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Category: Is It Fair?

Is It Fair To Discriminate TDS Unfairly Over Advance Tax? The Curious Case Of Section 234B Of The Indian Income Tax Act

BACKGROUND

Section 234B of the Income Tax Act was introduced in the year 1988; It seeks to levy interest for non-payment of advance tax or payment of advance tax of an amount less than ninety percent of assessed tax.

However, Section 208 obligates the assessee to make payment of advance tax if the amount of advance tax payable is ₹10,000 or more. It defines the methodology of computing the advance tax and it gives credence to deduction of TDS while computing the advance tax to be paid.

It is further provided in Section 234B that where the pre assessment taxes (that is, total taxes paid during the financial year, prior to assessment that happens after the end of the Financial Year) paid are above 90 per cent of the finally assessed tax, no interest is leviable.

Also, Explanation 1 to Section 234B (extracted below) requires that TDS should be deducted while computing the advance tax payable as it recognises that TDS is part of the pre assessment tax.

[Explanation 1. – In this section, “assessed tax” means the tax on the total income determined under sub-section (1) of section 143 and where a regular assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of,1-any tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;

In this article, we shall see that the Department computes interest on advance tax deficiency by treating TDS differently by adversely discriminating it vis a vis advance tax payment, even though both (advance tax and TDS) are, factually, logically and legally, pre assessment taxes.

THE ISSUE:

The department treats TDS with disdain and advance tax as a superior one. The department has provided a 234B interest calculator. The hyperlink of that site is https://incometaxindia.gov.in/Pages/tools/interest-234a-234b-234c-234d-tool.aspx

The following example may be keyed in and you will find to your surprise that 234B interest is calculated for a pure TDS case, even where the TDS coverage is more than 90% of the required advance tax liability.

For readers, you may input this example:

Assessment year 2025-26
Interest payable under section 234B
Tax payable on total Income ₹2,54,043
TDS/TCS ₹2,42,352
Advance tax paid 0
Balance ₹11,691

On pressing CALCULATE button it computes interest of ₹696 up to 19th Sep. 2025 (i.e. ₹116/- per month from 1st April 2025 for six months).

Now repeat the above example but key in 0(zero) for TDS/TCS and ₹2,42,352 in advance tax (which again is more than 90% of the advance tax liability) row, the 234B interest is ZERO. Ta da!!

Looks like that for levy of penal interest, the term pre assessment taxes cover only advance tax (paid directly) and indirect payments of tax (Tax withheld from and remitted on behalf of the assessee, though made in the same Financial Year), are fully disregarded.

It is inconceivable in logic how such a discrimination is justified between two types of pre assessment taxes remitted to Government, in the same Financial Year; Ideally, both types of payment are to be treated as fungible and the duo must be taken together and given credit against the advance tax due for the Financial Year.

Another example:

A Corporate whose estimated advance tax liability is ₹1 crore pays advance tax, say ₹91 lacs leading to a deficiency is ₹9 lacs, will not attract Section 234B interest, as it has fulfilled the 90% pre assessment tax obligation. This residual amount of ₹9 lacs is greater than ₹10,000; No Section 234B interest liability is triggered. Thus, it is obvious the small tax payer undergoes the hardships of Section 234B. The small tax payers are busy with their daily lives and don’t have the wherewithal to understand nuances of advance tax payments; it is not right to penalise for non-payment of advance tax, when the TDS coverage is more than 90% of the total tax liability while filing the return of income.

Another reason to treat TDS and advance tax on par.

IS IT FAIR?

Where the residual tax payable is ₹10,000 or more, TDS remitted from the taxpayer’s money is treated with no respect, while Advance tax payments are considered superior.

Some statistics and big picture:

From CAG report

Report No. 14 of 2024 (Direct Taxes)

(Source: Income Tax Department Time Series Data for financial year 2016-17 to 2021-22 and Press Information)

“More than ninety per cent of the tax collection is through voluntary compliance by taxpayers. TDS and Advance Tax are significant contributors to the pre-assessment tax collections. The direct tax collection through TDS, Advance Tax and Self-Assessment Tax has consistently increased over the years (except in year 2019-20). While a significant part of the Direct Tax collections accrue from voluntary compliance, less than 10 per cent of the tax collections are made through post-assessment procedures. Composition of TDS and advance tax figures in the year 2021 were around 47 and 51 percent respectively in relation to total pre assessment taxes.

