Budget 2023: Proposed amendments to the Tax Deduction at Source framework

Partner: Himanshu Sinha, Counsel: Aditi Goyal Associate: Aishwarya Palan

BACKGROUND

The concept of tax deduction at source (TDS) was introduced with the aim of collecting tax from the source of income. While TDS has been found to be a convenient way of expeditiously augmenting the collection of tax revenue and obtaining information about taxable transactions, it also adds to the compliance burden of taxpayers.

At present, there are over 30 different sections governing TDS on payments made to residents alone, and several other sections for payments to non-residents. TDS rates range from 0.1% to 40% and vary depending on several factors, including the nature of the payment, residential status of the payee, past tax filings made by the payee, etc. Many TDS provisions have been subject to interpretational disputes and challenges leading to protracted litigation.

As a result, the TDS framework has become increasingly complicated and cumbersome over the years. There was widespread expectation that the Finance Bill, 2023 (Bill) would rationalise the TDS framework to reduce the compliance burden and give a boost to the government’s efforts to promote ease of doing business in India. While the Bill has proposed some amendments with an intent to simplify and rationalise the TDS framework, certain proposals are expected to add to the complexity of the TDS regime. The key amendments are discussed below.

Key proposals under the Bill

1. Tax treaty relief to non-residents receiving income from mutual funds

Section 196A of the Income Tax Act, 1961 (ITA) provides for TDS at the rate of 20% on a non-resident’s income from the units of an Indian mutual fund or the Unit Trust of India. The Bill proposes to allow the payer to withhold tax at any lower rate that the non-resident may be entitled to under the provisions of the tax treaty between India and the country of tax residence of the non-resident, so long as the non-resident provides a valid tax residency certificate.

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