Why Budget 2026 must simplify TDS to ease cash flow pressures

With TDS contributing nearly 42% of India’s tax collections, the government has begun simplifying the withholding tax system through higher thresholds and removal of overlapping provisions.

Written by Raju Kumar

Tax Deducted at Source (TDS) contributes up to 42% of the country’s total tax collections in recent years. But while it has ensured steady revenue for the Government, the framework has grown increasingly complex, characterised by nuanced provisions, multiple sections, varied rates, and procedural frictions.

For businesses, this translates to cash‑flow strain, compliance hurdles, and constant reconciliation cycles. Hence, rationalising TDS and addressing system‑level issues is essential to improve both liquidity and compliance outcomes across the industry.

Recent Union Budgets reflect a clear intent to simplify the TDS framework while safeguarding revenues.

Threshold rationalisation has been a key step, most notably the restructuring of TDS on rent from an annual Rs 2.4 lakh threshold to ₹50,000 per month, effectively tripling the limit.

The withdrawal of TCS on sale of goods from 1 April 2025 was widely welcomed, as it removed overlapping compliance requirements and eased reconciliation challenges.

Further, the Finance Act, 2025 eliminated higher TDS/TCS rates for non-filers and allowed TCS adjustment against TDS on salary, easing cash flow pressures and reducing refund-related friction.

The forthcoming Income-tax Act also adopts clearer and more coherent drafting for TDS/TCS provisions, reinforcing a sustained move towards a predictable and streamlined withholding tax regime.

Despite ongoing reforms, the TDS/TCS framework remains operationally demanding. With over 30 sections and rates ranging from 0.1% to 30%, businesses must navigate multiple thresholds, payee classifications, and transaction-specific conditions.

This increases the risk of inadvertent errors, often resulting in excessive withholding, liquidity constraints, and prolonged refund cycles without defined timelines. Routine rectifications still frequently require physical or manual follow-ups, adding to compliance friction.

While technology has expanded coverage, it has also created new challenges. Taxpayers are required to work across two platforms – the Income-tax Portal and the TRACES portal, for returns, challans, and credit tracking.

Automated default notices issued by CPC through TRACES, often triggered by system-driven mismatches, require manual resolution even where deductions are correctly made.

These frictions add to administrative burden and contribute to withholding-related disputes, which form a part of India’s already significant tax litigation backlog.

A clearer path forward lies in rationalising TDS/TCS rates into three or four broad categories with consistent rates. Such standardisation would significantly reduce classification disputes and the risk of penal consequences for bona fide compliance.

Industry bodies, including CII, have echoed this need, reinforcing the case for simplification.

Greater alignment with GST, also anchored on PAN, offers another opportunity to streamline compliance and enable targeted TDS exemptions without eroding the tax base.

Addressing operational issues such as delays in TDS certificate issuance, rectification backlogs, and auto-adjustment errors, along with introducing clearer accountability frameworks for CPC interactions, would further enhance taxpayer confidence.

Leveraging artificial intelligence more effectively in CPC administration could materially improve accuracy and response times.

Additional steps, such as removing TDS on payments to IFSC units, could provide meaningful support to the rapidly growing GIFT City ecosystem, where cash flow efficiency is critical.

Similarly, using granular withholding data to avoid repetitive lower-withholding applications can help create a more stable and business-friendly regime, reducing uncertainty and administrative effort for both taxpayers and the tax administration.

A more streamlined TDS architecture can deliver multiplier benefits across the tax system, reducing litigation costs, freeing administrative capacity, and improving collections.

Greater clarity and predictability can help shift the regime from an enforcement-heavy model to a trust-based, technology-enabled framework, where disputes are the exception rather than the norm.

The time is ripe for informed decisions on tax governance, anchored in transparency, simplicity, and meaningful ease of compliance. A thoughtful push towards TDS rationalisation can expand the direct tax base and deliver tangible benefits for taxpayers, administrators, and India’s broader economic landscape alike.

