The finance ministry could take forward further simplification and rationalisation of the tax deducted at source regime in the Union Budget 2025-26 while a more comprehensive revamp of the Income Tax Act, 1961, could take longer.
According to sources, the Budget is likely to announce further streamlining of TDS rates with a more simplified slab structure that would have a lower number of rates. The move is aimed at easing the compliance burden for tax deductors and is part of government initiatives to simplify the Income Tax Act.
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To this end, Finance Minister Nirmala Sitharaman had also announced a number of measures for simplification of the TDS regime in the Union Budget 2024-25. While she had announced a comprehensive review of the Income-tax Act, 1961, to make it “concise, lucid, easy to read and understand” and reduce disputes, she had also made a start to it by simplifying the TDS rate structure. Among the measures, she had announced that the 5% TDS rate on many payments would be merged into the 2 % TDS rate and the 20% TDS rate on repurchase of units by mutual funds or UTI would be withdrawn.
According to official sources, the review of the Income Tax Act, 1961 is still underway and could take some more time, following which it would go through several rounds of consultations. This would then be followed by the legislative process.
Tax experts are of the view that there should ideally be two to three rates for TDS that would help improve compliance and cut down on litigation.
Yeeshu Sehgal, Head of Tax Markets, AKM Global noted that there is a need to simplify and streamline the current TDS/TCS regime as it leads to considerable compliance burden on businesses that causes errors, confusions, unintentional defaults on Traces portal and TDS certificates.
“One of the most impactful changes that can be done is the removal of multiple TDS rates into a simpler two or three tier structure,” Sehgal said, adding that Form 16A should be eliminated as the information is readily available through Form 26AS and the Annual Information Statement (AIS). Additionally, for property buyers, depositing 1% TDS involves a great deal of information that they have to put in whereas it should be simply the value of the property and the Pan of the seller along with the TDS deposited.
The US-India Tax Forum—a dedicated Tax Policy Forum of the US-India Strategic Partnership Forum (USISPF) in its pre-Budget recommendations has also called for streamlining the TDS structure to two or three rates, which would help reduce compliance burdens and enable businesses to focus on growth.
At present, different activities attract TDS at different rates, ranging from 1% to as high as 50% with various rates in between.
Rony Antony, Partner & Leader, Corporate Tax (South), Tax & Regulatory Services, BDO India also noted that there are multiple provisions in the TDS sections that are creating issues for taxpayers.
“Rationalisation of rates is one area that can help,” he said, noting that a few quick fixes that can help taxpayers is the rationalisation of TDS obligations.
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