TDS on Remuneration to the Partner: Government must understand that the Power to Tax includes Power to Destroy

 

The more the Government talks about simplification, the more complicated they make it. The more they talk about ease of doing business, the more complications they add to it.

This is not with any one Government or anyone political party. All are the partners in the crime. All ensures that they add their piece of complication & make the legislation more and more complicated. It all ensures that the life of taxpayers turns out miserable with each passing budget.

Payment of tax is not the punishment but the responsibility for the welfare state. No one now has any objections or reservation to pay the tax. But taxpayers do have a plate full of complaints when the law is introduced without considering the grass reality & practical issues involved over it.  Was it not the duty of the policy wing of the CBDT to have a discussion with the stakeholders (i.e., taxpayers) before introducing it in the parliament?

In the last few years, enormous compliance burden has been imposed on the taxpayers without any additional revenue benefit. One such most complicated provision in the recent past was the introduction of TDS provision for each and every purchase transaction under section 194Q or TCS on such transactions under section 206C(1H). Though the reporting of each and every bill details was already there with the Tax department through GST returns, an additional compliance burden has been imposed on the taxpayers as they have power to do so. Was it required?

Now, Budget – 2024 has proposed to add another section 194T in the Income Tax Act – 1961 to make the partnership firm do the TDS on the amount of salary, remuneration, commission, bonus or interest to a partner of the firm.

One may note that all these expenses are normally not finalized at the year end i.e., 31st March but are finalized at the time of filing income tax return. These are not actually considered as expenses but are in the nature of appropriation of profit for which specific deduction has been provided under section 40(b).

At the grass root level, everyone is aware of this fact except those in the North Block. While drafting the law & imposing any additional compliance burden on the taxpayers, they do not consider the facts & reality persisting at the grass root level. Latest result is the proposal to introduce section 194T.

Now, additional compliance is imposed without realizing the following facts:

1. Partnership firms at the time of filing the ITR are already reporting the amount paid to the partners and so section 194T is not for the purpose of ensuring income trail or to control the tax evasion.

2. Remuneration, interest, etc to the partner is finalized normally at the time of filing income tax return and not as on 31st March every year.

3. TDS @ 10% is going to result in the blockage of additional funds of the partner.

4. Computation of remuneration is dependent on “Book Profit” & various other amount which may be known to the firm only at the time of filing income tax return (like few deductions only if the amount is paid before the due date of filing ITR, etc) and so computation of exact amount of remuneration may not be permissible even as on 31st March even by strong efforts.

5. The payment or credit will attract the TDS without understanding the fact that the amount of such credit may not be allowable as deduction U/s 40(b). The taxability in the hands of the partner is governed by the allowability of the same in the hands of the firm U/s 40(b). If the amount is not allowable as deduction U/s 40(b), nothing would be taxable in the hands of the partner. However, the TDS provision as proposed and contained in section 194T provides for deduction on payment/credit without considering its allowability u/s 40(b). For example, the remuneration paid by the firm to the partner is Rs. 6 Lakh whereas the amount allowable works out to say Rs. 40,000/- only. In view of poor drafting of section 194T, TDS would be required on Rs. 6 Lakh i.e., TDS of Rs. 60,000/- as against actual taxability of mere Rs. 40,000/- in the hands of the partner.

Conclusion:

Above are just random thoughts while having just a cursory look at section 194T. There are numerous issues which will emerge from poor drafting of section 194T which I will discuss in subsequent issues of the Tax Talk.

One thing is sure that the power to tax includes the power to destroy. By making provisions like section 194T, 194Q, 206C(1H), lawmakers are doing everything to destroy the ease and constructive activities of the taxpayers. I won’t blame the bureaucrat alone who has drafted the illogical provisions but would blame the political bodies too who are elected by the people but fail to discuss it with them before placing it in the parliament. Hopefully, sooner or later, there will be a practice of “No Law without discussion”.