The concept of Tax Withholding at Source has always been a very controversial topic in the tax laws. In India, the commonly used term for tax witholding is TDS. It simply means that the payer of certain incomes has to deduct tax at a prescribed percentage of the total amount, at the time of payment or booking the expense and pay such tax to the authorities. Thereby, paying the sum net of TDS to the destined recipient or sometimes, merely accounting for the expense and paying TDS thereon to the authorities. Interestingly, there is also a concept of Tax Collected at Source or TCS under the Indian tax laws. TDS or TCS is an age old concept in the Indian tax laws and comes with its complicated and often, costly compliances and controversies. Let's see how.
Interestingly, the very nature and existence of TDS under the laws can spark several controversies. The underlying rationale of this concept is that the law assumes a certain tax component in every payment / expense which any person or enterprise make / incur and it demands the payer to pay such tax amount to the authorities without any delay. Thus, for tax authorities, TDS yield revenue immediately without even the need to reach out to the ultimate taxpayer. What happens to the payer and payee who have to fulfill TDS obligations, lets see : The payer has to deduct and deposit TDS and file its returns in the prescribed manner. If the payer of such income does not fulfill it's obligations, he can be subject to additional taxes, interest, penalties etc. Vide TDS, the recipient of such income pays a certain portion from its total tax on his income at the time of earning of such income itself. At the year-end, there is a final assessment done of such person's (recipient) income and tax liability and after offsetting the TDS already deposited on his income, such person pays balance taxes or claim refund.
But without questioning the sanctity or the existence of the TDS concept, the parties wants to meet their obligations. So, how to devise a system to comply with the requirements effectively.
As we now know, TDS arise at the time of every payment or expense, however for ease of performance, the law requires TDS on all payments / expenses for a particular month to be deposited in the first week of next month. For a payment made or expense booked booked month of May, TDS thereon can be deposited till June 7. Thus, arise the need to account for all payments / expenses and keep a check thereon to accurately comply with TDS requirements. And thus, arise the need to have a robust accounting system in place, develop a culture of proper and systematic accounting and administration by the people responsible for such tasks and having an effective reviewer for a final check and on time compliance.
But is it really so complicated? Let us see : the number of transactions for any enterprise can vary from few to extremely huge, however, every payment or expense has to be examined to see what is its nature/categorisation for TDS and thereby applying accurate TDS rate thereon. It is important to remember that wrong rate of TDS can cause worries for both payer and recipient. While short deduction of TDS by payer can lead to penalties and interest on the shortfall, the excess deduction of TDS can have the destined recipient receiving lower amounts than expected. Thus, correct classification of payments for TDS and deduction of taxes at accurate rates is very important. The complications arise further when payment is made to a foreign party and the classification and TDS rate can be determined under Indian domestic tax laws or the tax treaty with such country, whichever is beneficial to the foreign recipient. The payer / recipient can also obtain a lower tax certificate from the tax authorities and TDS on their respective payments can be at lower prescribed rates.
The TDS accumulated from payments made in a month has to be deposited with the authorities in the early next month. Thereafter, TDS return has to be filed by the payer and it has to be ensured that the deductee's name, registration number and other details are filled in accurately. If in the TDS return, the payer makes a mistake with the party's name, the credit of TDS will not go to the correct recipient. Then, the payer has to provide a TDS certificate to the recipients, basis which the recipient claim credit of TDS in their final tax computation and assessment.
As we have seen above, there are several obligations cast on the payer, the non- compliance of which can lead to penalties, interest, litigation. In some cases, such as TDS deducted and deposited late, the penalties can be more serious and can implicate prosecution of persons responsible. Yes, its prosecution even in cases of delay in deposition of TDS even by one day.
So, how to comply with the above. One robust accounting system is certainly the must have. The system must be designed comprehensive enough to capture all transactions taking place in an enterprise and that can generate reports at periodic intervals and enable the compliance teams perform compliances and also enable checker or reviewer to check the necessary details for corrections.
Then, comes an effective and a well defined accounting and administrative function. The accountants must possess adequate knowledge of their function and how they have to comply with TDS. The data entry teams must ensure that TDS is accurately booked and in the name of correct recipient. If there is lower tax certificate, it's effect is correctly taken. The teams must ensure that the lower tax certificate is reviewed periodically and if it gets cancelled or expired, the recipient is informed and TDS deducted accurately. Whenever, any new transaction is entered into or in doubt, professional advice is sought. Delays in accounting of invoices and expenses must be avoided. Records are properly filed and kept. The funds are allocated for payment of TDS. Year end expenses / provisions are properly booked. Having a cultured and effective accounting and administration of TDS is a regular and long term process, but if there are cracks in the accounting then things can fall into cracks and go unnoticed. It can lead to serious repercussions, as we have seen earlier.
As a natural process, errors are bound to happen in any function, so it will be there. Hence, the role of a final reviewer or checker, who has to be ultimately made responsible for checking the details and giving his go-ahead and thereby, carrying out all the compliances in time.
After doing all the above, will there be a system that can lead to error free and litigation free TDS process from the payer's end, is a difficult question. The inherent nature of TDS process, the manner in which tax laws are framed and administered by the authorities and the way TDS impact any business generally makes it highly tough to have an error free process.
However, as said earlier, better to invest in effective administration, compliance procedures and solving TDS controversies, than incurring cost in falling prey to those complications and finding solutions thereafter.
Thanks Immanuel
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