Ayush Saraf, Senior tax professional, also contributed to the article.

Written by Raju Kumar

Tax Deducted at Source (TDS) contributes up to 42% of the country’s total tax collections in recent years. But while it has ensured steady revenue for the Government, the framework has grown increasingly complex, characterised by nuanced provisions, multiple sections, varied rates, and procedural frictions.

For businesses, this translates to cash‑flow strain, compliance hurdles, and constant reconciliation cycles. Hence, rationalising TDS and addressing system‑level issues is essential to improve both liquidity and compliance outcomes across the industry.

Recent Union Budgets reflect a clear intent to simplify the TDS framework while safeguarding revenues.

Threshold rationalisation has been a key step, most notably the restructuring of TDS on rent from an annual Rs 2.4 lakh threshold to ₹50,000 per month, effectively tripling the limit.

The withdrawal of TCS on sale of goods from 1 April 2025 was widely welcomed, as it removed overlapping compliance requirements and eased reconciliation challenges.

Further, the Finance Act, 2025 eliminated higher TDS/TCS rates for non-filers and allowed TCS adjustment against TDS on salary, easing cash flow pressures and reducing refund-related friction.

The forthcoming Income-tax Act also adopts clearer and more coherent drafting for TDS/TCS provisions, reinforcing a sustained move towards a predictable and streamlined withholding tax regime.

Despite ongoing reforms, the TDS/TCS framework remains operationally demanding. With over 30 sections and rates ranging from 0.1% to 30%, businesses must navigate multiple thresholds, payee classifications, and transaction-specific conditions.

This increases the risk of inadvertent errors, often resulting in excessive withholding, liquidity constraints, and prolonged refund cycles without defined timelines. Routine rectifications still frequently require physical or manual follow-ups, adding to compliance friction.

While technology has expanded coverage, it has also created new challenges. Taxpayers are required to work across two platforms – the Income-tax Portal and the TRACES portal, for returns, challans, and credit tracking.

Automated default notices issued by CPC through TRACES, often triggered by system-driven mismatches, require manual resolution even where deductions are correctly made.

These frictions add to administrative burden and contribute to withholding-related disputes, which form a part of India’s already significant tax litigation backlog.

A clearer path forward lies in rationalising TDS/TCS rates into three or four broad categories with consistent rates. Such standardisation would significantly reduce classification disputes and the risk of penal consequences for bona fide compliance.

Industry bodies, including CII, have echoed this need, reinforcing the case for simplification.

Greater alignment with GST, also anchored on PAN, offers another opportunity to streamline compliance and enable targeted TDS exemptions without eroding the tax base.

Addressing operational issues such as delays in TDS certificate issuance, rectification backlogs, and auto-adjustment errors, along with introducing clearer accountability frameworks for CPC interactions, would further enhance taxpayer confidence.

Leveraging artificial intelligence more effectively in CPC administration could materially improve accuracy and response times.

Additional steps, such as removing TDS on payments to IFSC units, could provide meaningful support to the rapidly growing GIFT City ecosystem, where cash flow efficiency is critical.

Similarly, using granular withholding data to avoid repetitive lower-withholding applications can help create a more stable and business-friendly regime, reducing uncertainty and administrative effort for both taxpayers and the tax administration.

A more streamlined TDS architecture can deliver multiplier benefits across the tax system, reducing litigation costs, freeing administrative capacity, and improving collections.

Greater clarity and predictability can help shift the regime from an enforcement-heavy model to a trust-based, technology-enabled framework, where disputes are the exception rather than the norm.

The time is ripe for informed decisions on tax governance, anchored in transparency, simplicity, and meaningful ease of compliance. A thoughtful push towards TDS rationalisation can expand the direct tax base and deliver tangible benefits for taxpayers, administrators, and India’s broader economic landscape alike.

Ayush Saraf, Senior tax professional, also contributed to the article.