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. For more details please read Clause 34(a)- Tax Audit Reporting- Nitty Gritty and Challenges Involved
To achieve this objective, every organization is supposed to reconcile its expenses with P&L to assess TDS liability (applicable or not applicable with reasoning for every line item).
Based on this reconciliation, Tax Auditor is going to attest Form 3CD as per clause 34 of IT Act.
It’s a mammoth task for tax team of any organization if the expense line items goes into few lakhs per annum. Every line item in expense ledger must be checked for
- Applicability of TDS whether applicable or not applicable depending upon nature of expense, vendor type etc.
- TDS Section applicability depending upon nature of expense
- TDS Rate applicability depending upon vendor type whether vendor is a company/individual, 206AB compliant status, Lower Deduction certificate etc.
Companies do spend weeks and months on these tasks if it is done manually. Typical challenges involved in doing this reconciliation are as follows
- ERP Configuration – While companies do spend millions in implementing best ERP solutions but at the end it comes to configuration of ERP Systems. For expense booking, GL Codes are created in ERP depending upon the nature of expense. While creating a vendor, nature of expense is also defined depending upon the services being taken from the vendor or material. But it is all left to the discretion of user to select the GL Code at the time of expense booking and there is fool proofing done to avoid such mistakes. Tax teams often need to go through invoices to check if user has committed a mistake at the time of invoice booking.
- Time Gap – It has been often seen that there is a significant amount of time gap between the receipt of material or service and booking of expense in ERP System. In SAP terminology, it is called MIGO and MIRO difference. Due to this time gap, tax team need to keep a track of expenses which are not yet booked or have been booked without Purchase Order.
At times, the workaround used to save time is using the quarterly TDS Returns filed to create a reconciliation statement which can be risky for companies if Tax Auditor or assessing finds out an anomaly later.
This can bring a loss to reputation of company, getting involved into litigation and attracting penalties.
Recommended approach is to reconcile all expense line items with P&L statement with a reasoning regarding TDS applicability.
To save time, companies can either do fool proofing at the time of ERP Implementation or they can use technology to automate generation of Form 3CD as per Income Tax Act.