Budget 2026: Call for Comprehensive Reform of the TDS Framework

India’s tax deduction at source (TDS) framework, initially established to ensure consistent revenue and enhance tax compliance, has evolved into a complex system that burdens businesses with cash-flow challenges and legal disputes. Tax experts are now advocating for a thorough overhaul of the withholding tax provisions, highlighting the need for simplification amid an ever-expanding array of TDS rates and thresholds. The current system, characterized by rates ranging from 0.1% to 30%, has led to increased compliance errors and significant financial strain on taxpayers.

Complexity of the Current TDS Framework

The existing TDS and tax collection at source (TCS) framework is fraught with complications due to its numerous rates and thresholds. According to tax professionals, this complexity not only heightens the risk of compliance errors but also creates liquidity issues for businesses. Rohinton Sidhwa and Amit Bablani, partners at Deloitte India, emphasize that excessive withholding can lead to cash-flow constraints and necessitate additional administrative efforts to secure refunds. Data from the Central Board of Direct Taxes (CBDT) reveals a troubling trend: income tax refunds surged from ₹1.92 lakh crore in FY21 to ₹4.76 lakh crore in FY25, with a significant portion attributed to excess TDS and TCS. This situation has resulted in blocked working capital for businesses and increased interest liabilities for the government.

Proposed Reforms for Simplification

In response to the challenges posed by the current framework, the Finance Act of 2024 introduced some measures aimed at simplification. Notably, several TDS rates were reduced from 5% to 2%, and the TDS rate for e-commerce transactions was aligned with that of goods purchases and sales at 0.1%. However, tax experts argue that these changes do not address the underlying issues of complexity and lack of uniformity. A key reform proposal suggests leveraging the existing Goods and Services Tax (GST) framework to eliminate TDS and TCS for transactions where GST applies. This approach would utilize the robust invoice-level reporting mechanism already in place under GST, allowing the Income-tax Department to track transactions without imposing additional compliance burdens on businesses.

Streamlining Withholding Tax Provisions

To further simplify the withholding tax landscape, experts recommend consolidating the provisions into three broad categories. The proposed structure includes a 0.1% withholding tax rate for transactions involving the purchase of tangible goods or conducted through electronic platforms (if not subject to GST), a 2% rate for service transactions (if not subject to GST), and a 10% rate for residual transactions such as interest and dividends (if not subject to GST). Additionally, the requirement to issue TDS and TCS certificates is increasingly viewed as unnecessary, given that tax credits are now electronically reflected through Form 26AS and AIS. Eliminating this obligation could significantly lower compliance costs, particularly for small and mid-sized enterprises.

Shifting Towards Trust-Based Compliance

One of the more contentious aspects of the current TDS framework is the stringent prosecution provisions for delays in depositing TDS and TCS, which can result in penalties ranging from three months to seven years. Although the law allows for relief in cases of reasonable cause, industry feedback indicates that prosecution is often pursued mechanically, causing undue hardship for taxpayers. As India’s tax administration becomes more data-driven, experts advocate for a shift from excessive withholding and punitive measures to a trust-based compliance model. A streamlined TDS regime could alleviate cash-flow pressures, reduce litigation, and foster a more cooperative relationship between taxpayers and the government, ultimately benefiting both parties.

Observer Voice is the one stop site for National, International news, Sports, Editor’s Choice, Art/culture contents, Quotes and much more. We also cover historical contents. Historical contents includes World History, Indian History, and what happened today. The website also covers Entertainment across the India and World.

Follow Us on Twitter, Instagram, Facebook, & LinkedIn