  • Taxpayers are expected to self-assess and pay their taxes. Tax is also deducted while making payments (TDS) and collected at source (TCS).
  • As of 2022, about 93% of income tax collection was at the pre-assessment stage. These involved collection through TDS, advance tax, and self-assessment tax.”

The interesting question is whether TDS, which is also, undoubtedly, a pre assessment tax, (whereby money is transferred from the taxpayer to the credit of Government during the Financial Year, albeit through a different process, that is by a third party) is on par with Advance tax or not.

It is a mystery how the logic of the department is justified. The discriminatory treatment meted out to TDS remitted from taxpayer’s money, ends up imposing additional taxes from assessees, in above mentioned cases. It is well recognised by the Judiciary that interest is compensatory and is linearly related to the period and quantum of the relevant cashflow withheld. Resultantly, the distinction between the two types of cashflows poured into the Government kitty (one through TDS remitted by third parties
and another by direct payment as advance tax) defies logic.

APPEAL TO GOVERNMENT AND CONCLUSION.

The Government should be fair and logical and hence treat TDS and Advance tax on the same footing. Both result in cashflow to the tax department from the taxpayer as part of preassessment tax payment.

To say more clearly, where more than 90% of taxes have been remitted/recovered in the aggregate, in the financial year (whether by advance tax payments directly by the taxpayer or TDS remittances on behalf of the taxpayer), the levy of interest is not justified in the ₹10,000 threshold cases. Therefore Section 208 (new Sections 404 and 405 of the new Income Tax Act, 2025) and 234B (Section 424 of the new Income Tax Act ,2025) need to be amended suitably to address the anomaly so that TDS will be treated on the same footing as advance taxes.

1 Revised estimates have been used for 2024-25.; Sources: Starred Question No 231, Lok Sabha, March 17, 2025; Budget documents; PRS

IS IT FAIR? INDIAN TAXPAYERS / SAVINGS CLASS AND THE PROPOSED ROLE OF REGULATORS AND MINISTRY OF FINANCE IN GIVING THEM JUSTICE

The purpose of this article is to highlight some injustices being meted out to the individual taxpayers / savings class by the regulators – the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) – along with the Ministry of Finance (MOF), and to stop / prevent the same

WHY TAX INCOME TWICE?
The first issue needing to be looked at is – ‘Why does income become taxable a second time when it has already been taxed ONCE?’ This becomes a matter of greater injustice when the individual (who is a salaried employee) retires and becomes a senior citizen. An employee earns salary income on which he has already paid income tax. He invests some savings in shares, debentures, bank fixed deposits and savings accounts. Why should income from these investments be taxed once again under Income Tax Law? He has paid Income Tax on his salary income. Just because there is a change in ‘Head of Income’, should the income become liable to taxation once again? Is there not a possibility that we are positively discouraging financial savings and perhaps encouraging savings in gold and property?

Why is Income Tax treatment differential – by nature of contributor?
Taking this argument a little further, why do we have an Income Tax differential on interest earnings? An employee invests in PPF / PF which gives him tax-free income at interest rates which are 7.00% +. PPF contribution cannot exceed Rs. 1.50 lakhs in the year. For the year 2021-22, it has been stated that PF interest income on an annual private employee’s contribution in excess of Rs. 2.50 lakhs and a government sector employee’s contribution of Rs. 5.00 lakhs will be taxable. Why this separation of private sector and Government sector employees? What is the logic guiding this differentiation? Why the favouritism to Government employees? Are not all taxpayers equal?

https://economictimes.indiatimes.com/wealth/invest/contributing-over-rs-2-5-lakh-in-epf-you-will-now-have-two-pf-accounts/articleshow/85825052.cms?frm=mailtofriend&intenttarget=no

Why are bank savings and fixed deposit interest rates not at par with other small savings interest plans?
What needs to be understood is why are bank savings and term deposit interest rates so low (between 4.00 – 6.00%) per annum? When small savings interest plans give interest rates around 6.00 – 7.00%, why are bank deposit interest rates so low? Also, except for a very low threshold of tax-free income, these interest earnings are taxable. Can RBI and the Ministry of Finance please explain why bank interest income to the taxpayer has such a low interest rate (and post-tax the rate drops further)?
If the Ministry of Labour is able to get tax-free interest on PF contributions at 7.00+%, why is RBI as regulator failing the bank depositors by accepting rates of interest lower than 6.00% and that, too, as taxable income?

