Tax Deducted at Source (TDS) is applicable on almost every purchase made by an organization, whether goods or services.

Companies are supposed to deduct TDS as per Income Tax Act on behalf of Government and deposit TDS on monthly basis. Non-compliance attracts penalties, disallowance of expenses and prosecution in some cases.

There are three stages of TDS compliance for a company

Monthly TDS liability computation – For expenses done by any company in a month, TDS liability has to be calculated before 7 th of next month and TDS has to be deposited with government mentioning the sections of TDS under which TDS has been deducted. Company needs to preserve the details like TDS Challan No., BSR Code and Date for quarterly return filing.

Quarterly Return Filing – Based on the monthly TDS Challans, company need to file its quarterly Income Tax Returns as per utilities for Form 26Q or Form 27EQ as applicable to the government and once such return is filed & accepted by government, respective Form 16A(s) can be shared with vendors and same information is populated in 26AS form of the vendor(s) on TRACES portal

Annual Form 3CD (as per Clause 34A of Income Tax Act) – Company needs to reconcile all its expenses & payments (transaction wise) for TDS deduction mentioning whether the expense was subject to TDS or not with reason mentioned. If the right amount of tax was deducted or lesser amount. If lesser amount of TDS was deducted then companies need to pay interest. Company needs to get this attested by auditors to complete the audit.

Typical Challenges in TDS Compliances

Large Data Volume – Any company doing business of more than INR 50 Crores annually has large number of purchase transactions and tax team spends significant amount of time in computing monthly TDS liability and generating Form 3CD as per clause 34A.
With manual processes, achieving transaction by transaction reconciliation is an uphill task for tax teams.

People Risk – With manual processes, company relies on tax professional whether any expense is subject to TDS deduction or not. In case the person goes wrong, company carries non-compliance risk. If the person leaves the company, then it becomes difficult for company to explain how the TDS calculations were arrived at without reworking the entire data.

Audit Risk – If reconciliation is done on total basis or just by matching the expenses with quarterly return filed then auditors may leave a remark while attesting Form 3CD, which is not a desirable situation for a company.

Looking at the overall process for TDS compliance and typical issues –

it is very important for a company to use a system which can help in ensuring accuracy, saving time, strengthening audit trail

A company need to reconcile TDS Receivable also to ensure right amount of tax credit can be claimed without loosing the time. To know more on this please click here