Why Budget 2026 Must Simplify TDS to Ease Cash Flow Pressures
Tax Deducted at Source (TDS) has become a cornerstone of India's revenue system, contributing a substantial 42% of the country's total tax collections in recent years. While this mechanism ensures steady government revenue, the TDS framework has evolved into an increasingly complex structure, characterized by nuanced provisions, multiple sections, varied rates, and procedural frictions. For businesses across India, this complexity translates directly into cash-flow strain, compliance hurdles, and constant reconciliation cycles that drain resources and hamper operational efficiency.
Clear Policy Momentum Toward Simplification
Recent Union Budgets have demonstrated a clear intent to simplify the TDS framework while safeguarding revenue streams. Threshold rationalization has emerged as a key strategy, most notably through the restructuring of TDS on rent from an annual threshold of Rs 2.4 lakh to ₹50,000 per month, effectively tripling the limit and providing significant relief to taxpayers.
The withdrawal of Tax Collected at Source (TCS) on sale of goods from April 1, 2025, was widely welcomed across industry sectors, as it removed overlapping compliance requirements and eased reconciliation challenges that had burdened businesses for years. Furthermore, the Finance Act of 2025 eliminated higher TDS/TCS rates for non-filers and permitted TCS adjustment against TDS on salary, directly addressing cash flow pressures and reducing refund-related friction.
The forthcoming Income-tax Act adopts clearer and more coherent drafting for TDS/TCS provisions, reinforcing a sustained movement toward a predictable and streamlined withholding tax regime that benefits both taxpayers and administrators.
Operational Complexity Continues to Challenge Businesses
Despite these progressive reforms, the TDS/TCS framework remains operationally demanding for businesses of all sizes. With over 30 sections and rates ranging from 0.1% to 30%, organizations must navigate multiple thresholds, payee classifications, and transaction-specific conditions that increase the risk of inadvertent errors. These errors often result in excessive withholding, liquidity constraints, and prolonged refund cycles without defined timelines.
Routine rectifications still frequently require physical or manual follow-ups, adding substantial compliance friction to business operations. While technology has expanded coverage, it has also created new challenges. Taxpayers are required to work across two separate platforms – the Income-tax Portal and the TRACES portal – for returns, challans, and credit tracking, creating unnecessary complexity.
Automated default notices issued by the Centralized Processing Center (CPC) through TRACES, often triggered by system-driven mismatches, require manual resolution even in cases where deductions have been correctly made. These operational frictions add to administrative burdens and contribute to withholding-related disputes, which form part of India's already significant tax litigation backlog.
A Roadmap for Rationalization
A clearer path forward lies in rationalizing TDS/TCS rates into three or four broad categories with consistent rates. Such standardization would significantly reduce classification disputes and minimize the risk of penal consequences for bona fide compliance efforts. Industry bodies, including the Confederation of Indian Industry (CII), have consistently echoed this need, reinforcing the compelling case for simplification.
Greater alignment with the Goods and Services Tax (GST) system, which is also anchored on Permanent Account Numbers (PAN), offers another significant 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 and compliance.
Leveraging artificial intelligence more effectively in CPC administration could materially improve accuracy and response times, creating a more efficient system that serves both taxpayers and the government.
Measures to Support Growth and Cash Flow Efficiency
Additional strategic steps could provide meaningful support to India's economic growth. Removing TDS on payments to International Financial Services Centre (IFSC) units could provide substantial support to the rapidly growing GIFT City ecosystem, where cash flow efficiency is particularly critical for financial operations.
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 tax administration. These measures would directly address the cash flow pressures that currently constrain business expansion and investment.
Toward a Trust-Based, Technology-Driven Withholding Regime
A more streamlined TDS architecture can deliver multiplier benefits across India's entire tax system, reducing litigation costs, freeing administrative capacity, and ultimately improving collections through enhanced compliance. Greater clarity and predictability can help shift the regime from an enforcement-heavy model to a trust-based, technology-enabled framework where disputes become 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 toward TDS rationalization in Budget 2026 can expand India's direct tax base while delivering tangible benefits for taxpayers, administrators, and the broader economic landscape. This strategic approach would position India's tax system as both efficient and business-friendly, supporting the nation's economic ambitions while ensuring sustainable revenue collection.
