India's TDS Framework: Navigating Complexity in the Direct Tax System
Tax Deducted at Source (TDS) has served as a fundamental pillar of India's direct tax collection mechanism for decades. This system ensures regular revenue flow to the government while creating an effective transaction monitoring framework. During the financial year 2024–25, TDS contributions represented approximately one-third of the total gross direct tax receipts, highlighting its significant role in national revenue generation.
The Growing Complexity Challenge
Despite its importance, the TDS framework has become increasingly intricate due to frequent amendments responding to evolving business models and economic patterns. The current system features multiple tax rates, diverse categories, and varying thresholds that depend on income types and taxpayer profiles. This complexity frequently leads to administrative errors, delayed vendor payments, stringent penalty impositions, working capital constraints, prolonged refund cycles, and unnecessary litigation.
Recent Reform Efforts and Persistent Challenges
Over the past two years, several reform initiatives have attempted to simplify the TDS structure. Notable changes include:
- Reduction of TDS rates from 5% to 2% on commission, brokerage, rent, and life insurance payments
- Increased basic threshold limits for smaller transactions
While these adjustments represent positive steps, practical implementation challenges persist due to the fragmented rate structure and overlapping regulatory provisions. Industry feedback consistently indicates that further rationalization could substantially reduce compliance burdens and enhance liquidity across business sectors.
Key Areas for Rationalization and Simplification
Uniform Threshold Implementation Across Sections
Currently, threshold limits vary significantly across different TDS sections. For example, under Section 194C, TDS applies when a single payment exceeds ₹30,000 or aggregate payments cross ₹1,00,000 annually, while Section 194R maintains a basic threshold of ₹20,000. Taxpayers must maintain robust tracking systems to monitor these varying limits, increasing administrative overhead and default risks. Implementing a common threshold across sections would simplify compliance procedures and prevent TDS deduction shortfalls.
Revisiting Section 194Q for Goods Purchases
Section 194Q was introduced primarily to establish an audit trail and prevent tax evasion in goods transactions. However, with purchase data now comprehensively captured under the Goods and Services Tax (GST) system, this objective is already being fulfilled. The additional requirement of deducting TDS on goods purchases creates duplication and increases compliance costs without delivering proportional benefits. Eliminating this provision would significantly streamline business processes.
Simplifying Section 194R for Benefits and Perquisites
Section 194R mandates 10% TDS deduction on the value of benefits or perquisites exceeding ₹20,000, whether provided in cash or kind. The regulation applies even when items lack independent commercial value or provide no real benefit to recipients, creating substantial practical difficulties. For instance, pharmaceutical companies distributing free medical samples to doctors for testing or patient distribution face TDS obligations despite the non-commercial nature of these transactions. Similarly, low-value brand reminders shared with professionals trigger compliance requirements. Exempting free samples and nominal-value brand reminders while raising the overall threshold would dramatically reduce compliance burdens.
Addressing Sector-Specific Liquidity Challenges
Working Capital Constraints in Key Industries
TDS deductions based on gross receipts create severe working capital pressures in sectors like real estate, infrastructure, and business process outsourcing, where profit margins remain modest. Even taxpayers holding exemption certificates or experiencing losses struggle to obtain nil-rate certificates, resulting in fund blockages that can only be resolved through tax return filings. Introducing benchmark withholding rates aligned with sector profitability and improving nil TDS certificate issuance would alleviate liquidity stress.
TDS Credit in Corporate Restructuring
During mergers, demergers, or slump sales, TDS credit deducted by predecessor companies does not automatically transfer to successor entities. This forces taxpayers to pursue time-consuming rectification procedures or appeal processes. Establishing clear guidelines for TDS credit transfer in corporate restructuring scenarios would prevent unnecessary litigation.
Form 71 Processing Delays
Form 71 enables taxpayers to claim credit for previous-year TDS when income has already been offered for taxation. However, the absence of streamlined processing procedures causes significant delays in credit realization, adversely impacting cash flow management.
Relief for Insolvency Resolution Entities
Deducting TDS on payments to companies undergoing Insolvency and Bankruptcy Code (IBC) proceedings drains critical cash resources needed for business revival. Implementing TDS exemptions once resolution plans receive approval would unlock immediate liquidity and accelerate the turnaround process that IBC legislation aims to facilitate.
Toward a Simplified TDS Regime
A streamlined, business-aligned TDS framework can enhance compliance rates, reduce disputes, and free working capital for productive investment. By addressing practical implementation bottlenecks, policymakers can achieve an optimal balance between revenue collection objectives and operational efficiency. Such reforms would deliver long-term benefits to both taxpayers and the government, supporting India's economic growth trajectory.
Samir Kanabar serves as Tax Partner at EY India, providing expert perspectives on taxation matters affecting the Indian business landscape.
