Overview

• In the last write up we had discussed, the issues and areas of concern with respect to Clause 34 Working of Tax Audit Report (Form 3CD). The auditors in order to report in the Tax Audit Report ask for a reconciliation of Financial Statements with the TDS/TCS returns, which, leave aside the complex procedure, is a cumbersome task to perform with bulky data in place.
• Therefore, in this era of big data, the need for technology to streamline the processes, especially those which attach statutory importance to it, becomes important.

Technology can be the only solution

• Bringing technology into business for core administration tasks has been cited as one of the innovations that has rescued most corporate tax departments over the last two years. 

• Further, entities expanding their presence in different states/countries need robust system to govern their tax function more efficiently to streamline the processes within all the jurisdictions.

• Apart from the challenges and factors discussed above, COVID-19 outbreak has created a situation where the employee attrition is increasing day by day. Accordingly, it is important that the entities understand that tasks should be technology driven rather than people driven to avoid sudden disruption in the organisation.

• With a changing compliance arrangement, tax and finance leaders are now a days keener to adopt technology within almost all the function in order to improve data accuracy, reducing manual effort of data collation and reconciliations and identify tax risks and potential tax leakages.

• Accordingly, enablement of technology even within the tax function has become urgent and important these days as the tax administrations have started employing sophisticated technologies to analyse the data. The high level of digitalisation of tax administration in India has enabled tax authorities to identify the deficiencies in the data and cases where there are defaults.

• Reconciliations in relation to clause 34 of Tax Audit Report is one among many other areas where technology can play an important role in streamlining the process especially for the tax functions.

Overcoming the tedious task 

• Presently, employing technology to deploy an integrated approach for tax compliances has become a must-have requirement for organizations to avoid tax qualifications knocking the doors of the business, leading to unwanted chaos in the day to day working and eventually welcoming tax litigation.

• The compliance of “Direct tax provisions” not just involves dealing with huge data, but it also requires other provisions of law including the adherence to thresholds prescribed by various sections of the Indian Income Tax Laws, along with applying higher rates of taxes in case of incorrect Permanent Account Number (‘PAN’) as required by section 206AA of the Act. Further, the tool facilitates checking the status of the deductee if they fall under the category of specified person as prescribed by section 206AB of the Income Tax Act for applying double rate of tax where the deductor has not filed its Income Tax Return for the previous years, amongst other checks.

• For the purposes of clause 34(a) of Tax Audit Report, reconciliation is required of the expense general ledgers (GL) vis-à-vis details reported in the TDS return. Expense data is voluminous and unstructured which makes it time consuming and prone to error. Lack of reliable report regarding transactions on which ‘tax is not deducted’ results in overall qualification in clause 34(a) of Tax Audit Report.

• Therefore, it is important to have a tool to manage the compliances with a touch of a button providing a ready output for the monthly, quarterly and Clause 34 reconciliation of the Tax Audit Report without involving the time and efforts of the intellectual workforce in something which is routine, mundane and monotonous.

• Employing effective tool to perform the task, will help in tracing the financial statement expense line items to its TDS data points (date of payments, reasons for non-deduction, etc.) and vice versa, thereby improving accuracy in applying tax rates and sections using machine learning.

• This will not only help in easy preparation of reports but will also help higher management in re-evaluating their existing control mechanics by examining the applied withholding tax rates.

• Different reports for different users, in accordance with their requirements, is also one of the purpose of bringing technology into place.

• The increased accuracy of the reconciliation report and process improvements with the help of a technology tool will lead to better analysis of the data and help in different areas of business.

• The time and efforts shall also reduce significantly on the complex reconciliation process which will lead to efficiency and increased accuracy.

• Accordingly, a comprehensive cloud-based Direct tax payable solution which is equipped to handle Tax Deduction at Source (‘TDS’) on different types of purchase of goods and services is important. 

• With a paradigm shift in the manner tax departments are working and the businesses operations expanding their global presence, it is important to use a web-based tool that integrate data obtained from ERP and manage petty direct tax compliances so that the business can focus on more important and productive tasks. A tool that integrates data from three different dimensions being TDS transactions, general ledger account mapping, and vendor and challan details, will help deliver accurate reports, balance tight control, and efficiency, be audit-ready and gain actionable insights. A tool which with the following features will help streamline the withholding tax procedures and process:
  • Monthly TDS computations, deposits and Quarterly returns
  • Audit trail mechanism for better control
  • Reconciliation of financial statements with TDS returns and general ledger
  • Historical data management to analyse past data
  • Analytical reports to assist the senior management in effective decision making
  • Managing High Volume of data paired with vast processing power. 
  • Automated process to provide tax credit to vendors
  • Prompts transactions where rectifications are required
  • Analyses impact of reversals, debit notes and credit notes

• Automation also helps to analyse the rates applicable to a particular transaction along with rates applicable to a particular vendor, being an individual or company. For instance, section 194C requires the deduction of TDS at a lower rate in case of vendors being individual/ Hindu Undivided Family. The tool helps analyse the rate applicable on the basis of the PAN Number. 

• Having discussed the benefits of an automated tool to streamline direct tax processes, it is important to have process driven systems in place to apply appropriate checks and balances to avoid punitive implications on the business which will not just have monetary impact but will also impact the reputation of the business in the market.