Tax and industry experts are pitching for stability in rates, rationalisation of withholding taxes, streamlined dispute resolution, easier compliance for foreign companies and simplified taxation on employee stock options in the upcoming Union budget.
Rationalisation of tax deducted at source (TDS) has emerged as a common ask from various quarters. Under the current system, tax is deducted on specified payments such as salaries, interest, commission, rent and even cryptocurrency transactions above prescribed thresholds, with rates ranging from 0.1 per cent to 30 per cent. This complex structure has resulted in frequent litigation.
“TDS is not a tax on the deductor’s income. Rather, the deductor acts as an agent of the state, facilitating collection. Yet, the current regime prescribes multiple rates across numerous sections, creating interpretational challenges. Litigation arises around the applicable rate, classification of payments and procedural lapses — often without any underlying revenue loss,” said Dinesh Kanabar, chairman and CEO, Dhruva Advisors.
Kanabar said there is a strong case to consolidate TDS into two or three broad buckets — a rate for salary income, another for non-salary payments, and a higher rate for exceptional categories such as lottery or windfall gains — to lower compliance costs and reduce litigation without materially impacting revenue.
EY India, in its pre-budget expectations, echoed the demand, pointing out that more than 37 categories of payments currently carry TDS at different rates, making the framework “a fertile ground for disputes”. It suggested that the budget can outline a roadmap with no more than three to four TDS rates.
Dispute resolution
As of FY25, 5.39 lakh cases were pending at the first appellate authority and another 63,784 cases before appellate tribunals, high courts and the Supreme Court, involving a cumulative disputed amount of ₹26.30 lakh crore, according to government data. A further ₹1.52 lakh crore remains locked in customs disputes.
Analysts are, therefore, calling for a comprehensive dispute resolution mechanism, both for direct taxes and customs.
“Estimates suggest that, at the current pace of disposal, it would take five or six years to clear the existing backlog. Schemes introduced in the past, including those in 2020 and revisited in 2024, witnessed significant participation and resulted in meaningful revenue mobilisation and dispute reduction. There is a strong case of re-imagining a comprehensive dispute resolution framework for both direct and indirect taxes — particularly customs, where litigation has accumulated over decades,” Kanabar said.
EY India suggested a one-time settlement under customs law and further simplification of customs tariffs, including sector-wise rationalisation to keep Indian goods competitive amid geopolitical turmoil. The basic customs duty structure was reduced to eight slabs in the previous budget, and industry expects a further consolidation to five or six slabs this year.
Personal tax stability
With the new Income Tax Act 2025, scheduled to take effect from April 1, 2026, major changes in personal taxation are seen as unlikely, especially as the changes introduced in the previous budget have made tax liability zero for taxpayers up to ₹12 lakh of nominal income.
Kanabar said substantive direct tax proposals would undermine the clean-slate approach of the new law.
Analysts also warned that raising surcharges could trigger migration of high-net-worth individuals to lower-tax jurisdictions. “When you start making it prohibitive, you run the risk of high-income earners wanting not to be in India, and that is possible in the world today,” Amit Rana, partner, PwC told PTI.
Instead, experts want the tax administration to become more facilitative. “Concerns around indiscriminate issuance of notices, mechanical reopening of assessments and lack of accountability continue to affect taxpayer confidence. While faceless processes have reduced some friction, they have also introduced new challenges relating to responsiveness and application of mind,” Kanabar said.
Esop taxation
Highlighting a critical pain point for India’s innovation economy, Ajai Chowdhry, co-founder of HCL and chairman of the EPIC Foundation, said that the current dual taxation model — which levies taxes on Employee Stock Option Plans (ESOPs) both at the time of exercise and again at the point of sale — is creating significant friction for talent retention. “That is actively pushing Indian start-ups and founders toward offshore relocation,” said Chowdhry, urging a relook at the ESOP taxation in the budget.
Presumptive option
Tax experts further expect the government to examine Niti Aayog’s proposal for an optional presumptive taxation regime for foreign companies in select sectors. The framework is aimed at lowering disputes, providing certainty and simplifying compliance while protecting revenue.
The think tank has suggested presumptive rates ranging from 5 per cent to 30 per cent for sectors such as offshore supply, infrastructure, EPC, oilfield services, consulting, management and software services, as well as digital and e-commerce platforms.