Section 194T (10% TDS) causing cash-flow blockage for MSMEs

Section 194T, mandating 10% TDS on partner remuneration and interest, is likely to create serious cash-flow stress for MSMEs, particularly partnership firms and LLPs that depend heavily on working capital. Since partner payouts are regular and essential, a flat 10% deduction leads to immediate liquidity loss, with funds remaining blocked until refunds are processed after ITR filing. This causes artificial working-capital pressure and may force small firms to borrow at high cost. The provision also introduces disproportionate compliance burdens—regular TDS deductions, returns, certificates, reconciliations, and exposure to interest and penalties—despite the fact that partner income is already fully reported through books, tax audits, and ITRs of both firm and partners. The flat rate operates regressively, impacting smaller firms more severely, increasing refund dependence, administrative workload, and disputes, without delivering meaningful additional revenue gains. A reduced TDS rate and threshold-based or audit-linked relaxations are therefore sought.

Dated 24.01.2026

To 
Smt. Nirmala Sitharaman ji
Hon’ble Union Minister of Finance
Government of India
North Block, New Delhi

Subject: Representation for reduction of TDS rate under Section 194T from 10% to 1% – to avoid regressive tax impact, reduce cash-flow blockage, and prevent duplicate compliance

Respected Madam,

With utmost respect, I wish to submit this representation seeking your kind intervention for rationalisation of Section 194T of the Income-tax Act, which mandates TDS @ 10% on payments made by Partnership Firms/LLPs to their partners, such as remuneration, salary, commission, bonus and interest, once the threshold is crossed.

While the intention of strengthening compliance and widening the tax base is appreciated, the present framework of 10% TDS under Section 194T is creating genuine hardship for small partnership firms, MSMEs, and professional entities, mainly due to cash-flow blockage, increased compliance burden, and repetitive reporting, even though these transactions are already fully disclosed through existing ITR and audit compliances.

Section 194T (10% TDS) causing cash-flow blockage for MSMEs

1) Severe cash-flow blockage and working capital pressure

Partnership firms and LLPs are typically working-capital driven. Partner remuneration and interest are often monthly, essential payouts, linked to business continuity and household obligations of partners.

However, deduction of 10% TDS results in:

• Immediate reduction in partner receipts (only 90% received),
• Blocked funds for several months until ITR filing and refund processing, and
• Artificial liquidity stress, forcing genuine businesses to borrow funds at high cost.

Illustration:

If partner remuneration is ₹2,00,000 per month, then TDS @10% blocks ₹20,000 per month, i.e., ₹2,40,000 per year per partner.

In firms with multiple partners, this becomes a significant cash-flow drain withoutcorres ponding revenue benefit.

2) Additional compliance burden and avoidable procedural complexity

Many small firms do not have dedicated tax teams. Section 194T imposes continuous compliance such as:

• periodic deduction and deposit of TDS,
• filing of TDS returns,
• issuance of TDS certificates,
• reconciliation with Form 26AS/AIS, and
• responding to notices for mismatch/short deduction/late deposit.

Even minor delays lead to interest, late fees, and penal exposure, increasing compliance cost disproportionately for small taxpayers.

3) Duplicate reporting already exists in ITR and audit – Section 194T becomes repetitive

Madam, it is humbly submitted that partner payments are not hidden or untraceable. They are already reported through existing compliances like:

• books of accounts,
• ITR of the firm/LLP,
• Tax Audit Report (Form 3CD) wherever applicable, and
• ITR of the partner, where the income is offered to tax.

Therefore, imposing a high-rate TDS mechanism on the same reported transactions leads to duplicate compliance without materially improving transparency.

It is respectfully submitted that the mechanism should primarily focus on reporting of income through existing compliance systems, rather than introducing an additional high-rate TDS layer which blocks funds and increases procedural burden.

4) Regressive tax impact should be discouraged to attract more direct tax participation

Madam, one of the most important objectives of tax policy is to encourage more taxpayers to voluntarily enter and remain within the ambit of direct taxation. For this, tax administration must remain simple, fair, and non-regressive in practical impact.

A flat 10% TDS under Section 194T, irrespective of the partner’s actual tax slab or effective tax liability, results in a regressive effect, because:

• smaller partners and smaller firms face a higher cash-flow burden relative to their income,
• refunds become routine, making honest taxpayers dependent on refund timelines, and
• the overall system feels compliance-heavy rather than facilitative.

Discouraging such regressive practical outcomes will support the larger national objective of widening the direct tax base by building trust, ease, and voluntary compliance.

5) No major revenue gain, but increased refund burden and avoidable disputes

In many cases, the 10% deduction leads to:

• excess TDS credit,
• refund claims,
• increased workload for CPC, and
• avoidable mismatch notices and grievances.

Thus, the system experiences higher administrative load, while genuine businesses face avoidable hardship, without meaningful additional revenue collection.

Prayer / Request

In view of the above, I humbly request the Hon’ble Finance Ministry to kindly consider:

Primary request:

✅ Reduce TDS rate under Section 194T from 10% to 1%

This will ensure:

• compliance continues,
• cash-flow blockage reduces substantially,
• refund dependency reduces, and
• small firms remain encouraged to operate within the direct tax system.

Further supportive relief measures (if considered appropriate):

• enhance the threshold to protect small firms, and/or
• provide relaxation where transactions are already covered under tax audit and ITR reporting.

Conclusion

Madam, Section 194T’s intent is understood and respected. However, the present rate and structure create additional compliance and liquidity stress, even though the same income is already captured through existing reporting mechanisms. A rationalised approach focusing on reporting-based compliance and a reduced TDS rate will promote ease of doing business and encourage more taxpayers to participate willingly in the direct tax system.

I shall be grateful for your kind consideration of this genuine representation.

Thanking You,

Yours faithfully,
Anirban Dey
Silchar, Assam
Date: 23 January 2026