Disallowance in case of short/non deduction of TDS

In the context of the Income Tax Act, 1961, expenses are subject to disallowance if TDS (Tax Deducted at Source) is either not deducted or deducted at a lower rate than required. The relevant section for such disallowance is Section 40(a)(i) and Section 40(a)(ia) of the Income Tax Act. Here’s an overview of how these disallowances work and their implications:

Section 40(a)(i) and Section 40(a)(ia)

  • Section 40(a)(i): Applies to payments made to non-residents, including interest, royalty, fees for technical services, or any other sum chargeable under the Income Tax Act.
  • Section 40(a)(ia): Applies to payments made to residents, including interest, commission, brokerage, rent, royalty, fees for professional services, and contract payments.

TDS Disallowance Criteria

Expenses are disallowed if:

  1. No TDS Deducted: If TDS is not deducted on an expense that is subject to TDS.
  2. Short Deduction: If TDS is deducted at a rate lower than the rate prescribed under the Income Tax Act.
  3. TDS Deducted but Not Deposited: If TDS is deducted but not deposited with the government within the stipulated time.

Impact of Disallowance

  • Disallowance of Expenses: The 30% of amount of the expense or the proportionate amount (in the case of short deduction) is disallowed and added back to the taxable income of the taxpayer.
  • Increased Tax Liability: The disallowance increases the taxable income, resulting in a higher tax liability.
  • Interest and Penalties: The taxpayer may also be liable to pay interest under Section 201(1A) and penalties under Section 271C for failure to deduct or deposit TDS.

Conditions for Allowance of Disallowed Expenses

  • Subsequent Deduction and Payment: If TDS is deducted and paid to the government in a subsequent year, the previously disallowed expense is allowed as a deduction in the year of payment.
  • Payment Before Due Date: If the TDS for the last month of the previous year (March) is paid on or before the due date of filing the return of income, the expense is allowed in the same year.

Example of Disallowance Under Section 40(a)(ia)

Scenario

  • A company pays rent of Rs. 1,00,000 per month to a landlord.
  • The applicable TDS rate on rent payments is 10%.
  • The company deducts TDS at 5% instead of 10%.

Calculation

  • Rent Payment for the Year: Rs. 1,00,000 x 12 = Rs. 12,00,000
  • TDS Required to be Deducted: Rs. 12,00,000 x 10% = Rs. 1,20,000
  • TDS Actually Deducted: Rs. 12,00,000 x 5% = Rs. 60,000
  • Short Deduction of TDS: Rs. 1,20,000 – Rs. 60,000 = Rs. 60,000

Disallowance

  • Since TDS is deducted at a lower rate, the proportionate expense related to the short deduction is disallowed.
  • Disallowed Expense: ((Short Deduction / TDS Required) x Total Expense) *30% = ((Rs. 60,000 / Rs. 1,20,000) x Rs. 12,00,000)*30% = Rs. 1,80,000
  • Rs. 1,80,000 of the rent expense is disallowed and added back to the taxable income of the company.

Steps to Avoid Disallowance

  1. Correct Application of TDS Rates: Ensure that the correct rate of TDS is applied as per the Income Tax Act.
  2. Timely Deduction and Deposit: Deduct TDS at the time of credit or payment, whichever is earlier, and deposit it with the government within the due dates.
  3. Maintain Proper Documentation: Keep records of all TDS deductions, deposits, and Form 26AS reconciliations.
  4. Regular Compliance Checks: Conduct regular compliance checks and audits to ensure all TDS provisions are followed correctly.
  5. Use of Automated Tools: Utilize tools like LedgerVision for detailed analysis and accurate TDS deduction and reporting.

LedgerVision simplifies the process of calculating disallowance under the Income Tax Act by automating the scrutiny of TDS (Tax Deducted at Source). Here’s how LedgerVision calculates disallowance for short or non-deduction of TDS, leveraging its detailed analysis and reporting capabilities:

How LedgerVision Automates Disallowance Calculation

  1. Detailed TDS Scrutiny:

LedgerVision provides a comprehensive TDS scrutiny report in a tabular format. This report includes all the relevant details necessary for analyzing TDS deductions and calculating disallowances:

  • Party-wise Details: Breaks down expenses by each party to whom payments are made.
  • Expenses-wise Details: Segregates expenses into different categories, such as salaries, rent, interest, professional fees, etc.
  • TDS Category-wise Details: Classifies expenses according to the applicable TDS categories.
  • TDS Ledger-wise Details: Segregates expenses based on the TDS ledger accounts.
  1. Data Columns in LedgerVision:

LedgerVision’s report contains the following critical columns for disallowance calculation:

  • Expense Amount: The total amount of expense incurred.
  • Applicable TDS Amount: The TDS amount that should have been deducted based on the prescribed rates.
  • Actual TDS Amount: The TDS amount that was actually deducted and paid to the government.
  1. Disallowance Calculation Formula:

Whenever the Actual TDS Amount is less than the Applicable TDS Amount, LedgerVision calculates the disallowance @30% of expenditure as calculation explained above

Advantages of Using LedgerVision for Disallowance Calculation

  1. Automated Calculations: Eliminates manual errors in calculating disallowances, ensuring accuracy.
  2. Comprehensive Reporting: Provides a detailed breakdown of expenses and TDS deductions, making it easier to identify discrepancies.
  3. Time-Saving: Speeds up the process of TDS scrutiny and disallowance calculation, freeing up time for other tasks.
  4. Easy Integration with Tally: Works seamlessly with Tally accounting software, allowing for quick data extraction and analysis.
  5. Excel Download: Allows users to download reports in Excel format, facilitating further analysis and reporting.

Conclusion

LedgerVision is an invaluable tool for tax auditors and finance professionals, offering automated and accurate calculations of disallowances under Section 40(a)(i) and Section 40(a)(ia) of the Income Tax Act. By providing detailed scrutiny of TDS deductions and facilitating easy reporting, LedgerVision helps businesses ensure compliance and avoid

Disallowance of expenses due to short or non-deduction of TDS can significantly impact a taxpayer’s financial statements and tax liability. It is crucial to adhere to the TDS provisions of the Income Tax Act and ensure proper deduction, deposit, and reporting of TDS to avoid such disallowances.