for salary, specific services, and for goods, to small traders or individuals. These serve a dual purpose for government, to keep a check on tax evasion and bring all such people under the tax net.
The list of such payments and collections seems to be growing year by year. Recently, this list has also included several high sum payments for personal purposes like rent, contracts, purchase of immovable property, etc.
GST Reverse Charge: Under GST, liability to pay falls on the person supplying goods and services. But in some cases, the government has asked receiver of goods or services to pay tax on behalf on the supplier. One classic example is goods transportation service. In India, logistics industry is largely unorganized and fragmented. A large number of transporters are truck owners owning fewer trucks. It would be very difficult for the government to bring them under tax net and would be more convenient to place liability on service receiver since all the businesses in some way would require goods transport service and the sector at large would not escape tax net. Government has listed number of such goods and services on which reverse charge is applicable. In most of the scenarios, supplier of goods or services are in industry, which is unorganized, or in which there are many small taxpayers in that industry.
To our relief, the government has not yet notified reverse charge on purchases from unregistered suppliers, which could prove to be a big burden on businesses.
TCS on ecommerce: All the ecommerce operators are required to deduct a specific percentage of the sum when making payments to sellers of their e commerce marketplace. There are handful of big ecommerce operator like Amazon, Flipkart, Meesho, etc. while sellers on such network are more than one million. The deducted amount is paid to the government and sellers could claim it as credit against their GST liability. Here, government easily brought all the sellers under tax net just by putting additional compliance burden to a few ecommerce operators.
Reporting of SFT: Government has notified list of transactions, such as cash deposits in banks, credit card payments by cash, transactions in immovable property, etc. which are required to be reported in notified forms by specified persons. These measures are often undertaken to track unaccounted income by detecting any mismatch or unusualness with tax returns and initiate proceedings against them. It often proves quite vital for tax authorities.
Effectiveness of such measures: The form of withholding of taxes is prevalent in many countries, given it could really be difficult to collect taxes from the one who is liable to pay tax at times due to various reasons. But to what and how far these laws should go is a big question. Government has often cited the reason for increase in TDS/TCS compliance as to bring more people under tax net and trace the transactions. If the real reason is to trace transactions, we could conveniently follow systems applicable in other countries where payments above a certain threshold are just required to be reported to tax authorities in specific forms and there is no deduction liability on payer.
Such a higher compliance burden on already compliant taxpayers proves burdensome, and tax authorities often see this as a first and very convenient step in effective tax administration, but the bigger question here is whether next steps are effectively followed by tax authorities. In this data driven world, it is very easy for tax authorities to collect data of taxpayers and catch unscrupulous transactions.
Underlying rationale: The underlying rationale for these higher compliance measures on bigger taxpayers is quite appealing when we look it from the lens of small business owners and taxpayers. But this should serve as a starting point and the government’s primary job is make full use of it in effective and efficient tax administration; otherwise this proves to be of little to no value. A number of recent measures have brought a lot of people under the tax net, both direct and indirect tax. But if the government keeps rewarding people who comes under the tax net with more compliance as a substitute of effective tax administration, I’m not sure how effective these measures would prove in the longer run.
Disclaimer: The article strictly contains personal views of the author and is not intended to be taken as professional advice. The article reflects the law as applicable on the date of the publication, and the author is in no way liable to intimate any further changes as applicable from time to time.