The Table below shows the unfairness of interest taxability for individuals. The RBI and the MOF need to sit down and put an end to this unfairness:

Nature
of interest income

Rate
of interest – % per annum

Taxable
/ non-taxable income

Authority
in charge

PPF Interest (maximum annual
contribution R1.50
lakhs per person)

7.00%
+

Non-taxable

Ministry of Finance

Interest on PF accumulation

7.00% +

Mainly non-taxable (refer above para for new tax-free / taxable
contribution limit)

Ministry of Finance and Ministry of Labour (EPFO – Board of
Trustees)

Bank Savings and Term Deposit
accounts

<6.00%
mainly at most banks

Taxable after certain tax-free value

Reserve Bank of India and Ministry of
Finance

Debentures and company deposits

7.00 – 9.00%

Taxable

Ministry of Finance

Why are bank savings and term deposits getting such a raw deal on taxability considering that these are the favourite savings options of senior citizens? Net of income tax, these bank interest earnings don’t even cover the consumer inflation rate. Are we not penalising the savings class?

Why are savings and fixed deposits with banks not fully insured?
Another area where the RBI has let down bank depositors very badly is in the security of the deposits made by the individual savings class with banks. As regulator, it is the responsibility of RBI to take care of the interests of bank depositors (savings accounts and / or term deposits). Why cannot RBI mandate that all deposits should be fully insured by bankers? If the Deposit Insurance and Credit Guarantee Corporation of India cannot take the load, let this insurance arena be open to other domestic and foreign insurers. The MOF may need to step into this. If other small savings like PPF, Post Office savings, etc., are fully secured, why cannot deposits with banks be made fully secured (through insurance)?

This issue is a lot more complex on behavioural economics. Rightly or wrongly, Indians believe that their money is fully secured with nationalised public sector banks (PSBs). It would be a huge shock to 90% of individual depositors if they were told that they are secured only to a maximum of Rs. 5.00 lakhs per bank, per individual.

https://cleartax.in/g/terms/deposit-insurance-and-credit-guarantee-corporation-dicgc

This is inherently unfair and the RBI / MOF argument that the current limit of Rs. 5.00 lakhs covers 90% of the depositors’ population is misleading and unjust. Nobody should risk losing a major part of their savings just because effective risk mitigation steps are not taken. It is the responsibility of RBI and MOF to take these steps so that the individual savings class is protected. In my view, this would squarely fall in the RBI’s domain. It is RBI’s responsibility to get matters organised at the Government and Ministry of Finance levels.

Why is SEBI not confronting misuse of the dividend payout option by Mutual Funds AMCs?
Another preferred area of investment by the individual taxpayer is Mutual Funds – Dividend Payout option. This is obviously to get a steady stream of income, particularly by a senior citizen and retired individual.

However, there is a catch in these dividend payouts and SEBI needs to be mindful of the same.

https://www.business-standard.com/article/pti-stories/sebi-directs-the-renaming-of-dividend-options-of-mutual-fund-schemes-120100501347_1.html

What SEBI should address is the fact that the Mutual Fund AMC cannot distribute dividend that is more than the amount sitting in the difference between the market price and the cost of the units. SEBI has recognised that in certain instances there could be return of capital as dividend which is taxed in the MF holder’s hands. This is unfair. The illustration below will explain the position:
(a) Investments into the MF scheme (cost) – Rs. 10 lakhs;
(b) Dividend declared @10% – Rs. 1 lakh worth of units will be redeemed;
(c) Market value on dividend payout date – Rs. 12 lakhs;
(There is no problem in this since dividend payout is less than the MF units’ appreciation.)
(d) Alternatively, the market value on dividend payout date is Rs. 10.75 lakhs;
(In this case, dividend on MF unit appreciation is Rs. 75,000 and Rs. 25,000 is Capital Units redemption, total dividend Rs. 1 lakh).

In my view, this payout of Rs. 25,000 to the scheme’s unit holders by the AMC is wrong. The individual is also being taxed on Capital Redemption as Dividend. SEBI should actually mandate that dividend paid to the MF unit holder cannot exceed the appreciation of units in his folio. Therefore, in the second instance described above (d), only Rs. 75,000 can be declared as dividend, and thus the real dividend rate becomes 7.50% and not 10.00% for the scheme unit holder concerned. This enables the MF unit holder to take a view on continuing or discontinuing his investment in the scheme. In my opinion, SEBI has realised the problem, but needs to take it further for the sake of the individual investor.

