A PIL was moved in the Supreme Court on Thursday to declare that the Tax Deducted at Source (TDS) system under the Income Tax Act “is manifestly arbitrary, irrational and against Articles 14, 19 and 21 of the Constitution hence void and inoperative.”

The petition has been filed by an advocate Ashwini Kumar Upadhyay who has argued that the TDS system disproportionately burdens asseesses with significant administrative expenses.

The office space, utilities and operational costs related to compliance can amount to 10-20 per cent of the total tax collected by the deductor, for which no compensation is paid. Additionally, non-compliance, even if unintentional, invites heavy penalties, interest, and prosecution under Sections 201 and 276B of the Income Tax Act.

The Tax Deducted at Source (TDS) system, is presently governed by 39 Sections, 28 Rules and 41 Forms under the Income Tax Act, mandates assessees (the deductors) to collect tax at the time of making payments to payees.

These payments include salaries, contractual fees, rents, commissions and other taxable sums.

While TDS ensures steady revenue inflow for the government, it imposes substantial administrative and financial obligations on the assessees.

These obligations include determining applicable TDS rates across various provisions, deducting taxes before payments or credits, depositing taxes with the government treasury within specified timeframes, issuing TDS certificates to deductees, filing returns and ensuring compliance with frequent legal amendments and defending against assessments, penalties in cases of inadvertent non-compliance.

“The regulatory and procedural framework surrounding TDS is excessively technical, often requiring specialised legal and financial expertise, which most assessees lack. The result is an unjust shifting of sovereign responsibilities from the government to private citizens without adequate compensation, resources, or legal safeguards.

Illiterate or economically weaker assessees, who lack the capacity to navigate technical framework, suffer undue hardship and harassment, undermining the constitutional guarantee of equality. This amounts to an indirect tax burden imposed on assessees, which lacks explicit legislative sanction, making it unconstitutional and against public interest," Upadhyay said.