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TDS and TCS: Do you have Complete Control Over Your Company’s Tax Credits?

Organizations frequently risk losing tax credits (i.e., TDS and TCS) owing to a lack of regular reconciliation between books of accounts and government data (Form 26AS). The year-on-year lock-up of TDS credit caused huge working capital inefficiencies, which is a major source of worry for CFOs and tax chiefs.

Aside from tax credits, if revenues stated in returns of income fall short of revenues represented in Form 26AS and credits are obtained as per Form 26AS, it becomes a fit case for under-reporting of income during tax scrutiny. It is now necessary to provide a line-by-line reconciliation with explanations for any discrepancies and to corroborate the proper income data with the correct corresponding year before the tax officer.

This exercise in balancing tax credits and revenue is far from straightforward. The following are some of the most typical issues that organizations face:

  • Data collection
  • Monitoring and data processing
  • Ineffective governance and control

To elaborate:

  1. Data captured in ERPs is frequently missing or incorrect, resulting in misleading/incomplete findings during reconciliation.
  2. Manual efforts to reconcile large data sets hinder the entire process of identifying the causes of discrepancies and taking appropriate measures to resolve them. Often, such reconciliation is performed on excel files, which grow large and unresponsive, resulting in substantial processing time.
  3. Inadequate monitoring of available credits – The majority of organizations claim tax credits using Form 26AS. Customers/suppliers, on the other hand, regularly update their TDS/TCS returns, resulting in regular changes in Form 26AS, which affects the availability of tax credits. As a result, credits claimed in income tax returns may vary during an inspection, necessitating quick monitoring and remedial action.
  4. Difficulties in obtaining TDS/ TCS returns from Customers/ Suppliers – Most organizations undertake reconciliation during scrutiny proceedings (3 years after the end of the fiscal year of a transaction), and at that point, 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 difficult task.
  5. A lack of visibility and sufficient governance control contributes to working capital blockage and income increases in scrutiny processes. To demonstrate, consider the following significant reasons for mismatches leading to possible credit leakages/working capital inefficiencies, which necessitate additional action:
  • Tax credits are lost owing to erroneous PAN or non-reporting in TDS returns.
  • Excess TDS deduction on the entire invoice including GST
  • Postponement of taking advantage of tax advantages for income not taxed in the current year

The absence of visibility in the aforesaid circumstances results in the loss of credits and additions during the examination and also becomes a critical risk area for the imposition of interest and penalties.

So, how might technology aid in the efficient management of tax credits and revenue reconciliation? In our experience, five important factors contribute to its success:

A well-defined procedure for documenting transactions

Digital administration

  • Validation of data
  • Corrective action is visible.
  • A comprehensive examination and stringent follow-up

To elaborate, the following things are noteworthy:

  • Complete and correct input is critical for any automation.
  •  Adopting solutions that automate tax credit and revenue reconciliation and aid in digitalizing the reconciliation process may be quite beneficial.
  • To accomplish maximum reconciliation on an automated basis, such technology should include data validation procedures, be flexible enough to reconcile data over several years, and have in-built numerous parameters to reconcile data, such as one line too many or many lines to one. Tax technical expertise may be used to create scenarios and logic/parameters for automated reconciliations.
  • Most importantly, following reconciliation and identification of reasons for mismatches, the technology platform should be able to share a bird’s eye view of the reasons for mismatches with customers/suppliers, as well as enable insightful and analytical dashboards that track potential tax credit leakages due to incorrect entries made by customers/suppliers.
  • Year-over-year dashboards can also assist tax or finance chiefs to determine whether there is a basis for process reform to reduce the lock-up on tax credits. For example, it is frequently seen that customers deduct TDS on the GST amount on the invoice as well, although there is no such necessity under the law. With thorough monitoring of such circumstances, one may insist on having this corrected as soon as possible, to improve working capital efficiency.
  • Equally important is having digital governance and control that allows for a thorough review of the reasons for mismatches, rigorous follow-ups with customers and suppliers, and evaluation scope for process improvement by deploying an experienced team (internal or outsourced) to manage the overall value of the reconciliation exercise. In our experience, some organizations have benefited from a focus on integrating processes with technology, and such a solution is frequently sought after by CFOs/Tax heads to obtain greater visibility and control over credit reconciliation.
  • To summarize, by carefully implementing the right process, digital governance, and a tax technical experienced team to effectively manage the credits, one can undoubtedly achieve increased automation and accuracy in this critical reconciliation process, with the end goal of unlocking lost tax credits and improving working capital efficiency.

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