TDS | Tax Credit: TDS and TCS: Are you in control of your organisation’s tax credits?

Often, organisations run the risk of losing tax credits (i.e., TDS and TCS) due to lack of regular reconciliation between books of accounts and the government records (Form 26AS). The year-on-year lock up of TDS credit leads to significant working capital inefficiencies, which becomes a core area of concern for CFOs and tax heads of organisations.

Beyond tax credits, if revenues as reported in return of income as compared to revenues reflected in Form 26AS are short and credits are taken as per Form 26AS, it becomes a fit case for under-reporting of income during tax scrutiny. It becomes imperative to furnish a line-by-line reconciliation with explanations on mismatches and substantiate the correct revenue details with correct corresponding year before the tax officer.

This exercise for reconciling tax credits and revenue reconciliation is, by no yardstick, simple. Some of the commonly encountered problems faced by organizations are on:

  • Data capturing
  • Data processing & monitoring
  • Lack of adequate governance & control

To elaborate:

  1. Data recorded in ERPs is often not complete or correct and can lead to misleading/ incomplete results on reconciliation
  2. Manual efforts to reconcile voluminous data sets complicates the overall process to identify reasons for mismatches and take effective action for resolution. Often, such reconciliation is undertaken on excel files, which become bulky and non-responsive leading to significant processing time
  3. Lack of timely monitoring of available credits – Majority of the organisations avail tax credits as per form 26AS. On the other hand, customers/ suppliers continuously update their TDS/ TCS returns leading to regular changes in Form 26AS impacting availability of tax credits. Hence, credits claimed in return of income can change during scrutiny assessment and requires timely monitoring & corrective action
  4. Difficulties in getting TDS/ TCS return rectified from Customers/ Suppliers – Most organisations undertake reconciliation during scrutiny proceedings (3 years after the end of financial year of transaction) and at that point in time, the follow-up action of calling up customers/ suppliers for rectification of their past TDS/ TCS returns to correctly reflect tax credits in Form 26AS becomes a challenging task
  5. Lack of visibility and adequate control for governance further adds to the working capital blockage and income additions in scrutiny proceedings. To illustrate, below are few critical reasons for mismatches leading to potential credit leakages/ working capital inefficiencies, which require further action:
  • Loss of tax credits due to incorrect PAN or non-reporting in TDS return
  • Excess deduction of TDS on total invoice including GST
  • Postponing of availment of tax credits with respect to income not offered to tax in current year

The lack of visibility on above cases, leads to loss of credits & additions during scrutiny and also becomes a key risk area for levy of interest and penalties additionally.

So, how can technology help in effectively managing tax credits and revenue reconciliation? In our experience, there are 5 critical aspects that contribute to its success:

  • A well-defined process for recording transactions
  • Digital governance
  • Data validation
  • Clear visibility of corrective action needed
  • Comprehensive review and rigorous follow-ups

To elaborate on this, following points are noteworthy:

  • Complete and correct input is most essential for any automation.
  • Adopting technologies which facilitate tax credits and revenue reconciliation on an automated basis and help in digitalizing the process of reconciliation can greatly help.
  • Such technology should have data validation rules, it should be flexible to reconcile data across multiple years, have in-built multiple parameters to reconcile data such as one line to many or many lines to one, to achieve maximum reconciliation on an automated basis. Tax technical knowledge can be leveraged to conceptualise scenarios and build logic/ parameters to achieve automated reconciliations.
  • Most importantly, upon reconciliation and identification of reasons for mismatches, the technology platform should be able to share the bird’s eye view of reason of mismatches with customers/suppliers and should enable insightful and analytical dashboards which track potential tax credit leakages due to incorrect entries made by customers/ suppliers.
  • Year-on-year dashboards are also helpful for tax or finance heads to evaluate whether there is a case for process improvement to bring down the lock-up on tax credits. For instance, it is sometimes seen that customers deduct TDS on the GST amount on invoice also, whereas technically there is no such requirement under the law. With close monitoring of such cases, one can insist on getting this rectified timely and helping in bringing better working capital efficiency.
  • Equally important is to have a digital governance & control which enables a comprehensive review of reasons of mismatches, rigorous follow-ups with customers and suppliers and evaluate scope for process improvement through deploying an experienced team (internal or outsourced) to manage the overall value of the reconciliation exercise. In our experience, several organisations have benefitted with focus on embedding processes with technology and such a solution is highly sought after by CFOs/ Tax heads to gain better visibility & control of credit reconciliation.

To sum it all, through a careful adoption of the right process, digital governance coupled with a tax technical experienced team to effectively manage the credits, one can surely achieve an increased automation and accuracy in this important reconciliation process with the end objective to unlock loss of tax credits and improve working capital efficiency.

(The writer is Partner, Tax & CIT Tax Technology Leader, KPMG in India)

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