Rationalisation Of TDS And TCS (2025): Bridging The Gap In Tax Compliance And Efficiency

Policy Update
Varalika Raizada

Introduction

Tax deducted at source (TDS), is a tax collection mechanism utilised by the Government of India for the collection of revenue at the very source of income. TDS is a form of indirect tax that ensures a regular revenue source for the government, advances tax collection, prevents tax evasion, and widens the tax base. TDS collection is supervised by the Central Board for Direct Taxes (CBDT). TDS is a crucial step in the tax collection process.

The TDS collections contribute nearly 30% to 40% of its entire tax collection to the gross direct tax revenues. For example in the financial year 2020–21, TDS contributed upto 45% of total gross direct tax receipts, and for the financial year 2021–22, the share was 49%.

Tax Collected at Source, or TCS, is a kind of indirect tax which becomes functional upon sale and purchase of goods. The customer pays the TCS when buying any item, and the seller is responsible for transferring it to the Government. The vendor then pays the tax authorities the money that was obtained from the buyer. According to Section 206C of the Income Tax Act, sales of different kinds of commodities are subject to different TCS rates. For instance, a car costing ₹11 lakh will have a TCS payable at 1%, that is ₹11,000. This payment will be paid by the buyer to the car’s seller, who then will deposit it to the tax authorities.

Both TDS and TCS are instruments used by the Income Tax Department (ITD) to help the government timely and efficiently collect taxes from taxpayers. These tools assist the government in prevention of tax evasion and ensuring flow of revenue to the government accounts.

Key Objectives

The recent amendments made to TDS and TCS are an attempt to streamline the taxation frameworks and promote better compliance. The core intention behind changes is to make tax processes more manageable for taxpayers and the tax authorities. Key changes made include revised thresholds for TDS thresholds for TDS deductions and increased TCS limits on remittances from abroad. Additionally there were previously numerous tax provisions which were overlapping such as Section 194C (Payments made to contractors) and Section 194J (payments made for technical and professional services). By eliminating such redundancies, these updates are set to enhance administrative efficiencies and create a favourable environment for sustained economic growth.

Proposed Changes

TDS Threshold Rationalisation

TDS provisions have various thresholds. It is proposed in the Union Budget 2025 that these thresholds be rationalised –

TCS on Remittance under LRS

It is suggested that the threshold for tax collection at the source be raised from Rs 7 lakh to Rs 10 lakh, and TCS be eliminated from remittances made for educational purposes. According to section 206C of the Act, any seller receiving payment above Rs. 50 Lakhs for the sale of goods is responsible for collecting tax from the buyer at the rate of 0.1% of the sale.

Removal of higher TDS/TCS for non-filers

According to Section 206AB, if the specified deductee does not file an income tax return, the deduction must be made at a higher rate. According to Section 206CCA, if the specified collectee fails to file the income tax return, the tax must be collected at a higher rate. As per the proposed changes, Sections 206AB and 206CCA of the Act are to be removed in order to lessen the burden of compliance for the deductor/collector.

Exemption from prosecution for delayed payment of TCS in certain cases

If the tax collected at source is not paid to the Central Government’s credit, Section 276BB of the Act allows for punishment. The punishment includes rigorous imprisonment from anywhere between three months to seven years, along with a fine. According to the proposed changes, section 276BB is to be amended to state that if the payment of the tax collected is received at source on or before the deadline for filing taxes under section 206C of the Act, the individual or business will not be subject to prosecution.

Implications

These reforms are a welcome move towards modernising India’s tax framework. The increased thresholds and reduced TDS rates are expected to:

Boost Transparency: A more predictable and business-friendly tax climate will result from updated thresholds and more precise definitions.
Improved Cash Flow: By reducing the number of smaller purchases for which TDS is deducted
Compliance Ease: Since fewer transactions will now be subject to TDS, administrative processes will be simplified.
Increased Disposable Income: As exemption restrictions are lifted, consumers will have more money to spend, which will spur economic growth.
Reduced Litigation: There will be fewer disputes between taxpayers and the tax department as a result of clearer and more straightforward tax procedures.

Implications on Various Taxpayers

Impact on Salaried Individuals: Since less money is deducted from monthly paychecks of salaried individuals the proposed higher exemption limits will increase the take-home pay. However, people may need to manage tax payments in order to fulfill advance tax obligations.
Impact on Companies: With lower TDS rates businesses are less financially burdened and can reinvest the extra funds in operations and expansion, contributing to economic growth. Fewer unnecessary deductions is especially beneficial for SMEs. Businesses need to meet the advance tax deadlines to avoid fines under Sections 234B and 234C of the Act.
Impact on Professionals and Freelancers: For professionals, there will be a reduction in excessive deductions. Moreover, lower TDS rates will help in the improvement of cash flow and better management of expenses.

Conclusion

The proposed amendments are crucial reforms aimed at simplifying tax compliance. The streamlining of TDS and TCS processes is a step towards building a more taxpayer friendly environment. The government throughout the Union Budget 2025 has shown that financial inclusion and ease of doing business are its priority by lowering regulatory burdens, raising exemption ceilings, and simplifying procedures. Apart from making tax collection and compliance easier, these reforms would promote voluntary compliance, which would be an advantage for both individuals and businesses.