Simplifying TDS for Better Cash Flow in India
The 2026 Budget presents a vital opportunity for India to simplify the Tax Deducted at Source (TDS) framework. Currently, TDS accounts for a substantial part of the government's revenue, but it has become increasingly complex. This complexity results in significant cash flow strains for businesses, as they face compliance hurdles and the arduous task of constant reconciliation.
Recent Union Budgets have shown a clear intent to simplify the TDS structure while ensuring that revenue is safeguarded. For instance, the threshold for TDS on rent was raised from an annual limit of Rs 2.4 lakh to ₹50,000 per month, effectively tripling the threshold. Additionally, the withdrawal of Tax Collected at Source (TCS) on the sale of goods from April 2025 was a welcomed move, as it eliminated overlapping compliance requirements.
Further reforms, such as the Finance Act of 2025, have also contributed to easing cash flow pressures. The Act removed higher TDS/TCS rates for non-filers and allowed TCS to be adjusted against TDS on salary, thereby reducing refund-related issues. The forthcoming Income-tax Act promises clearer drafting for TDS/TCS provisions, supporting a more predictable withholding tax system.
Despite these positive changes, challenges remain. The TDS/TCS framework is still operationally demanding, with over 30 sections and varying rates ranging from 0.1% to 30%. Businesses must navigate multiple thresholds and classifications, increasing the risk of errors that can lead to excessive withholding and prolonged refund cycles.
Moreover, technology, while expanding compliance coverage, has introduced new complexities. Taxpayers often need to juggle between the Income-tax Portal and the TRACES portal for returns, challans, and credit tracking. Automated default notices from the CPC can create further administrative burdens, compounding taxpayer frustrations.
A clearer path forward lies in rationalizing TDS/TCS rates into three or four broad categories. This standardization could significantly reduce classification disputes and the risk of penalties for genuine compliance. Industry bodies like the CII have echoed the need for simplification, emphasizing the importance of a streamlined framework.
Aligning TDS with the Goods and Services Tax (GST), which is also anchored on PAN, could offer additional opportunities for compliance efficiency. Addressing operational issues such as delays in TDS certificate issuance and rectification backlogs could further bolster taxpayer confidence.
By leveraging technology and introducing clearer accountability frameworks, the government can facilitate a more efficient tax environment. Steps like removing TDS on payments to International Financial Services Centres (IFSC) units could support the growing GIFT City ecosystem, enhancing cash flow efficiency.
Ultimately, a more streamlined TDS architecture can deliver multiplier benefits across the tax system, reducing litigation costs and improving collections. The time is ripe for informed decisions that prioritize transparency, simplicity, and ease of compliance, benefiting taxpayers and the broader economic landscape in India.
