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Ernst & Young has called for a sweeping overhaul of the tax deducted at source (TDS) framework, arguing that the current structure is overly complex and imposes a significant compliance burden on businesses.
At present, the Income Tax Act contains nearly 37 different TDS provisions for payments made to residents, each with its own rate and threshold. EY believes this complexity leads to frequent disputes, interpretational challenges and higher compliance costs, particularly for corporates with large vendor and employee bases.
The firm has proposed consolidating the existing structure into three to four broad TDS categories. These would include one category for salary payments linked to applicable income tax slabs, a higher punitive rate for income from activities such as lotteries and gambling, and one or two additional standard rates to cover all other payments.
According to EY, such a rationalised structure would significantly reduce ambiguity around the classification of payments, lower the risk of litigation and make compliance easier for businesses without compromising revenue collection.
EY has also sought the removal of the 0.1% TDS applicable to certain transactions, arguing that the provision has outlived its original purpose. The low-rate TDS was introduced primarily as a reporting and tracking mechanism rather than a revenue-generating tool.
The firm has pointed out that transactions covered under the Goods and Services Tax regime are already comprehensively tracked through invoices, returns and digital reporting systems. Continuing to apply TDS on such transactions, EY argues, results in duplication of compliance and increases administrative costs for businesses.
Also Read | Budget 2026 must anchor growth continuity, tax certainty and sector-led investments: EY India
With the government significantly expanding its digital monitoring of both direct and indirect taxes, EY believes that GST data can effectively serve the tracking objective that the 0.1% TDS provision was designed to achieve. Removing the levy for GST-linked transactions could therefore ease compliance without weakening oversight.
The firm has acknowledged that stronger real-time integration between GST and direct tax systems would further support this move. However, it has noted that reconciliation between the two tax streams is already being undertaken in several cases.
As the government prepares the Union Budget, EY’s recommendations on TDS rationalisation are being viewed as part of a broader push to simplify tax laws, reduce friction for businesses and improve overall tax certainty.
Watch accompanying video for entire discussion.
At present, the Income Tax Act contains nearly 37 different TDS provisions for payments made to residents, each with its own rate and threshold. EY believes this complexity leads to frequent disputes, interpretational challenges and higher compliance costs, particularly for corporates with large vendor and employee bases.
The firm has proposed consolidating the existing structure into three to four broad TDS categories. These would include one category for salary payments linked to applicable income tax slabs, a higher punitive rate for income from activities such as lotteries and gambling, and one or two additional standard rates to cover all other payments.
According to EY, such a rationalised structure would significantly reduce ambiguity around the classification of payments, lower the risk of litigation and make compliance easier for businesses without compromising revenue collection.
EY has also sought the removal of the 0.1% TDS applicable to certain transactions, arguing that the provision has outlived its original purpose. The low-rate TDS was introduced primarily as a reporting and tracking mechanism rather than a revenue-generating tool.
The firm has pointed out that transactions covered under the Goods and Services Tax regime are already comprehensively tracked through invoices, returns and digital reporting systems. Continuing to apply TDS on such transactions, EY argues, results in duplication of compliance and increases administrative costs for businesses.
Also Read | Budget 2026 must anchor growth continuity, tax certainty and sector-led investments: EY India
With the government significantly expanding its digital monitoring of both direct and indirect taxes, EY believes that GST data can effectively serve the tracking objective that the 0.1% TDS provision was designed to achieve. Removing the levy for GST-linked transactions could therefore ease compliance without weakening oversight.
The firm has acknowledged that stronger real-time integration between GST and direct tax systems would further support this move. However, it has noted that reconciliation between the two tax streams is already being undertaken in several cases.
As the government prepares the Union Budget, EY’s recommendations on TDS rationalisation are being viewed as part of a broader push to simplify tax laws, reduce friction for businesses and improve overall tax certainty.
Watch accompanying video for entire discussion.
