What do the Scientific Periodic Table and TDS and TCS rules under the Income Tax Act have in common? Both are remarkably complex frameworks, each containing essential building blocks. Understanding both requires specialised knowledge and careful application. The Periodic Table enumerates 118 chemical elements, while current TDS and TCS rules have over 60 sections and at least 10 different tax rates. This is despite certain rationalisation of TDS and TCS rates made in Budget 2024.Tax Deducted at Source (TDS) provisions were introduced under the Income Tax Act to ensure a consistent revenue stream for the Government while capturing taxpayers’ transactional footprints. However, constant amendments in TDS laws and the expanding scope of these rules over the years have led to significant compliance challenges, increased litigation, and confusion among taxpayers.
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The Union Budget 2025 presents a crucial opportunity to streamline and simplify TDS and TCS rules, enhancing clarity, reducing disputes, and fostering a more business-friendly environment. Below are some key changes the Government should consider streamlining the TDS provisions in Budget 2025.
Standardise TDS rates to minimise confusion
Multiple TDS rates across various transactions often confuse tax deductors. Introducing a streamlined structure with standardised rates can significantly reduce this complexity and enhance compliance.
To address this challenge, the Government should consider implementing a three-tier TDS rate structure:
- Minimum TDS Rate of 1%: The TDS rate of 1% should apply to transactions aimed primarily at capturing transactional footprints of taxpayers, such as cash withdrawals from banks, property sales and high-value financial transactions.
- Maximum TDS Rate of 30%: The maximum TDS rate of 30% is suitable for income that is taxable on a gross basis, such as winnings from lotteries or online gaming, salary income, etc.
- Moderate TDS Rate of 10%: The TDS rate of 10% should apply to all other cases, such as passive income, TDS on interest from fixed deposit or income taxable on a net basis.
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Create a consolidated schedule of TDS Rates
Currently, TDS rules are scattered across various sections of the Income-tax Act. This results in confusion and makes it challenging for taxpayers to scout the correct section and applicable TDS rate for specific transactions.To address this issue, the Government should replace the multiple TDS rules with a single comprehensive law. Within this law, the Government should be empowered to introduce a consolidated schedule specifying TDS rates and thresholds for various transactions, providing a single reference point for deductors and taxpayers.
Additionally, through notifications, the Government should be empowered to prescribe new transactions along with corresponding TDS rates and thresholds. This flexibility would eliminate the need to amend the Income-tax Act each time a new transaction is brought under the TDS ambit.
Address Common Disputes in TDS rules
Litigation around TDS rules often arises due to ambiguities regarding GST components, out-of-pocket expenses, and year-end provisions. Currently, these issues are addressed primarily through circulars and case laws, leading to inconsistent interpretations and prolonged litigation. To resolve these ambiguities, the Government should explicitly address these concerns within the law itself.
- GST Component: GST is not considered part of the payee’s income. TDS rules should explicitly exclude the GST component from the tax deduction requirement.
- Out-of-Pocket Expenses: TDS should not apply to out-of-pocket expenses if the payee provides a separate bill with supporting documents.
- Year-End Provisions: Since these provisions are based on approximations and lack identifiable payees or precise amounts, TDS should not apply to such provisions.
Eliminate TAN requirement for small businesses
Obtaining a Tax Deduction and Collection Account Number (TAN) is mandatory for furnishing TDS statements, even for individuals in certain laws, non-residents and small businesses with only a few TDS transactions. This requirement imposes an administrative burden on small taxpayers and non-residents, particularly those with limited or one-time TDS obligations.
The Government should allow individuals, non-residents, and small businesses to file TDS statements using their PAN. It will simplify the process for those with minimal TDS transactions. TAN should be mandatory only for organisations operating in multiple states or with substantial and regular TDS obligations.
Faceless process for lower deduction certificates
The process for obtaining lower deduction certificates from the Income Tax Department under Section 195(2) and Section 197 is cumbersome and may require physical interaction with assessing officers. This often results in harassment, delays, and opportunities for corruption.
Thus, to ensure transparency and efficiency, it is recommended that a faceless and fully online process be introduced for issuing lower deduction certificates.
The Income Tax Department should consider creating a dedicated process where taxpayers can apply, upload necessary documents, and track the status of applications. An AI-driven system can be developed to evaluate applications based on predefined criteria, such as past returns, existing certifications, and transaction nature. This will bring efficiency and eventually reduce the burden on CPC in first processing the TDS statement and subsequently paying the refund with interest.
