Fewer TDS rates can reduce compliance costs for taxpayers, says CEO of Dhruva Advisors

From a tax point of view, what are the broad areas that the government should address in this year’s Budget?

When the Finance Minister presents the Budget for 2025-26, there will be significant expectations in direct taxes. This is particularly relevant because in last year’s Budget, she explicitly stated that simplification of tax laws was high on the government’s agenda.

In that Budget, several changes were made to simplify the capital gains tax regime. Following this, suggestions were invited from the chambers of commerce, professional bodies, firms, and taxpayers on what they would like to see in the tax laws in terms of simplification. Since then, over a thousand presentations have been received, suggesting a wide range of changes. It will be interesting to observe how many of these will be incorporated in the upcoming Budget and how many are deferred for future implementation.

What are the critical areas that need to be addressed in terms of changes to the Income Tax Act?

Three key objectives stand out: simplification of laws to provide certainty for taxpayers, addressing mounting litigation, and facilitating ease of compliance to minimise growing compliance costs. These are critical for building trust between taxpayers and the revenue department.

What can really be done when it comes to simplification of laws?

Over time, the tax laws have become cumbersome with each section having sub-sections, explanations, provisos, etc. Besides, the drafting of several sections leave a lot to be desired, making the law susceptible to multiple interpretations. Now, the fact is each officer can interpret the law differently and that means a lack of certainty on interpretation.

Taxpayers would rather have a higher rate of tax but want certainty of liability. This becomes a major challenge, especially when it comes to foreign investors. Clearly, any attempt to simplify the language of the law is a welcome move. It is not difficult to understand why taxpayers are opting not to choose a tax regime without deductions and exemptions, but one with a greater degree of certainty. I expect the government will provide greater incentives to individuals to opt for the new tax regime.

The issue of tax litigation has only got more complex…

Tax litigation is not new and does come up year after year. However, it has now taken on greater significance on account of the growing backlog at the appellate level. Substantial additions made during assessments have burdened taxpayers with a requirement to pay 20% of the demand while appeals are pending. They believe these demands are unjust, making the upfront payment a big financial strain. That said, if the revenue succeeds in litigation, it loses out on the remaining 80%, creating dissatisfaction on both sides.

To address this, it is necessary to look at a few ways of going about it. Perhaps, a larger share of cases can be handled by the Dispute Resolution Panel (DRP) and matters involving higher stakes can be allowed to be directly addressed by the Income Tax Appellate Tribunal (ITAT).

What is your view on the time taken when it comes to resolving tax disputes?

Tax litigation often takes 12-15 years to reach a conclusion in the Supreme Court. Such delays create challenges for taxpayers, including contingent liabilities that impact company valuations and IPOs. A practical solution could be to introduce a settlement scheme, enabling taxpayers to negotiate and settle disputes with tax authorities. That will avoid prolonged litigation.

For non-resident taxpayers, the revival of the Authority for Advance Rulings (AAR) is imperative. Providing certainty to non-residents is essential if India wants to attract significant foreign investment.

How do you look at the challenges around compliance?

There are several issues that merit attention. Tax collected at source (TCS) is one that has risen to as high as 20%. It raises a pertinent question: is TCS necessary at all? While it is intended to monitor transactions, taxpayers already under the ambit of GST should not have to bear an additional TCS burden.

Coming to tax deducted at source (TDS), the complexity of it and the administrative burden it imposes on those withholding taxes is another significant challenge. Rationalising TDS rates to just a couple of slabs would go a long way towards reducing compliance costs for taxpayers. It is indeed a waste of time and costs for those deducting tax at source to be subjected to litigation merely because the tax officer believes that the rate of withholding should have been higher under a different section.

Finally, there is the issue of accountability. The large-scale additions by the tax office, which ultimately get knocked off in appeals, create a huge negative impact. There needs to be a mechanism to monitor the additions, and I do hope to see some provisions on this front in the Budget.

@krishnagopalan