Returns to TDS, Budget provisions have holes galore

Ideally, the Budget should be just a statement of government finances — a forum where the government shares with the public its past performance and vision for the future, and also the fiscal policy it intends to adopt for stability, growth, compliance and investment.

Customarily, however, the government has used the forum to also announce direct and indirect tax amendments.
This creates its own set of problems. Often times, it so happens that a particular rule gets modified but the consequent direct or indirect effect of this modification on some clause gets overlooked.

A case in point is Budget 2011, where the age threshold of a senior citizen was reduced from 65 years to 60 years for application of various tax slabs and rates of tax.
However, there were certain other provisions of the Income Tax Act where the qualifying age of a senior citizen remained unaltered at the earlier 65 years.

For example, Sec 80D of the Act provides for a deduction of up to `20,000 to a senior citizen in respect of the medical premium paid. Similarly, Sec 80DDB provides for a deduction of up to `60,000 to a senior citizen in respect of the medical treatment of specified diseases or ailments. Lastly, under Sec 197A(1C), a senior citizen can furnish Form 15H for requesting non-deduction of TDS on interest income etc.

In all of these provisions — sections 80D, 80DDB and 197A — the effective age for a “senior citizen” who can avail of the benefit remained at 65 years.

This led to the anomalous situation where a senior citizen had to be of a certain age (60 years) for determining his or her tax slab but of another age (65 years) for being eligible for the above mentioned deductions.

It is only now, one year later, that necessary amendments have been carried out in the Budget to make the effective age of senior citizens uniform across all the provisions of the Income Tax Act.
Similarly, there are certain provisions in the current Budget, too, where an amendment or change has been carried out but the consequent cascading effects on other elements of the law have been left unattended to.

Take the Budget proposal to provide a deduction in respect of savings bank interest up to `10,000. Salaried taxpayers, whose total income from salary and interest does not exceed `5 lakh, are exempted from filing tax returns provided their savings bank interest incomes do not exceed `10,000.

In other words, while the ceiling on the total income is `5 lakh, within this overall limit, there is a `10,000 sub-ceiling on the interest earned.

This leaves several questions unanswered.
Would a person be required to file a return if his savings bank interest is actually `20,000 but reduces to the required `10,000 on account of the deduction?

What happens in a case where the salary income is `5 lakh and savings interest is `10,000, making the total income `5.10 lakh and thus ineligible for the exemption from filing a return? Notably, in this case, on account of the new deduction on interest, the total income would reduce to `5 lakh. Then, would such a person be exempted from filing his/her tax return?

Here’s hoping the authorities will take early cognisance of this ambiguity as the time limit for filing tax returns begins from April 1.
Yet another area where a certain amount of confusion reigns is the provision where with effect from October 1, 2012, it has been made obligatory for the buyer of an immovable property, at the time of making payment to the seller, to deduct tax at source @ 1% of the sale consideration, if the same exceeds (a) `50 lakh where the property is situated in urban areas and (b) `25 lakh in other cases. There will be no registration of the transfer of such property unless the buyer furnishes proof of deduction and payment of TDS.

Now what happens in cases where the seller plans to save his capital gains tax liability by buying 54EC bonds? Or when the tax liability is sought to be avoided by reinvesting in a new residential property?

In other words, where the seller will not be liable to pay any tax by virtue of reinvesting the capital gain amount in approved assets, why should he suffer tax deduction at source at the hands of the buyer?
Of course, the way out could be for such a buyer to claim refund of the TDS, but everyone knows how prompt the tax authorities are in respect of issuing refunds.

Detailed rules regarding this provision haven’t yet been issued. Let us hope that when they are, this situation is taken care of by providing a process through which the seller can prevent a wrongful/ redundant at source deduction.

The writer is director,  Wonderland Consultants, a tax and financial planning firm, and can be reached at sandeep.shanbhag@gmail.com