The Union Budget 2025-26 could bring welcome relief for taxpayers with proposals to simplify and rationalize the Tax Deducted at Source (TDS) regime. According to sources, the government may introduce a streamlined slab structure with fewer TDS rates, aimed at reducing compliance burdens and improving ease of doing business.
This move aligns with ongoing efforts to simplify the Income Tax Act, 1961, ensuring it is easier to understand and navigate for businesses and individuals alike.
A Step Toward TDS Rationalization
Sources indicate that Finance Minister Nirmala Sitharaman is expected to build on the initiatives introduced in the 2024-25 Budget, where several measures were announced to streamline the TDS regime. One of the notable changes last year was the merging of the 5% TDS rate into a 2% rate, along with the withdrawal of the 20% TDS rate on repurchase of mutual fund units.
For 2025-26, the focus remains on creating a simpler TDS rate structure, potentially with just two or three rates, making it easier for businesses and individuals to comply.
Why Simplify TDS?
The current TDS regime involves multiple rates ranging from 1% to 50%, with specific provisions for various activities. This complexity creates challenges for tax deductors and taxpayers, including:
- Increased compliance burden.
- Confusion and errors in filings.
- Unintentional defaults on platforms like the TRACES portal.
- Frequent disputes and litigation.
Tax experts agree that simplifying the TDS framework could significantly reduce these issues.
Expert Opinions
Tax professionals have expressed strong support for rationalizing TDS rates.
Yeeshu Sehgal, Head of Tax Markets at AKM Global, emphasized the need to consolidate multiple rates into a two- or three-tier structure. He also suggested eliminating Form 16A, as the same information is already available through Form 26AS and the Annual Information Statement (AIS).
Sehgal highlighted the challenges faced by property buyers, noting that depositing 1% TDS on property transactions requires extensive documentation. Simplifying this to just the property value, the seller’s PAN, and TDS deposited could ease compliance significantly.
Similarly, Rony Antony, Partner & Leader, Corporate Tax (South) at BDO India, pointed out that multiple provisions in TDS laws create unnecessary hurdles for taxpayers. Rationalization of these provisions and rates could address many of these issues.
Recommendations from the US-India Tax Forum
The US-India Tax Forum, a policy group under the US-India Strategic Partnership Forum (USISPF), has also recommended reducing TDS rates to two or three tiers. This change could not only lower compliance burdens but also enable businesses to focus on growth and expansion.
Challenges with the Current TDS Framework
The existing TDS framework involves complexities that often confuse taxpayers. Key issues include:
- Varied rates for different activities, such as 1% for property transactions and up to 50% for specific cases.
- Overlapping provisions that lead to errors and unintentional defaults.
- Frequent litigation due to disputes over rates and provisions.
By addressing these challenges, the government aims to create a more taxpayer-friendly environment.
Steps Toward Simplification
The rationalization of TDS rates is part of the larger review of the Income Tax Act, 1961, announced in the 2024-25 Budget. While this comprehensive review is still underway, the government plans to roll out interim changes, such as simplifying the TDS framework, in the upcoming budget.
Finance Minister Sitharaman’s focus on simplifying tax laws is expected to reduce disputes and compliance burdens while fostering a more transparent taxation system.
FAQs
What changes can we expect in TDS rates in Budget 2025-26?
The Budget is likely to introduce a simplified slab structure with two or three TDS rates, reducing the number of rates currently in use.
Why is TDS simplification important?
Simplifying TDS rates will ease the compliance burden for businesses, reduce errors, and minimize litigation.
What were the TDS-related changes in the 2024-25 Budget?
The previous budget merged the 5% TDS rate into 2%, removed the 20% TDS rate on mutual fund unit repurchases, and announced a comprehensive review of the Income Tax Act.
How will TDS simplification benefit property buyers?
It could reduce the documentation required for depositing TDS on property transactions, limiting it to the property value, seller’s PAN, and TDS deposit details.
What role does the US-India Tax Forum play in these recommendations?
The US-India Tax Forum has called for streamlining TDS rates to two or three tiers, which would simplify compliance and help businesses focus on growth.
Will Form 16A be eliminated?
Experts suggest eliminating Form 16A, as the information it contains is already available in Form 26AS and the Annual Information Statement.
When will the comprehensive review of the Income Tax Act be completed?
The review is still in progress and will require further consultations and legislative processes before completion.
How will these changes impact businesses?
Simplified TDS rates and streamlined processes will reduce compliance costs and allow businesses to operate more efficiently.
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