We want to reconcile our sale and TDS with 26as form – this is what we hear when we speak to different companies regarding automation of 26as reconciliation. This is also expected by auditors while auditing books of any company.
Does TDS accounting practice followed by companies is directed to meet this objective?
Let’s have a look at the TDS accounting methods followed by companies to book their TDS receivable in their ERP system
TDS Accounting Scenario 1 – TDS Booked at the time receipt of payment
Majority of companies are booking TDS Receivable on the receipt of payment in their books, with different methods as mentioned below
– Some companies book TDS on the basis of payment advice received from the customer but there is no linkage with the sales invoice(s) against which the TDS has been booked.
– Few companies book TDS by passing a journal entry in the ERP system and one journal entry may be linked to single payment advice or multiple payment advices
In this case, the data is not linked to sales and moreover the data which is used for reconciliation is that data where payment is already received.
This reconciliation is more a reconciliation of Form 16A’s received v/s the entries updated in 26as form. However, this accounting practice doesn’t meet the expectation of reconciling sales and TDS with 26as form.
TDS Accounting Scenario 2 – Companies booking TDS on accrual basis
Few companies have started booking TDS on accrual basis (expected TDS amount as per the nature of services and LDC shared) and they are reconciling their sales and expected TDS in books with respect to Amount paid and TDS reflected in 26as form.
In this approach, companies can easily update the amount of expected TDS based on the nature of services provided or Lower Tax Deduction certificates (LDC) shared with customers.
Companies know beforehand the amount of sum they expect to receive or received from the customers and amount of TDS expected from customers. During reconciliation, companies can easily identify mismatches where the payment has been received and TDS has been deducted as per the expected rates. If a company is doing reconciliation on quarterly basis then they can intimate the customers to ensure that all the invoices are being paid and TDS is deducted at a desired rate.
This can help companies in saving working capital by proactively reconciling the expected TDS amount with TDS amount reflecting in 26as form. Any discrepancy/TDS not deposited can be followed up with customer for a rectification. Delay in depositing TDS by customer is a working capital loss for any company.
Proactive reconciliation also helps in avoiding any disputes which may happen due to different tax rates applied by customers or tax credit not reflecting in 26as form but deducted by customer (https://economictimes.indiatimes.com/wealth/legal/will/rs-1-5-crore-tax-refund-withheld-by-income-tax-dept-due-to-mismatch-between-itr-and-form-26as-taxpayer-files-case-wins-in-high-court/articleshow/124801941.cms?utm_source)
In this case, the general expectation of reconciling sales & TDS both is being met in addition to identify a variance of expected TDS v/s actual TDS reflecting in 26as form.
Example – A company was reconciling its books data with 26as form recently. As per the books, TDS should have been deducted at 1% (LDC rate) rate while it was deducted at 2%. Since the company had updated its records with expected TDS amount and during reconciliation, they were quickly able to identify the variance for both sales and TDS amount.
The corrective action was to send a follow up mail to the customer to
- Remind them to deduct TDS at lower tax rate
- Identify the reasons for difference in sales amount – in some cases, TDS was deducted at Invoice value and not at taxable value and few other invoices, were yet to be paid and hence TDS was also pending.
In this example, company clearly knows the amount of sales & TDS reconciled, discrepancy in tax rate and the amount of TDS which is due bit not deposited with government yet. While both approaches are right but to meet the defined objective of reconciling sales and TDS with 26as form, second approach seems to be more suitable and disciplined.
To understand possible reasons for Tax Credit mismatch with form 26as, please read