Budget 2025: Major Overhaul In TCS/ TDS Regime Expected?

The Union Budget 2025-26, scheduled to be presented on February 1, 2025, is anticipated to bring significant changes to the Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) regime. These changes aim to simplify tax compliance, reduce administrative burdens, and enhance the ease of doing business.

What Is TCS And TDS?

TCS (Tax Collected at Source) and TDS (Tax Deducted at Source) are two key mechanisms in India’s taxation system designed to facilitate tax collection at the transaction level.

• TDS: Under the TDS framework, a portion of the payment is deducted by the payer at the time of making specific types of payments, such as salaries, rent, or professional fees. This deducted amount is then deposited with the government on behalf of the payee, ensuring tax is collected in advance.

• TCS: TCS applies to certain transactions where the seller collects a specified percentage of tax from the buyer at the time of sale. For instance, TCS is applicable on the sale of goods like scrap, tendu leaves, and minerals, among others, as well as on foreign remittances exceeding prescribed limits.

These systems aim to prevent tax evasion by bringing more transactions into the tax net. However, their complexity often leads to confusion among taxpayers, compliance challenges for businesses, and disputes over applicability and rates.

Background Of Proposed Changes

In recent years, TCS and TDS regulations have grown increasingly intricate. For instance, Budget 2024 introduced higher TCS rates for foreign remittances, which drew criticism for adding to compliance complexities. Ahead of the 2025 general elections, the government is now expected to simplify these tax mechanisms to address stakeholder concerns and improve tax collection efficiency.

Industry Recommendations For Budget 2025

Key industry bodies, including the Federation of Indian Chambers of Commerce and Industry (FICCI), have submitted a comprehensive set of recommendations to the Finance Ministry, aiming to simplify India's tax structure and enhance support for women's participation in the workforce. These include:

1. Consolidation of TDS/TCS Rates: The current TDS framework involves 37 categories of payments with rates ranging from 0.1% to 30%, causing confusion and disputes. FICCI recommends:

• TDS on salary at applicable slab rates.

• TDS on lotteries and online games at the maximum marginal rate.

• A standard rate for other payments.

2. Higher Threshold Limits: Businesses and individuals face significant compliance burdens due to low threshold limits for TDS and TCS applicability. The industry is urging the government to increase these limits to reduce unnecessary filings.

3. Elimination of Redundant TDS/TCS: FICCI has urged the government to eliminate TDS/TCS on transactions already subject to Goods and Services Tax (GST), as the relevant data is available through GST filings. This would help prevent redundant paperwork and tax deductions1.

4. Independent Dispute Resolution Forum: The industry body has suggested the introduction of a new Independent Dispute Resolution forum for effective and time-bound dispute resolution in direct tax matters. This forum would involve independent experts like retired judges of the Supreme Court or High Court, retired President/Vice President of Tribunal, or professionals like lawyers or Chartered Accountants with a stipulated minimum experience.

5. Support for Women’s Participation: FICCI has also stressed the need to support women’s participation in the workforce by introducing tax exemptions on daycare expenses. This would help working women, especially those in manufacturing sectors where commuting to workplaces far from residential areas is a significant challenge.

6. Simplified Refund Mechanisms: Taxpayers often experience delays in refunds for excess TDS or TCS deductions. An automated refund system could make the process faster and more efficient.

Additional Insights For Budget 2025

Here are additional insights and expectations from the upcoming Budget:

• Income Tax Slabs: There are speculations that the government may change the income tax slab under the new tax system. The proposed changes include a reduction in the TDS rate from 5% to 2% for rents exceeding ₹50,000 paid by an individual or Hindu Undivided Family (HUF) for a month or part thereof.

• Standard Deduction: The government is considering increasing the standard deduction for salaried individuals. Tax experts have recommended linking the standard deduction to a particular proportion of an individual's income, with a maximum cap of ₹1 lakh, regardless of the tax system chosen.

• Import Duty on Gold: There are discussions about increasing the import duty on gold to address concerns about the trade deficit and reduce excessive imports.

• Section 80C Deduction Limit: The Section 80C deduction limit, which has seen minimal increases over the years, is a topic of discussion among tax experts. There are suggestions to increase the limit to ₹3.5 lakh to better align with the rising cost of living.

Government’s Potential Reforms

In response to these recommendations, the government is considering:

• Simplification of TDS Rates: Rationalizing TDS rates to minimize compliance challenges and prevent litigation.

• Personal Income Tax Relief: Reducing income tax rates for individuals earning up to ₹15 lakh annually, benefiting millions of salaried taxpayers.

• Digital Integration: Leveraging Artificial Intelligence (AI) and Big Data for pre-filling tax returns and identifying discrepancies.

Implications Of TCS/TDS Reforms

The proposed changes will have widespread implications for various stakeholders:

• For Businesses: Simplified compliance processes will reduce administrative costs and shift the focus to high-value transactions. However, businesses need to prepare for transitional challenges as the new reforms are implemented.

• For Individuals: Simplified procedures and potential tax relief would lead to increased disposable income and make tax filing more straightforward for individuals.

• For the Government: The reforms align with the government’s objectives of enhancing ease of doing business, improving voluntary tax compliance, and ensuring steady revenue collection.

Conclusion

The Union Budget 2025-26 is expected to introduce reforms to the TCS and TDS regime, addressing concerns around complexity, compliance burdens, and efficiency. These reforms aim to simplify tax structures, promote transparency, and enhance taxpayer convenience while supporting the government’s objectives of economic growth and ease of doing business. With measures like rationalized TDS rates, higher threshold limits, and streamlined refund processes, the budget has the potential to bring significant relief to businesses and individuals alike.

FAQs

Here are some frequently asked questions to help you understand the anticipated changes in TCS and TDS for Budget 2025-26

Q1. What is the key focus of the TCS and TDS reforms in Budget 2025-26?

The reforms aim to simplify the tax structure, reduce compliance burdens, and ensure efficient tax collection, benefiting both businesses and individual taxpayers.

Q2. How does TDS work, and what are the proposed changes?

TDS involves deducting tax at the source during payments like salaries or rents. Proposed changes include consolidating rates and increasing threshold limits to simplify compliance.

Q3. What are the industry recommendations for TCS changes?

Key recommendations include eliminating redundant TCS for GST-covered transactions and simplifying rates to improve the ease of doing business.

Q4. Will there be changes to income tax slabs in the 2025 budget?

Speculations suggest potential revisions, including reduced TDS rates for rent and increased standard deductions for salaried individuals.

Q5. How will these reforms benefit businesses and individuals?

Businesses will experience reduced administrative costs and simplified compliance processes, while individuals may benefit from potential tax relief and straightforward filing procedures.