Budget 2010-11 has proposed a hike in threshold limits for deduction of tax from various payments including those to contractors, fees for professional or technical services, winnings from lottery or crossword puzzle and winnings from Horse Race.

The threshold limit for withholding tax of various payments are proposed to be raised to adjust for inflation and also to reduce the compliance burden of deductors and taxpayers, a Revenue Department official said.

The hike in threshold does not cover all payments for which tax deduction at source (TDS) is mandatory. However, the quantum of threshold increase has been at least 50 per cent for the payments that had been selected, the official noted.

The Finance Minister, Mr Pranab Mukherjee, had in his Budget speech noted that the threshold limits of payments below which tax is not deductible at source have remained unchanged for a long time and hence the proposed move to rationalise the thresholds.

In the case of payment to contractors, the threshold limit is proposed to be raised from Rs 20,000 to Rs 30,000 per transaction and from Rs 50,000 to Rs 75,000 (annual limit). For insurance commission, the threshold limit is proposed to be hiked to Rs 20,000, a four-fold increase from the existing limit of Rs 5,000.

For rent payments, the threshold limit is proposed to be increased to Rs 1,80,000 (Rs 1,20,000). In the case of fees for professional and technical services, the threshold limit is to be hiked to Rs 30,000 (Rs 20,000).

The threshold limit changes are to come into effect from July 1, 2010. No withholding of tax is required to be made if the payments do not exceed prescribed threshold limits.

The proportion of TDS to the gross direct taxes collection had been dwindling from a level of over 80 per cent in the late eighties to a level of about 27 per cent in 2007-08.

Although the direct tax pie had seen a remarkable growth ever since the economy opened up in the early nineties, the fall in the proportion of TDS to gross direct tax revenues was a source of concern for policy makers.

In 2007-08, the Government initiated a series of legislative and administrative steps on the TDS front, which seem to have paid some dividends.

From a level of 27 per cent in 2007-08, the proportion of TDS collections to gross direct tax revenues climbed to 30 per cent in 2008-09 and to 35 per cent in 2009-10. The steps include increase in the number of TDS commissionerates from 4 to 16 across the country.

Even as the threshold limits for withholding tax are proposed to be revised upwards, some tax experts reckon that the quantum of increase was marginal.

The cost of compliance for SMEs and small taxpayers is very high today. The proposed hike in threshold limits is marginal. The same holds true for the proposed increase in tax audit limit. It is very marginal when you consider that the earlier limits were introduced in 1984, Mr Aseem Chawla, Partner, Amarchand & Mangaldas, told Business Line.