One of the greatest feelings in the world is the message that tells you your salary for the month has been deposited in your bank account. But accompanying it usually, comes the slight irritation of having Tax Deducted at Source (TDS) cut from it every month.
TDS is a direct tax that is collected from the people at the time of payment like salary, rent, commission, etc. Essentially it’s a payment of tax cut from your salary before you ever receive it. The TDS collected is then transferred to a government account.
While TDS is rather taxing on a financially aware person’s mind, it has numerous advantages for the public. As tax deduction takes place throughout the year, it ensures a continuous flow of revenue for the government and is a great measure to prevent tax evasion. It also helps to increase the tax reach as it is deducted at the time of payment itself, preventing the committing of fraud.
I talk about this issue because, by some happenstance, my company ended up overpaying my tax last year. I have now filed for an income tax return to get the excess amount back, but it has been made clear to me to not expect my money back for the next few months at the earliest.
This made me think of the repercussions of cutting tax at source. They’ve held my money for the past 12 months and probably for another three to four more. Further, at no point in time was my consent asked when my company submitted my TDS. The government will obviously not be paying me interest for the money they’ve been holding. Ironically, the government is themselves earning interest on the money I earn.
I have to ask, exactly how is this fair.
Yes, I understand the concept of tax evasion, but as a salaried employee, I also know that the government has complete knowledge of my monthly salary. Tax evasion comes into play when the extent of my earnings are unknown to the government, and they have no means of reaching out to check if I have or haven’t paid full taxes based on my income.
Let us consider an alternative for a second, suppose I had paid my entire income tax that was due as per the government deadlines once every quarter. This would ensure that the government had a continuous stream of income, as the amount paid would be much larger and therefore, it would last longer. To satisfy my cause, it would also have ensured that the money I earned and was routed towards TDS, could have been invested by me otherwise.
To put this into perspective, most mutual funds in India give a return of 30% annually; the government holds let’s say ₹10,000 that got deducted as TDS for 15 months. This action has roughly cost me ₹4000 over this period. On a small scale this might not seem impressive, let’s expand it a little. For the fiscal year 2016-17, an estimated 28.2 million Income Tax Returns were filed. Let’s be conservative and say that 1% had a situation like mine. That’s a whopping ₹2820 million rupees of public money the government held on to. For the public, it is ₹1128 million lost as an opportunity cost for investors. In short, it is ₹2820 million in the hands of an inefficient government as opposed to ₹2820 million in the hands of consumers.
The contention by the government is that the money gained by the private households would be money lost by the government. They state that money held by the government can be used for public investment, which is crucial for the growth of the economy. While this is true, the economic and social impact of investment critically depends on its efficiency. According to a recent study done by the International Monetary Fund, around 30% of the potential benefits of public investment are lost due to inefficiencies in investment process on average. The size of the efficiency gap shrinks as income rises, with developing facing a gap of 40%, emerging markets facing a gap of 27%, and advanced economies facing a gap of 13% on average.
This combined with a household consumption demand which is still struggling to rise to pre-financial crisis levels would suggest that more money in the hands of individuals is required for spurring the Indian growth story. These are individuals whose consumption and investment patterns are what influence the economy of the entire country.
So how would the implementation of a quarterly system of tax payment affect the consumer? The effect, in my opinion, would start with there being more money in the hands of the everyday consumer. The major effect though would be the knock on effect of our increased consumption. Given more money we will buy more things, this, in turn, will put more money in the hands of more people who will also then pay more tax. This knock on effect will actually help our economy grow at a greater speed.
I do understand the importance of TDS in certain scenarios such as windfall gains where tracking the earnings of a person may be difficult for the government. However I find it deeply unfair when it’s applied to the salaried individuals already bearing the brunt of India’s tax burden; individuals for whom it would be virtually impossible to evade tax given that their salaries are known to the government and their PF’s held as collateral.