Tax professionals must be busy preparing statements before closing tax audits and ITR filing. A vital task is the reconciliation of 26as with books, particularly to avoid any Tax Credit Mismatch with Form 26AS.
There are possible issues, which may come up while doing 26as reconciliation with books
Income in books is less than 26as
This situation can’t be ignored and is going to be noticed by auditors or tax authorities. Sellers need to identify the probable reasons for this situation and file the ITR accordingly with proper reasoning to avoid notices from Income Tax department. It can happen due to multiple reasons
Timing difference
Customer deposits TDS on provision basis (at the end of financial year) while seller raises the invoice in next financial year when the service is completed.
Customer pays advance to the seller and deposits TDS with government. Seller cannot avail the credit till sales is booked.
To avoid any mismatch, these types of transactions shall be ideally carried forward to next financial year (tax credit should not be taken) or proper explanation shall be given.
This situation also gives an opportunity to seller to update their books, basis the 26as form – seller can check if any entry is not entered in books
Difference due to gross amount vs net amount
It is also possible that customer may have deducted the TDS on Invoice amount and not on Sale amount. In this case, seller should contact its customer to rectify this issue
Income does not belong to seller
A deductor may have deposited the tax by mistake against seller’s PAN number but there is no sale. Tax credit should not be considered in such cases
Income in books is greater than 26as
This is a normal scenario and normally does not attract notice from Income tax department as seller has declared the income and deposited taxes against it.
But this situation is a working capital loss for the seller and hence should not be ignored. If the difference in books income and income reflected in 26as is significant then seller cannot claim the tax credit and has to deposit the tax with government based on the income reported in books.
There can be multiple reasons for this –
Timing difference
Seller raises an invoice towards the end of the financial year; customer clears the invoice and deposits TDS in subsequent financial year. Seller can reconcile this TDS mismatch by carry forwarding the invoice to next financial year
Entry missed by deductor
It may happen that deductor misses to file TDS against an invoice or delays the TDS submission. In this case, proactive reconciliation of 26as form with books on quarterly basis can help (to read more on this please click and follow up with customers can help to save the working capital.
Income not subject to TDS
It may happen that income reported is not subject to TDS due to threshold limit not breached or foreign customers
Accrued income vs booked income
Difference may also come due to income booked in current financial year. Customer may have reported income as advance & deposited TDS in previous financial year. In such cases, transactions which were carried forward should match with these transactions.
Best Practices for 26as Reconciliation with books
It is always advisable to maintain Year on Year reconciliation records and maintain proper documentation for the same.
Proactive reconciliation on quarterly basis can help in saving the working capital
Intimate customers after reconciliation to close any issues identified related to Lower Deduction Rates, Gross vs Net amount, TDS deducted but not deposited
Always update books after 26as reconciliation to avoid any discrepancies
For more queries, please refer to FAQ’s published by Income Tax Department