Industry bodies and businesses want Budget 2026 to do away with tax deduction at source (TDS) and tax collection at source (TCS) on transactions subject to goods and services tax (GST), saying the parallel levy system has become redundant, costly and prone to compliance errors.
Several industry bodies and professional firms made these demand in their pre-Budget submissions, tax experts said.
The push is rooted in how India’s tax architecture has evolved since the GST rollout. GST is now a pan-India, invoice-level, real-time reporting system that captures virtually every business-to-business transaction.
Companies upload sales and purchase data, input tax credits and counter-party details into a centralised portal, giving tax authorities a live audit trail of economic activity.
Duplication, compliance burden
TDS and TCS, in contrast, were designed as a tracking and enforcement tool in a fragmented tax system, where the income tax department had limited visibility into business transactions.
Taxes are deducted or collected at the time of payment, so that transactions are reported and some tax is collected upfront, which is later adjusted against the final income tax liability.
“With the implementation of a pan-India GST framework, a unified tax reporting system already exists. This can be effectively used to reduce TDS/TCS compliance,” an industry said in its pre-Budget FY27 report.
“It is recommended that TDS/TCS be eliminated on all transactions where GST is applicable. The Income-tax Department can obtain information and track these transactions as needed by using GST returns, without creating any additional compliance.”
Tax experts say running both systems in parallel has created duplication without delivering any real enforcement benefit.
Under current rules, TDS and TCS rates range from 0.1 percent to 35 percent, depending on the nature of the transaction, the residency of the counter-party and the tax status of the recipient.
Companies are required to identify the applicable section, deduct or collect the correct amount, deposit it within timelines, file quarterly returns and issue certificates to vendors.
This complexity has raised compliance costs and increased the risk of mistakes, especially for companies that deal with hundreds or thousands of vendors.
The problem is particularly acute in services sector. Most professional and business services such as consulting, legal, engineering, marketing and IT are subject to 18 percent GST. At the same time, the person paying for the service must deduct TDS ranging from 1 percent to 10 percent, depending on how the service and the vendor are classified under the Income-tax Act.
Time to fix the system
The industry’s suggestion to waive TDS/TCS on transactions already subject to GST is well-intentioned and addresses genuine compliance challenges arising from multiple rates and frequent mismatches, an tax expert said.
“Since GST provides a robust, centralised trail of transactions, some degree of duplication in reporting and tracking can indeed be reduced,” he said.
There is also legal risk attached to the TDS regime. The responsibility to deduct tax is of the person making the payment. If a company fails to deduct or deposits wrong amount, it can be treated as an assessee-in-default and face interest, penalties and litigation, even if the recipient has already paid tax on the income.
That risk was starkly illustrated in the high-profile retrospective tax dispute involving Vedanta and Cairn India. When Cairn India acquired shares from its UK-based parent, Cairn Energy, in 2006, no TDS was deducted on the payment. The I-T department issued notices and initiated proceedings against both companies for failure to deduct tax, triggering years of litigation.
Eliminating TDS and TCS on GST-covered transactions would not weaken tax enforcement but would significantly simplify compliance, reduce disputes and free up working capital that is locked up as tax credits and refunds, companies have said.
Whether the government accepts their argument remains to be seen but tax professionals say the case for aligning direct and indirect tax systems has never been stronger.
