Will Budget 2025 Simplify TDS Rates for Taxpayers?

Currently, TDS and TCS rules have more than 60 sections and almost 10 tax rates. Even though the Budget 2024 has made few adjustments in designing these rates at ease, a complicated system prevails.

The introduction of TDS rules under the Income Tax Act helped the Government maintain a steady flow of revenue and keep track of the transactions of the taxpayers. The frequent changes in TDS rules and the gradual diversification of their scope over time have resulted in difficulties, increased disputes, and confusion among taxpayers.

The Union Budget 2025 gives a great opportunity to simplify the TDS and TCS rules, increase clarity, to boot the confidence of taxpayers, and avoid disputes, which will lead to a more business-friendly environment.

A few important changes that the Government should think about for streamlining TDS rules in Budget 2025 are as follows:

Simplify TDS rates to reduce confusion

Having different TDS rates for various transactions can confuse those who deduct tax. With the introduction of a simple, standard set of rates, can help in improve compliance and provide much clarity.

The Government should think about introducing a three-level TDS rate system to solve this issue, that are given below:

1% Minimum TDS Rate: This 1% rate should be used for transactions that help track taxpayer activities, like cash withdrawals from banks, sale of properties, and large financial transactions.

10% Moderate TDS Rate: This rate should apply to other types of income, such as interest from fixed deposits or income taxed on a net basis.

30% Maximum TDS Rate: This rate is for income that is taxed in full, like lottery winnings, online gaming prizes, or salary income.

Create an unified schedule of TDS rates

Currently, the TDS rules are spread throughout various sections of the Income-tax Act, which creates confusion and does not make it easier for the taxpayers to find the appropriate section and the TDS rate for the particular transaction.

To Identify this issue, the Government must make all those multiple TDS rules into a single comprehensive law and ensure, under this law, the authority to create a single schedule that lists the TDS rates and thresholds for various different transactions, so that the deductors and the taxpayers have one easy reference point.

Also, the Government should have the power to issue notifications for new transactions and set their TDS rates and thresholds. This flexibility would remove the need to change the Income-tax Act every time a new transaction is added to the TDS rules.

Remove TAN requirement for Small Businesses

Getting a Tax Deduction and Collection Account Number (TAN) is required to submit TDS statements, even for individuals under certain laws, non-residents, and small businesses with only a few TDS transactions. This causes more burden for smaller taxpayers, the non-residents, more specifically those taxpayers and non-residents, with minimal TDS responsibilities.

The government should allow a person, non-residents, and small businesses to file TDS statements using their PAN and simplify it for those with limited TDS transactions. Large organizations having regular TDS obligations or the ones doing business in multiple states should remain required to use TAN.

Fix Common issues in TDS rules

Disagreements over TDS rules happen because of unclear guidelines on GST components, out-of-pocket expenses, and year-end provisions. Currently, these matters are only dealt with through circulars and court cases, resulting in different interpretations and long-drawn legal battles. Therefore, the Government should include clear rules directly in the law itself to get this all sorted.

GST Component: GST is not part of the payee’s income so TDS rules should clearly state that GST is not subject to tax deduction.

Out-of-Pocket Expenses: TDS should not be deducted from out-of-pocket expenses if the payee provides a separate bill with supporting documents.

Year-End Provisions: Since these provisions are based on estimates and don’t have clear payees or exact amounts, TDS should not apply to them.