One year of TCS Section 206C 1H and One quarter of TDS Section 194Q – How have things changed?

By Vijender Singh — In Accounting Process, Process Automation, Tax Law Changes — November 13, 2021



This Diwali marked the completion of First Quarter of TDS u/s 194Q which was implemented w.e.f. 01 July 2021 and also the completion of First year of TCS u/s 206C 1H which was implemented w.e.f. 01 Oct 2020.

The new provisions have affected the cash flow of many industries by impacting how their transactions are taxed. The impact is such that even at a mere 0.1% tax rate, the tax amount is still significant for businesses with more than 1000 crore turnover. If the entire turnover of the company is subject to TDS u/s 194Q then any business with INR 1000 crore revenue will have INR 1 crore in their TDS receivables ledger. This is a significant amount when the industry has low profit margins, resulting in around 30% of the entire year’s tax amount being stuck in the Form 26AS of the business.

One argument that downplays this impact is that the deduction of TDS reduces burden on paying the advance tax on different instalments of advance tax during the year and this should ease the management of tax payments.

However, reality is far from this. When TDS is deducted on a payment, each TDS/TCS entry needs to be mapped to the corresponding revenue and expense item of the business. With matching concept in play, this becomes a very tedious and time-consuming job.

If the business decides to match the TDS amounts at the total level, then also there remains the risk of a particular TDS entry being missed to be carried forward to future quarters and financial years. This omission may lead to a denial of TDS credit against the tax payments as the Rule 37BA of the Income Tax Act, 1961mandates the matching of revenue and expenses of the business with the TDS and TCS appearing for the business.

Hence the industry is bound to feel the heat in many ways. To understand their pain points more, we had conversations with industry veterans and compiled a list of the significant issues that have cropped up on the ground.

Impact on the industry

Lengthier, more Voluminous Form 26AS statements: New entries of TDS and TCS have started overwhelming the tax credit statements leading to lengthier Form 26AS. Let’s keep in mind how every line item in 26AS is now under the gambit of TDS and TCS when transactions happen with specified buyers and sellers.

At the same time, the earlier exempted transactions of Goods Sales now come under the TDS ambit and hence the number of transactions to reconcile on the TDS/TCS payment as well as receipt side have also increased manifold.

Slow Download of 26AS from TRACES: Voluminous Form 26AS has made its download from TRACES a lot slower. Instead of taking 4-7 hours as was the norm earlier, any request to download it from the portal may now take a full-day.

Increased difficulty in navigating Form 26AS:  Since data flowing into Form 26AS for manufacturing companies is huge, the statement is now made available in TXT format which is a format hitherto not used widely by businesses. Hence there is a challenge of adapting the existing TDS register reconciliation process to ingest data in this new format.

Increased effort required in data reconciliation: Since TDS/TCS is a significant amount, it needs to be recorded, maintained and reconciled with internal data of revenue expense, more diligently.

“Getting this part of the process right is imperative and has put more pressure on corporate finance teams and in the absence of any technology support has increased demands in terms of time and resources, manifolds.”

TDS/TCS payable has become more complex and data heavy: Since all the transactions are more or less a part of TDS/TCS now, timely payment of TDS/TCS to the respective accounts and PAN numbers has become very important and time consuming. This is also due to the requirement of sections 206AB and 206CCA. These sections require maintaining a record of payees, a record of status of their filing and the rate of TDS/TCS to be applied on the vendor.

34A reconciliation has changed completely: Clause 34A reconciliation of Tax Audit Form 3CD has changed completely in principle. Earlier it was deemed to be a reconciliation of not just TDS applicable on the transactions in the year but also the non-applicability of TDS on the transactions in the year. However, now a lot of exempt items have changed. The purchase of goods has to be mapped to section 194Q and then the threshold has to be kept in check along with the the status of the vendor on the specified buyer, status of 206AB and 206CCA. Finally the recon of the remaining lesser number of nonapplicable transactions with the reasons properly given has to be carried out.

Added workload of Advance tax payment reconciliation with TDS: As explained above, the credit of TDS/TCS is subject to matching of the revenue and expense items for the time period for which the tax is due. Any TDS on the advance needs to be kept on hold till the time of the invoice and as such till that time, there needs to be a mapping of TDS entries. This is now another task added to the finance teams’ existing workload.

Working capital is taking a hit due to new provisions: Even with a lower tax rate, the new provisions are keeping a significant amount of money out of the reach of the businesses and this is making a dent in the cash inflows from debtors for the business.

Time dedicated to Follow-ups has increased massively:  The finance teams now need to follow up with the vendors and customers for their statement of the TDS deducted on the periodic basis. If there is a lag, a dispute needs to be raised immediately. This has added to the work load of an already busy finance team.

The time old dispute of TDS vs TCS on a particular transaction continues to prevail. The sections have a provision that if TDS is not deducted where it should have been deducted then the money receiving business shall collect a TCS on the same transaction. As such, the importance of the follow up with customers has increased significantly. If the customer has deducted TDS then it’s fine but if they have not then the communication related to the same has to be made, saved and TCS collection needs to be started to avoid the late collection of TCS.

As the industry continues to adapt to these changes, more insights will follow. However, the biggest fallout of all this has been a recognition of the importance of using technology in this process. The mighty excel, while a great ally for most of the number related tasks hitherto, is showing its limitations when the scope of work has changed with this intensity and the teams are getting hands full with the resulting increase in the number of email conversations required.

Tax technology that understands these challenges is the need of the hour. There is a huge scope to automate non-productive manual work, omit human errors, have comprehensive reporting and open effective channels of communication with buyers/sellers or tax departments.

Hence, this disruption caused by the introduction of 194Q and 206C  is also the right opportunity for companies to rethink their existing tax processes & to choose the right tax technology to do away with ineffective, arcane ways of doing their taxes. The road to compliance can always be a smooth sail through too.

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