Supreme Court rejects PIL calling TDS system ‘forced labour’

A bench comprising Chief Justice of India (CJI) Sanjiv Khanna and justice Sanjay Kumar dismissed the PIL under Article 32, stating that the petitioner could raise his grievances before the Delhi high court.

“You may have some points somewhere in the petition, but it is not properly drafted. You revise your petition and go to the Delhi high court first,” the bench advised advocate Ashwini Upadhyay, who had alleged that the current TDS framework violates several constitutional provisions, while imposing an undue burden on taxpayers without any remuneration for their efforts as tax collectors.

Rejecting the argument that TDS collection amounts to forced labour, the bench remarked: “TDS is collected worldwide, and no remuneration is paid by governments for such collection… The provisions have been upheld as constitutional by this court in earlier decisions too.”

TDS is a mechanism under which a specified percentage of tax is deducted by the payer at the time of making payments such as salaries, rent or contractual fees, and is subsequently deposited with the government. It is governed by the Income Tax Act, 1961, and serves as a tool for early tax collection, ensuring a steady flow of revenue to the government.

In his petition, Upadhyay had argued that the TDS framework places a disproportionate burden on assessees responsible for deducting and depositing tax. He contended that these taxpayers act as unpaid agents of the government, compelled to shoulder the operational costs, including staff salaries, professional fees and compliance expenses.

Upadhyay equated the imposition of tax collection duties without remuneration to forced labour, prohibited under Article 23 of the Constitution, lamenting the stringent penalties for non-compliance or errors, which include disallowance of expenses, interest at 18% per annum for delayed payments and even prosecution.

“TDS assessees perform the sovereign functions of the State, and this resembles an agent principal relationship where, normally, a principal must bear responsibility of the agent’s actions during the course of the work. But this is not seen in the plight of TDS assessees. They are unfairly held liable for interest, penalties, and prosecution even when the deductee (assessee) has fully paid the tax liability through other means (advance tax, self-assessment, or regular assessment),” stated the plea.

While TDS assessees face strict penalties, government assessment officers (AOs) are not subjected to similar accountability for errors, Upadhyay complained while contending that several countries provide compensation or incentives to entities responsible for tax collection, unlike India.

Even as the top court firmly rejected Upadhya’s statement that TDS constitutes forced labour, it acknowledged some merit in the arguments and advised Upadhyay to refine his petition and approach the Delhi high court. The bench, however, clarified in its order that it had not expressed any opinion on the merits of the petition.