TDS rates likely to be reduced

Even without making any changes in income or corporate tax rates, the government is likely to ease tax liability for large sections of industry soon by reducing the rates at which various tax deduction at sources are made. 
 
The reduction in the average rates of interest in the economy since the time when the current TDS rates were set has prompted the government to consider such a move. 
 
According to officials, since TDS is charged on the total receipts of an individual or a company and not on the actual income earned, at the current rates, the tax liability has grown disproportionately against the actual income earned by the entity. 
 
The reduction of TDS rates is expected to remove this anomaly. The step is significant because over 50 per cent of the annual income tax revenue earned by the department is accounted for by TDS returns. 
 
While industry has been making representations on the subject for quite some time, the unprecedented rise in direct tax revenue earned by the finance ministry in 2003-04 has given it the comfort zone to undertake the exercise. 
 
The ministry has, after a decade, crossed its enhanced revised tax receipts estimate to mop-up Rs 1,04,287 crore (Rs 1,042.87 billion), according to data available till April 15. This makes the ministry confident that in spite of the rationalisations it will not slip in meeting the tax mop-up target for 2004-05. 
 
As

per the Income Tax Act, in a large number of cases, before making any payment for any goods or services, the payee has to deduct TDS to be deposited by a challan to the tax department. 
 
For instance, in the case of salary earners companies use TDS at the applicable tax rates before disbursing the same to their employees. 
 
For others, TDS is deducted at the rate of 2 per cent for payments to contractors, 10 per cent on commission and brokerages, 15 per cent on rents, and 20 per cent on the income of foreign institutional investors from securities. 
 
The mechanism is used as a self-policing principle by the department to ensure that all transactions, where a tax liability emerges, are accounted for. 
 
Most of the TDS provisions from Section 193 to 197 of the Income Tax Act, 1961, were last changed in the mid nineties. But since then, the rates of interest in the economy have considerably come down. 
 
As a result, the profitability conditions have altered and it is felt that the TDS rates on various economic activities are on the higher side.