Supreme Court Rejects Petition to Declare TDS System Void and Unconstitutional

New Delhi (The Uttam Hindu): The Supreme Court on Friday rejected a public interest litigation (PIL) that sought the scrapping of the Tax Deducted at Source (TDS) system as outlined under the Income Tax Act. A bench of Chief Justice Sanjiv Khanna and Justice Sanjay Kumar told the petitioner, "We will not entertain this (petition). Dismissed." While not commenting on the merits of the case, the bench suggested that the petitioner approach the appropriate high court for further relief. The petition, which termed the TDS system as "manifestly arbitrary, irrational and against Articles 14, 19 and 21 of the Constitution," argued that the regulatory framework surrounding TDS is overly technical, requiring specialized legal and financial expertise that most assessees lack. This places considerable administrative and financial burdens on them.

It claimed that despite the government having sufficient resources to collect taxes directly, it transfers this responsibility to TDS assessees without any compensation. The petition also highlighted how minor errors—such as incorrect names, account details, PAN numbers or even spacing—can cause TDS amounts to be deposited by the assessor but not reflected in the assessee’s account. As a result, the legally owed amounts remain withheld until the errors are identified and rectified. The petition further argued that the TDS system imposes significant administrative costs on assessees, such as salaries for employees managing TDS compliance and professional fees for accountants or tax consultants. It also stated that even unintentional non-compliance leads to heavy penalties, interest and legal action under Sections 201 and 276B of the Income Tax Act.

The petitioners contended that illiterate or economically weaker assessees who lack the capacity to navigate the complex system, suffer undue hardship which undermines the constitutional guarantee of equality under Article 14. They also argued that assigning tax collection duties to TDS assessees amounts to "forced labour" under Article 23(1) of the Constitution, which prohibits coerced labor. According to the petition, the TDS system, governed by 39 sections, 28 rules and 41 forms under the Income Tax Act, requires assessees (the deductors) to collect tax at the time of making payments to payees, including payments for salaries, contractual fees, rents, commissions and other taxable sums.