Why the regulators must think of the individual as taxpayer and investor
It is the opinion of the writer that the regulators and the MOF must make the individual income tax payer central to their economic and financial plans. Both RBI and SEBI need to be very conscious of their responsibility to the savings / investing class. They cannot operate in the arena taking care only of the interests of banks / AMCs and totally ignore the individual’s interests.

(The author is grateful to the news links that have facilitated his understanding of the subject and helped develop his point of view)

 

 
 

IS IT FAIR TO INTERVENE WITH SEAMLESS FLOW OF INPUT CREDIT – RULE 36(4) OF CGST RULES?

BACKGROUND

GST has been rolled out in
India with one of its main features being bringing about a seamless flow of
input tax credit (ITC) across goods and services.

 

Provisions
of the Act related to ITC: The same are covered under
Chapter V of the Central Goods and Services Tax Act (CGST Act) and section 16
provides the criteria for eligibility and conditions for claiming the ITC which
are reproduced below:

 

‘(i)   he is in possession of a tax invoice or debit
note issued by a supplier registered under this Act, or such other tax-paying
documents as may be prescribed;

(ii)   he has received the goods or services, or both;

(iii)   subject to the provisions of section 41, the
tax charged in respect of such supply has been actually paid to the government,
either in cash or through utilisation of input tax credit admissible in respect
of the said supply; and

(iv) he has furnished the return u/s 39.’

 

Section 16 of the Act
entitles any registered person to claim ITC in respect of inward supply of
goods and services which are used or intended to be used in the course of business or
furtherance of business. Section 49 provides the manner in which ITC is to be
claimed. Section 49(2) provides that ITC as self-assessed in the return
of a registered person shall be credited to his electronic credit ledger in
accordance with section 41.

 

Further,
section 41(1) provides that every registered person shall, subject to such
restrictions and conditions as may be prescribed, be entitled to take credit of
ITC as self-assessed in the returns and such amount shall be credited on
provisional basis to his electronic credit ledger.

 

Section 42 provides for
matching, reversal and reclaiming of ITC by matching details of ITC furnished
in GSTR-2 with GSTR-1 of suppliers. It lays down the procedure for
communication of missed invoices with a facility for rectification of GSTR-1.

Due to technical limitations,
the process of filing GSTR-2 and 3 was suspended by the GST Council in its 22nd
and 23rd meetings. In the interim, the taxpayer was permitted to
avail ITC upon fulfilling the remaining conditions specified u/s 16, viz. valid
documents, actual receipt of supply, etc.

 

ISSUE

New Rule
36(4) inserted vide Notification No. 49/2019 with effect from 9th
October, 2019

The above-mentioned rule
relates to availment of input credit and was inserted in the CGST Rules
(reproduced below):

 

‘(4) Input
tax credit to be availed by a registered person in respect of invoices or debit
notes, the details of which have not been uploaded by the suppliers under sub-section
(1) of section 37, shall not exceed by 20 percent of the eligible credit
available in respect of invoices or debit notes the details of which have been
uploaded by the suppliers under sub-section (1) of section 37.’

 

As per the said rule, a
recipient of supply will be permitted to avail ITC only to the extent of valid
invoices uploaded by suppliers u/s 37(1) plus 20% thereof. In effect, the said
sub-rule provides restriction in availment of ITC in respect of invoices or debit notes, the details of which have not been uploaded
by the suppliers in accordance with section 37(1).

 

To clarify doubts, Circular
No. 123/42/2019-GST was issued on 11th November, 2019. It clarified
that the computation of the credit available as per the rule is required to be
done on a monthly basis, while computing the liability for the month and filing
GSTR-3B.

 

It was also clarified that
for the purpose of computation the auto-populate GSTR-2A as available on the
due date of filling of Form GSTR-1 should be considered and the balance credit
not appearing in the GSTR-2A can be claimed in succeeding months provided the
same appears in GSTR-2A

.

