Overview
- Clause 34 of Tax Audit Report (Form 3CD) requires Tax Auditors to comment on the overall Tax Deducted at Source (TDS/TCS) compliances by the tax payers. In accordance with the guidelines issued by Institute of Chartered Accountants of India on this clause, the auditors ask for a reconciliation of Financial Statements with the TDS/TCS returns.
- Clause 34 (a) requires furnishing of certain details regarding the amount of payment on which tax was required to be deducted and whether the same has been deducted and deposited to the credit of Central Government.
Clause 34(a) forming part of the Tax Audit Report is as follows –
34. (a) Whether the assessee is required to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB, if yes please furnish:
| Tax Deduction and Collection Account Number (TAN) | Section | Nature of Payment | Total Amount of payment or receipt of the nature specified in column (3) | Total amount on which tax was required to be deducted or collected at specified rate out of (4) | Total amount on which tax was deducted or collected at specified rate out of (5) | Amount of Tax deducted or collected out of (6) | Total amount on which tax was deducted or collected at less than specified rate out of (7) | Amount of Tax deducted or collected out of (8) | Amount of Tax deducted or collected not deposited to the credit of the Central Government out of (6) and (8) |
| (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) |
- Column (1) of Clause 34(a) requires reporting of each Tax deduction and collection Account number with regard to which tax has been deducted or collected at source.
- Column (2) requires to report various sections under which tax is required to be deducted or collected at source.
- Column (3) requires to furnish the details regarding the nature of payment.
- Column (4) requires to furnish the details of the total amount of payment or receipt of the nature specified in column (3). The details in the said column may be drawn from the books of account and other relevant documents which include aggregate of payments on which tax is liable to be deducted as well as not liable to be deducted.
- Column (5) casts an onerous responsibility on the auditor, wherein it is required to furnish the details of total amount on which the tax was required to be deducted or collected out of the amount mentioned in column (4) having regard to the nature of payments/ receipts under the relevant sections of Chapter XVII-B / XVII-BB.
- The Auditor, in order to report amounts in clause 34 of the Tax Audit Report, requires proper reconciliation of the amounts debited to Profit and Loss Account and out of the said amount, the amount on which tax has been deducted at source under Chapter XVII-B/XVII-BB.
Issues and Challenges
- In every business there exists different departments which hold lot of importance, and like other business sections, tax departments face increasing demand to operate more efficiently. At the same time, expectations are growing for tax departments to provide strategic tax viewpoints and additional value to the broader organization.
- Over the past few years, the tax administration has significantly increased the applicability of TDS provisions with the object of bringing the entire supply chain of businesses directly within the reporting landscape. In addition, they have also introduced higher TDS rates for transactions with parties who have defaulted in filing the Income Tax Returns. The Finance Act, 2022 has further extended the provisions of TDS to the transactions where one business party provides perquisite or benefit and also on transactions involving virtual digital assets.
- Expanding scope such as withholding taxes on dividends and purchase of goods is making the process more cumbersome and clerical.
- It is essential to note that it is the primary responsibility of the entity being audited, to prepare the information in such a manner that the Tax Auditor can verify the compliance as required in the clause.
- It may be noted that while determining the amount to be reported in Clause 34(a), the payments made by the entity in advance should also be considered and the reporting should not be restricted only to expenses debited to Profit & Loss or the TDS/TCS returns filed.
- Against the expenses where tax has not been deducted a reasoning is required to be given so that the auditors can judge whether disallowance u/s 40(a)(i)/40(a)(ia) is required or not.
- The Expense side reconciliation of voluminous data, for the purpose of reporting in clause 34, requires lot of efforts in the analysis of the data and identifying reasons for short/non-deduction of TDS.
- Various data sources have to be calibrated and synchronised in order to report the correct figures in Clause 34 of the Tax Audit Report.
- The onerous compliance, reconciliation and disclosure requirements requires the entities to grease their elbows in putting various reports and data sets together in meaningful manner.
- Further, the Tax Authorities are using sharper tools for completing the assessments and thereby requiring the tax assessees to provide these reconciliations required in the Tax Audit Report.
- Handling high volume of transactions with the lack of system based controls and validations in place leads to non-compliance of the legal provisions prescribed by law and thereby incorrect reporting which may in turn lead to errors and incorrect reporting.
- There is an increasing reputational and financial risks for the perceived non-compliance and may even jeopardise the normal functioning of the entity due to tax litigation which may arise due to inadvertent errors in handling the data and thereby incorrectly reporting the figures with the Tax Authorities.
- The Entities now use sophisticated Enterprise Resource Planning Software for the administration and accounting work. Extracting relevant reports from these software and then generating meaningful data for the purpose of reporting in clause 34 of the Tax Audit Report is easier said than done.
- In order to avoid lengthy workings in reconciling different data sets, some entities for the sake of simplicity, report the consolidated amounts of figures reported in TDS/TCS Quarterly Return, which is only a resort for the purpose of reporting amounts in clause 34, but it is not the correct and valid approach.
- Some entities rather than preparing the reports on yearly basis, try to reconcile the expense ledgers with the tax deduction ledgers on monthly or quarterly basis, which although is useful, leading to small data sets but it sometimes require extra time and efforts to perform working and analysis on short intervals.
- Further, expense and Withholding tax mapping requires technical taxation knowledge along with the expertise to contemporise the data sets and generate the meaningful results and identify areas of non-compliance to timely act upon and thereby avoid any punitive action by the Taxation Authorities.
- The working performed for clause 34 reconciliation forms basis of reporting for other clauses of Tax Audit Report also, for instance clause 21 of the Tax Audit Report. Further, the analysis performed for clause 34 working will have manyfold impact, as the figures reported in the clauses of Tax Audit Report have impact upon future years’ expenditure allowance and thus incorrect working and thereby incorrect reporting will lead to erroneous allowance/ disallowance working, attracting legal action against the entities being audited.
Therefore, in view of the above discussion, it is important that entities understand the importance of performing the reconciliations for the purpose of reporting in clause 34 and the issues and challenges that such reconciliations bring along.