Supreme Court Rejects Plea to Declare TDS System Unconstitutional: A Setback for Tax Reform Advocates

New Delhi: In a significant development for taxpayers across India, the Supreme Court of India on Friday dismissed a Public Interest Litigation (PIL) seeking the scrapping of the Tax Deducted at Source (TDS) system under the Income Tax Act.

The petition, which argued that the TDS framework is “manifestly arbitrary” and violates constitutional rights, was swiftly rejected by a bench comprising Chief Justice Sanjiv Khanna and Justice Sanjay Kumar.

The court, while declining to entertain the plea, suggested that the petitioner explore legal options at the appropriate high court level.

Background of the PIL

The PIL was filed by advocate Ashwini Kumar Upadhyay, who raised concerns about the complexities of the TDS system, which requires assessees (individuals or entities) to deduct tax at the time of making payments like salaries, rents, and commissions.

According to the petition, the current system places excessive administrative burdens on assessees, many of whom lack the financial or legal expertise to comply with the intricate requirements of the tax framework.

The petition highlighted several issues with the TDS system, claiming that it is “arbitrary” and violates fundamental rights under Articles 14, 19, and 21 of the Indian Constitution.

It further argued that the government’s reliance on private citizens to collect taxes, without providing adequate compensation or resources, was an unfair transfer of sovereign duties.

Allegations of Disproportionate Burden on Assessees

One of the central arguments made in the petition was that the TDS system imposes an undue financial burden on taxpayers.

The petition claimed that the system requires significant administrative resources, including paying employees and hiring professionals such as chartered accountants or tax consultants to ensure compliance.

Non-compliance, even if unintentional, can lead to severe penalties, interest, and prosecution under sections 201 and 276B of the Income Tax Act.

The petitioner also raised concerns about the impact of the system on economically weaker and illiterate assessees, who often struggle to navigate the complex and technical nature of TDS compliance.

Minor errors in form submissions, such as incorrect names or PAN details, can result in tax amounts being withheld from the assessee until errors are discovered and corrected.

This causes undue hardship, especially for individuals who lack the means to rectify such issues.

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Claims of Forced Labor and Constitutional Violations

In addition to financial hardships, the petition argued that the TDS system violates the constitutional guarantee of equality before the law under Article 14.

It also claimed that imposing tax collection duties on private citizens constitutes forced labor, in violation of Article 23(1) of the Constitution, which prohibits coerced labor.

The PIL further criticized the system for being excessively technical, with 39 sections, 28 rules, and 41 forms under the Income Tax Act, making it difficult for most assessees to comply without specialized legal or financial expertise.

The petition contended that the government’s failure to directly collect taxes and its shift of responsibilities to individuals without proper compensation was unjust and unreasonable.

The Court’s Ruling and Its Implications

Despite the serious allegations raised in the petition, the Supreme Court bench led by Chief Justice Sanjiv Khanna dismissed the plea, declining to entertain it.

The bench, however, did not comment on the merits of the arguments and suggested that the petitioner approach the appropriate high court for further legal recourse.

This ruling marks a significant moment in the ongoing debate about the TDS system in India. Advocates for tax reform have long criticized the system, arguing that it disproportionately affects small businesses, freelancers, and individuals who are not equipped to deal with the technicalities of the tax law.

Despite these concerns, the Supreme Court’s decision to dismiss the PIL indicates that any substantial changes to the TDS framework may require a more formal legislative process rather than judicial intervention.

The Future of TDS in India: Will Reform Be Possible?

The dismissal of this PIL does not necessarily end the debate on the TDS system, but it does highlight the challenges that advocates for tax reform face in bringing about substantial change.

Taxpayers and policymakers alike will need to consider alternative avenues for reform, whether through legislative action or administrative changes that could ease the compliance burden on assessees.

While the TDS system is designed to ensure timely tax collection and reduce tax evasion, its complexity and impact on ordinary taxpayers have raised serious questions about its fairness and efficiency.

Going forward, it remains to be seen whether the government will take any action to address the concerns raised in the PIL or whether the system will continue in its current form.