India Considers Major TDS Overhaul for Budget 2026
Overview
India's Tax Deducted at Source (TDS) system faces a proposed overhaul for Budget 2026. Experts highlight current complexity, multiple rates, and blocked working capital due to excess deductions, citing a sharp rise in income-tax refunds. Proposals include leveraging the GST network to streamline compliance, consolidating rates, and eliminating physical certificates, aiming to ease business burdens and reduce litigation.
India's tax administration is contemplating a significant overhaul of the Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) framework for Budget 2026. The current system, initially designed for revenue assurance, has evolved into a complex maze for businesses, causing cash-flow issues and increasing litigation.
Complexity and Cash Flow Strain
The existing withholding tax regime is plagued by a multiplicity of rates and thresholds, ranging from 0.1% to 30%. This fragmented structure breeds compliance errors and disputes. Rohinton Sidhwa and Amit Bablani, partners at Deloitte India, noted that "excessive withholding also results in liquidity constraints for taxpayers and additional administrative effort to seek refunds."
Refunds Surge as Indicator
Data from the Central Board of Direct Taxes (CBDT) illustrates the scale of the problem. Income-tax refunds have surged from ₹1.92 lakh crore in FY21 to ₹4.76 lakh crore in FY25. A significant portion of these refunds is attributed to excess TDS and TCS, tying up valuable working capital for businesses and increasing the government's interest payout. Tax professionals argue that despite recent simplifications, the fundamental structure remains cumbersome.
Proposed Simplification Measures
Key reform proposals center on aligning the tax system with the Goods and Services Tax (GST) network. Experts suggest eliminating TDS and TCS for transactions already covered under GST, leveraging the existing invoice-level reporting. This would reduce duplication without adding compliance burden, as suppliers already file GST returns.
Leveraging GST and Rate Consolidation
Deloitte India recommends mandating information returns from suppliers to track transactions. A simplified categorization of withholding tax provisions is also proposed: a 0.1% rate for tangible goods and electronic platforms (excluding GST), 2% for services (excluding GST), and 10% for residual transactions like interest and dividends (excluding GST).
Easing Procedural Burdens
The mandate to issue physical TDS and TCS certificates is deemed redundant, given the electronic tracking via Form 26AS and AIS. Eliminating this requirement could significantly cut compliance costs, especially for small and medium-sized enterprises.
Shift to Trust-Based Compliance
Furthermore, experts are flagging the need to reform stringent prosecution provisions for delays in depositing TDS/TCS, which often cause undue hardship despite voluntary payment with interest. As tax administration becomes more data-driven, the focus is shifting from excessive withholding and penalties towards trust-based compliance. A simpler TDS regime promises to ease cash-flow pressures, reduce litigation, and foster a less adversarial tax environment.