UNFAIRNESS

The registered persons who
have to file GSTR returns (GSTR-1) on a quarterly basis still need to make payment of taxes on monthly basis through Form GSTR-3B. GST, being a value-added
tax (VAT), a registered person is required to pay tax on his outward supplies after
taking credit of taxes paid on inward supplies. Thus, tax is payable on margin.
But the newly-inserted Rule requires the assessee to pay tax on outward
supplies and the ITC will be granted later on the basis of information uploaded
by the suppliers through their GSTR-1, which will be reflected in GSTR-2A.
Those who are filing GSTR-1 on quarterly basis, say for the months October, November
and December, 2019, the taxpayers will not have any credit and they will have
to make double payment of tax, i.e. once they have paid to the supplier and again they have to deposit with the government through GSTR-3B of
October, November and December, 2019. Although credit is not denied but it is
being postponed for three months. This is a huge drain on working capital for
all the taxpayers and more particularly on small and medium-sized businesses.

 

In the case of the SMEs and
MSMEs filing quarterly GSTR-1, the recipient would not be in a position to
claim ITC in respect of inward supply from them till return in GSTR-1 is filed
by them, although they are paying tax regularly every month. These enterprises
apprehend that because of this rule customers will prefer not to buy from them
and it will impact their existence and survival.

 

GSTR-2A is dynamic in
nature and is akin to moving the goalpost given the direct linkage to the
GSTR-1 filed by the supplier. The amount of ITC claimed vs. the amount reflected
in the ever-changing 2A with the books of accounts would result in a never-ending spiral of reconciliations.

 

GST returns are prone to
human error such as wrong punching of GSTIN, taxable amount, etc. for which the
amendment is required to be made in the following month’s GSTR-1 return. In
such cases, even if the claimant dealer has availed credit to the extent of the
amount reflected in the 2A on the due date of filing, a subsequent amendment by
the supplier can have severe consequences, even though the procedure was
followed correctly.

 

The Rule and the
clarification are silent on how they will operate vis-à-vis the invoices
pertaining to periods prior to October, 2019 which were uploaded by the
suppliers prior to October, 2019 but ITC on which is claimed post-October,
2019, and also vis-a-vis invoices between the 1st and the 8th
of October, 2019.

 

SOLUTION

Let the principle of
substance over form be followed. Let the GST return process be fully
implemented with all modules effective so that genuine credit is not denied.
Till then, Rule 36(4) be postponed and allow seamless credit flow.

 

CONCLUSION

IS IT FAIR?
In legal, commercial and compliance perspective

The present rules in
respect of ITC and furnishing details thereof in the return are not changed so
far. It is proposed to change new return provisions as contained in section 43A
from 1st April, 2020. The newly-inserted provisions of section 43A
provide for restriction of ITC maximum up to 20%. This provision is not yet put
into force and is proposed to be brought in from 1st  April, 2020.

 

Is it fair
on the part of the government to provide for restriction of ITC by 20% by
inserting sub-rule (4) in Rule 36?

 

As per law, currently there
is no requirement nor is there any facility to match invoices to claim ITC. So,
denying and restricting ITC by rule is contrary to the provisions of the Act,
particularly sections 38, 41 and 42.

 

GST law is stabilising, the
continuous tinkering with procedural aspects time and again creates confusion
and results in destabilisation.

 

Primarily, as per the new
section, ITC is available only for the entries appearing in GSTR-2A. For no
fault of genuine taxpayers, the ITC would be denied if it does not appear in GSTR-2A
which is out of his control and despite all valid documents on his records.

 

The government has not
appreciated the fact that a vast majority of the populace still has limited
access to technology and internet which are crucial for compliance. They are heavily
dependent on their consultants who are constantly battling with the frequent
changes in the compliance process; would they be able to cope with the
additional burden of matching credits?

 

Today businesses are
bleeding or working on paper-thin margins due to economic factors. How do they
survive if genuine credits are denied due to systemic issues?

How could ITC ever be
presumptive? What is the logic / basis of the 20% benchmark? Is it really
seamless flow of credit?

 

IS IT
FAIR? In broader perspective

India
recently moved to the 63rd ranking from 77th among 190
nations in the World Bank’s ‘Ease of Doing Business’ with a target to reach the
50th rank by 2020. Is it fair on the part of the law makers
to make frequent changes in the rules and compliances, small and sometimes
irrelevant, that cause a lot of stress to the business and professional
community, with escalating cost of compliances? Are we really on track to move
up to the 50th rank in ease of doing business?