India’s tax deduction at source (TDS) framework, originally designed as a mechanism to ensure steady revenue inflows and improve tax compliance, has over the years become a source of complexity, cash-flow stress and litigation for businesses. With the scope of TDS expanding almost every year, tax experts argue that the time is ripe for a comprehensive rationalization of withholding tax provisions.At present, the withholding tax system is marked by a multiplicity of rates and thresholds. TDS and TCS rates range from as low as 0.1 per cent to as high as 30 per cent, depending on the nature of the transaction. This fragmented structure increases the risk of compliance errors, often leading to disputes, interest and penalties.“The current withholding tax framework involves multiple TDS and TCS rates, which creates significant complexity and an increased risk of compliance errors. Excessive withholding also results in liquidity constraints for taxpayers and additional administrative effort to seek refunds,” said Rohinton Sidhwa and Amit Bablani, partners at Deloitte India, in their pre-budget booklet. Data released by the Central Board of Direct Taxes (CBDT) underlines the scale of the problem. Income-tax refunds have risen sharply from Rs. 1.92 lakh crore in FY21 to Rs. 4.76 lakh crore in FY25. A substantial portion of these refunds is attributed to excess TDS and TCS, resulting in blocked working capital for businesses and higher interest outgo for the government.The Finance Act, 2024 took some steps towards simplification by reducing several 5 per cent TDS rates to 2 per cent and aligning the TDS rate to 0.1% on e-commerce transactions with that on purchase and sale of goods. However, tax professionals point out that the underlying structure remains cumbersome with lack of uniformity.One key reform proposal is to leverage the nationwide GST framework to reduce duplication. Since GST already provides a robust, invoice-level reporting mechanism, experts suggest that TDS and TCS should be eliminated for transactions where GST is applicable.Deloitte India recommends:Using GST to reduce TDS/TCS compliance: With the implementation of a Pan-India GST framework, a unified tax reporting system already exists. This can be effectively used to reduce TDS/TCS compliance. It is recommended that TDS/TCS be eliminated on all transactions where GST is applicable (per the invoice). The Income-tax Department can obtain information and track these transactions as needed by mandating an appropriate information return from suppliers. Suppliers are already filing such returns (GST returns), so there will not be any additional compliance.Simplified categorization of withholding tax provisions: Withholding tax provisions should be consolidated into three broad categories, as follows:
- For transactions involving the purchase of tangible/material goods and for transactions undertaken through an electronic medium/platform (if not subject to GST), a withholding tax rate of 0.1 percent can be prescribed without any threshold limit.
- For transactions involving the supply of any type of services (if not subject to GST), a withholding tax rate of 2 percent can be prescribed without any threshold limit.
- For residuary transactions, such as withholding tax on interest and dividends (if not subject to GST), a withholding tax rate of 10 percent can be prescribed.
Experts also flag the need to ease procedural burdens. The requirement to issue TDS and TCS certificates, for instance, is increasingly seen as redundant in an era where tax credits are reflected electronically through Form 26AS and AIS. Removing this obligation could significantly reduce compliance costs, especially for small and mid-sized businesses.Perhaps most contentious is the continued use of stringent prosecution provisions (Three months up to seven years) for delays in depositing TDS and TCS, even where taxes have been paid voluntarily along with interest. While the law provides for relief in cases of reasonable cause, industry feedback suggests that prosecution is often initiated mechanically, causing undue hardship.As India’s tax administration becomes increasingly data-driven, experts argue that the emphasis should shift from excessive withholding and penal action to trust-based compliance. A simpler, more predictable TDS regime could ease cash-flow pressures, reduce litigation and ultimately make tax compliance less adversarial—benefiting both taxpayers and the exchequer.
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