TDS Receivables: Why TDS Reconciliation Is a Blind Spot for Accounts Receivable Teams

Understanding TDS Receivables

India is one of a handful countries of the world, which has a Tax Deducted at Source (TDS) on domestic commercial transactions.  TDS, by definition, is a tax deducted by the payer on behalf of the recipient, and the recipient can then claim credit for it in their tax filings.

TDS is typically applicable on Service transactions, since the presumption is that there is a high profit margin, which the government needs to collect the tax on time and not wait until the end of the quarter.

How the TDS Receivables Process Works

1. Supplier A has provided services to Customer B worth Rs 100 plus GST 18% o Rs 118 invoice value.
2. Customer B then pays the invoice as per the Payment Terms.
3. Customer B deducts (say) 10%of the basic value (Rs 100 i.e. Rs 10) from the overall payment of Rs 118.
4. Supplier A records the short payment as a TDS Receivable in their books
5. Customer B, then deposits the Rs 10 with the Government Treasury by the 7^th of following month.
6. Customer B then files a quarterly return giving a breakdown of the TDS deducted and deposited by them. In this, they are supposed to mention date of transaction, base amount on which TDS was deducted, the actual TDS deducted and the TDS deposited
7. When all returns are filed by the deadline, the Income-tax department compiles the data in a format called Form 26AS, which is available to each deductee i.e. the Supplier A in our case
8. Our Supplier A, will download the Form 26AS, which will include deposits from Customers B, and many more and try to reconcile the TDS Receivable in their books (see Step 4) with the Form 26AS entries
9. Ideally, if all the details are mentioned correctly, the deposit in Form 26AS should match the expected TDS Receivable and the process can be closed.

Challenges in TDS Reconciliation

1. Form 26AS does not have a provision for Invoice Numbers, therefore, the Lookup reconciliation based on a unique reference will not work
2. Mismatch in Transaction value: Customer deducts TDS on total invoice value whereas, you are expecting TDS on base value
3. Mismatch in TDS rates: Your system shows that TDS is supposed to be deducted at 2%, whereas Customer has actually deducted at 10%
4. Timing Differences: Your system shows payment received in July, while Customer may have reported the transaction in August. Worse, if this spills across Financial Years
5. Accrual v/s Payment date: Customer may have deposited the TDS in the month in which they accrued the payment and not when they paid. Again, leading to a wild goose chase to match the TDS
6. Wrong PAN number reported: Customer may have deducted and deposited the TDS, but has made an error in his TDS return by mentioning the wrong PAN number. In this case, the TDS Credit will accrue to some other party
7. Clubbing of invoices: Many Customers tend to club multiple invoices in their system and report it as one single transaction in their TDS return. This makes the matching a very difficult tax
8. Splitting of invoices: Some Customers record a single invoice as multiple transactions in their ERPs due to internal Cost allocations. In these cases, there could be multiple entries in Form 26AS for a single invoice.  The reverse of clubbing invoices, and equally painful to identify the breakup
9. Lower TDS rates: If you have obtained lower TDS rate Certificate from Income tax department for certain transactions, yet the Customer ignores the certificate rates and continues to deduct at standard rates.
10. Customer defaulting on TDS deposits: Customer has short paid you, citing TDS deduction, but has not deposited the amount with Government. This is an offence under Income Tax law, but lack of a robust timely reconciliation, means you detect this anomaly quite late to take effective action
11. Customer not filed TDS return: Even though they may have deposited the TDS on time, if they don’t file the quarterly return, there is no way you can the credit for the TDS deducted.

Organizational Challenges of TDS Reconciliation

Many large organizations have separate departments handling routine AR Collections and TDS Reconciliation.  Typically, TDS is with the Taxation department, since it is felt that it is a regulatory compliance matter.

However, the problem with this approach is that TDS Receivable is an outcome of Accounts Receivable.  Tax departments may not have the bandwidth nor the relationships with Customers like AR Collection teams have.

All this results in significant delays by the time a mismatch is identified, triaged and sent to the customer for resolution.

These delays could cost the organization, potential write offs, if Customers refuse to resolve mismatches of previous Financial Years citing book closures.

Need for Real-Time TDS Reconciliation

From the above, it is clear that TDS Form 26AS cannot be a part-time activity, as it can mean a real hit to the bottom-line. Every Rupee of TDS not sighted in Form 26AS is a direct hit to revenue as you may have to write off the amount.

Organisations need to invest in real-time reconciliation solutions, which are integrated with AR Collections systems, so that:

1. Mismatches are identified in time
2. Only Exceptions are communicated to the Customer
3. TDS Recovery communication is tracked and made part of routine Collections with added Urgency for filing deadlines

The Payback of Integrated AR and TDS Reconciliation platforms

Unlike Standalone Reconciliation Solutions, Integrated AR and TDS Reconciliation solutions will be much more effective in reducing manual effort with 80% match rate.  Collections teams can focus on exception cases with clear reasons like Timing Difference, Rate mismatch etc, and can proactively resolve them with Customer Collaboration.

Typical ROI for such platforms is achieved in less than one quarter.