How Can Corporates Ensure Compliance with Withholding Tax Provisions?

Withholding tax (often referred to as TDS or Tax Deducted at Source) is an important compliance requirement for corporates in India. It ensures that taxes are collected at the time of making certain payments (such as salary, interest, dividends, etc.) to individuals or entities. Non-compliance with these provisions can lead to penalties, interest charges, and legal issues. Therefore, corporates need to follow best practices to ensure they remain compliant with withholding tax requirements.

Steps Corporates Can Take to Ensure Compliance with Withholding Tax Provisions:

Understand the Applicability of Withholding Tax:

Corporates must understand which payments are subject to withholding tax. These typically include payments for salaries, interest, professional fees, rent, commission, etc.

They should be aware of the rates of withholding tax applicable to different payments, as the rates vary depending on the nature of the payment and the recipient (e.g., resident vs. non-resident).

Additionally, corporate tax teams should stay updated on any changes in tax laws or budget announcements that may affect withholding tax rates.

Accurate TDS Calculation:

Corporates must ensure that TDS is calculated correctly based on the applicable tax rates, taking into account exemptions, deductions, and applicable limits.

The calculation should also account for any valid certificates of lower or nil withholding tax rates, such as Form 15G/15H (for individuals) or tax treaties (for non-residents).

Obtain PAN or TAN from Vendors:

Corporates must ensure they collect the Permanent Account Number (PAN) or Tax Deduction and Collection Account Number (TAN) from all parties to whom payments are being made. Without these details, the withholding tax rate may be higher (e.g., 20% instead of the applicable rate).

PAN is necessary for employees and domestic vendors, while TAN is required for the company to deduct TDS.

Timely Deduction and Payment of Tax:

Corporates must ensure timely deduction of TDS at the time of making a payment. Delayed deduction can result in penalties and interest.

TDS should be deposited with the government within the prescribed due dates (usually by the 7th of the following month for most payments). Failure to deposit within the specified time can attract interest and penalties under the Income Tax Act.

Issue TDS Certificates:

After deducting TDS, the corporate is required to issue TDS certificates (Form 16 for salary payments and Form 16A for other payments) to the payees. These certificates act as proof of tax deduction and are essential for the payees while filing their tax returns.

TDS certificates should be issued within the stipulated time to avoid penalties and ensure smooth filing by the payees.

File Regular TDS Returns:

Corporates must file quarterly TDS returns (Form 24Q for salary payments, Form 26Q for non-salary payments, etc.) with the Income Tax Department. This helps ensure transparency and compliance with tax laws.

Returns must be filed on time (usually by the 31st of the month following the quarter end), failing which penalties can be imposed.

Reconcile TDS Data with Form 26AS:

Corporates must ensure that the TDS deducted is reflected in the Form 26AS (a tax credit statement) of the payee. Any mismatch between the TDS deducted and Form 26AS can lead to scrutiny by the tax authorities.

Regular reconciliation between the company’s records and the 26AS data will help in identifying and correcting discrepancies promptly.

Maintain Comprehensive Documentation:

Proper documentation is key to ensuring compliance. Corporates should maintain records of all transactions, payments, TDS deductions, TDS certificates issued, returns filed, and tax deposits.

These records should be readily accessible in case of any audit or query from tax authorities.

Training and Awareness:

Regular training of employees responsible for tax compliance can help avoid errors and keep them informed about the latest developments in tax laws.

Engaging with tax consultants or legal advisors can help ensure that the company complies with complex tax laws and reduces the risk of non-compliance.

Review Tax Audit Reports:

Corporates should periodically conduct internal audits or review tax audit reports to ensure that withholding tax is being correctly deducted and remitted.

A thorough review of financial statements, tax filings, and related documents will help identify and address any compliance gaps.

Best Practices to Minimize Risks and Penalties:

Automation:

Implementing tax automation tools can help in accurate and timely deduction, filing, and reporting of TDS.

Track Tax Amendments:

Corporates should regularly check for any changes in tax provisions, including withholding tax rates, exemptions, or new compliance requirements.

Early Remittance:

It is advisable to make TDS payments before the deadline to avoid interest and penalties for delayed payment.

TDS Deduction on Exempt Payments:

Ensure that TDS is not deducted where exemptions apply (e.g., payments under threshold limits, government-approved funds, etc.).

Example:

Suppose a corporate entity makes a payment of ₹1,00,000 to a consultant for professional services. The applicable TDS rate is 10%. The corporate must:

Deduct ₹10,000 (10% of ₹1,00,000) at the time of payment.

Deposit the ₹10,000 with the government by the 7th of the next month.

Issue Form 16A to the consultant, reflecting the amount of ₹10,000 as deducted.

File the quarterly TDS return (Form 26Q) to report this deduction.