Budget 2026: Can India Finally Fix Its Broken Tax System?

Let’s be honest: paying taxes in India often feels like running an obstacle course blindfolded. You’ve got TDS rules that shift like sand, disputes that drag on for years, and customs procedures that move at a snail’s pace. With Budget 2026 just around the corner, there’s a rare window of opportunity to fix this mess—not just for big corporations, but for every small business owner, freelancer, and salaried employee drowning in compliance paperwork.

The stakes? Nothing short of India’s economic credibility. The World Bank’s Ease of Doing Business rankings may be retired, but global investors still watch how smoothly a country handles its tax system. And right now, India’s system is more friction than flow. So what should Finance Minister Nirmala Sitharaman prioritize in Budget 2026 to truly improve the ease of paying taxes?

Table of Contents

• Why the Current Tax System Is Broken
• Three Key Reforms Budget 2026 Must Address
• Tackling TDS Complexity Once and For All
• Ending the Tax Dispute Nightmare
• Modernizing Customs for a Global Economy
• Conclusion: A Blueprint for Trust
• Sources

Why the Current Tax System Is Broken

India’s tax infrastructure hasn’t kept pace with its digital ambitions. While we’ve rolled out GST and e-filing portals, the underlying processes remain tangled in legacy logic. Consider this: over 50 million TDS returns are filed annually, yet minor mismatches trigger notices that take months to resolve [[1]]. Meanwhile, the Income Tax Department has a backlog of over 4.5 lakh pending appeals—some dating back to the early 2010s [[2]].

This isn’t just bureaucratic inefficiency; it’s a direct drag on investment. When entrepreneurs spend more time decoding tax notices than growing their business, something’s deeply wrong. That’s why Budget 2026 can’t afford incremental tweaks—it needs bold, systemic fixes.

Three Key Reforms Budget 2026 Must Address

Experts and industry bodies—including FICCI and CII—have converged on three critical areas where reform would yield immediate relief:

1. Withholding Tax (TDS) Simplification
2. Accelerated Tax Dispute Resolution
3. End-to-End Customs Automation

Let’s unpack each one.

Tackling TDS Complexity Once and For All

TDS (Tax Deducted at Source) was meant to be a simple prepayment mechanism. Instead, it’s become a compliance minefield. There are over 30 different TDS sections under the Income Tax Act, each with its own rate, threshold, and form. Miss a PAN entry by one digit? Get a notice. File Form 26Q a day late? Penalty applies.

Budget 2026 should consolidate these into a unified, risk-based framework. For example:

• Single TDS Return: Merge all quarterly TDS filings (26Q, 27Q, etc.) into one annual return for small businesses with turnover under ₹5 crore.
• Auto-Reconciliation: Integrate TDS credits directly with bank statements and Form 26AS so mismatches self-correct.
• Grace Periods: Introduce a 15-day penalty-free window for first-time filers or genuine errors.

Such changes would drastically cut down on avoidable litigation and build goodwill among taxpayers.

Ending the Tax Dispute Nightmare

India’s tax dispute system is infamous for its glacial pace. A case can bounce between the Commissioner (Appeals), ITAT, High Court, and Supreme Court for over a decade. The cost? An estimated ₹9.5 lakh crore locked in disputed tax demands [[3]].

To restore trust, Budget 2026 must supercharge dispute resolution:

• Expand the Vivad se Vishwas Scheme: Make it permanent with simplified eligibility and faster refunds.
• Digital First Appeals: Mandate all appeals under ₹10 lakh to be resolved via video hearings within 90 days.
• Independent Review Panels: Create taxpayer-friendly benches with equal representation from legal and industry experts.

As the Income Tax Department itself acknowledges, reducing pendency is key to improving voluntary compliance [[4]].

Modernizing Customs for a Global Economy

In today’s just-in-time supply chains, customs delays are deal-breakers. Despite initiatives like ICEGATE, importers still face manual verifications, inconsistent classifications, and unpredictable clearance times.

Budget 2026 should fast-track full automation:

• AI-Powered Risk Engine: Use machine learning to auto-clear low-risk consignments (like pharmaceuticals or electronics components) in under 2 hours.
• Single Window Integration: Link customs data with GSTN, DGFT, and RBI systems to eliminate duplicate submissions.
• Transparent Tariff Classification: Publish a public, searchable database of HS codes with real-time rulings.

Countries like Singapore and South Korea have already achieved near-instant customs clearance. India can too—with the right investment in customs automation.

Conclusion: A Blueprint for Trust

Budget 2026 isn’t just about fiscal math—it’s about restoring faith in the system. By simplifying TDS, slashing dispute timelines, and modernizing customs, the government can transform tax compliance from a burden into a seamless civic act. These reforms won’t just improve the ease of paying taxes; they’ll signal to the world that India is open for business—on fair, predictable, and efficient terms. The ball is in the Finance Minister’s court. Let’s hope she plays to win.

For more on India’s fiscal policy, explore our deep dive on [INTERNAL_LINK:gst-reforms-post-2025].

Sources

• Times of India. “How Budget 2026 can improve ease of paying taxes.” https://timesofindia.indiatimes.com/… [[1]]
• Ministry of Finance. “Annual Report on Direct Taxes.” Government of India, 2025. [[2]]
• Economic Survey of India 2025. Chapter 7: “Resolving Tax Litigation.” [[3]]
• Income Tax Department, India. Official Portal. https://www.incometaxindia.gov.in/ [[4]]