Enhancing the ease of doing business has remained a steadfast priority for the Indian government over recent years. Successive Union Budgets have consistently introduced initiatives aimed at policy and regulatory reforms, decriminalization of minor offenses, and simplifying compliance across various sectors, including taxation. The current financial year has seen significant strides with structural simplifications under the new Income Tax law, tax reliefs for individual taxpayers to stimulate consumption, and rationalization of GST rates.
Budget 2026: A Call for Continued Reforms
As Budget 2026 looms on the horizon, it is imperative that the government continues its reform agenda to reduce complexity, build trust among taxpayers, and boost domestic and foreign investments. Three critical areas demand immediate attention: withholding taxes, dispute resolution mechanisms, and customs procedures. Addressing these will not only streamline operations but also foster a more business-friendly environment.
Rationalizing TDS for Simpler Compliance
Tax Deducted at Source (TDS) plays a crucial role in ensuring a steady revenue flow for the government and capturing real-time data on financial transactions. However, the current TDS regime is fraught with complexities that hinder compliance and often lead to interpretational disputes. Presently, 37 different payments to residents attract TDS at rates ranging from 0.1% to 30%, causing cash flow blockages for taxpayers who await refunds.
While Budget 2024 took a step forward by reducing TDS rates from 5% to 2% on several payments, further rationalization is necessary. A simplified structure with three to four rates could be considered:
- TDS on salary at the applicable slab rate.
- TDS on lotteries and online games at the maximum marginal rate.
- Two standard rates for TDS across different categories of payments.
Additionally, business-to-business (B2B) payments subject to GST could be exempted from TDS, as transaction information is already captured in Form 26AS and the Annual Information Statement (AIS). Notifying a negative list of payments exempt from TDS—such as those to senior citizens, exempt income payments, and transactions with banks and financial institutions—would further ease the compliance burden.
Addressing the Pendency of Tax Disputes
As of the financial year 2024-25, over INR 26 trillion, approximately 8% of India's GDP, is locked in Income Tax disputes alone. Despite government efforts, more focused actions are required to resolve this backlog. Notably, 89% of income tax case pendency is at the first appellate level.
To tackle this, the government could prioritize long-pending and high-value cases, conduct more frequent virtual hearings, equip the Central Technical Committee with adequate manpower, and closely monitor case disposals. The Advance Pricing Mechanism (APA) program, while successful, still has over 850 cases pending before the APA authority, as per the APA Annual Report 2024-25.
Adopting a framework approach for resolving low-complexity APA cases, allocating additional specialist resources, and providing a special window for accelerated APAs for older cases could expedite resolutions. Amending safe harbor rules to make them more attractive would also alleviate the burden on the APA system.
Customs-related litigations also need attention. Increasing the validity of Advance Rulings in Customs from three to five years, with provisions for renewal or updates, would offer greater certainty. Introducing a one-time dispute settlement scheme under Customs Law, similar to the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 for Excise and Service Tax issues, could help unlock blocked amounts and resolve legacy disputes.
Digital Transformation in Customs Procedures
Budget 2026 should set a visionary roadmap to accelerate Customs automation. Implementing electronic revisions for customs bills of entry, automated customs duty payments, and refund applications through API-based compliance systems would significantly reduce delays and ease the compliance burden for taxpayers.
The ultimate goal should be to establish a paper-free Customs Administration that encompasses e-amendments, e-refunds, and e-adjudication, mandating complete digital correspondence between importers and Customs authorities. Such digital transformation would enhance efficiency, transparency, and accountability in trade processes.
Conclusion: Paving the Way for Business Growth
Improvements in these three areas—TDS rationalization, dispute resolution, and customs digitization—will lead to substantial time and cost savings for businesses. By simplifying compliance and reducing bureaucratic hurdles, the government can encourage voluntary compliance across all segments, ultimately fostering a more robust and investment-friendly economy. The views expressed in this analysis are personal and highlight the critical reforms needed as India prepares for Budget 2026.
