Income Tax Department targeting employers and employees for TDS-claims mismatch

TDS-claims mismatch

TDS-claims mismatch: The taxman may scrutinize both parties if there is a discrepancy between what an employer calculates and what an employee claims. The Income Tax (I-T) department is employing a fine-tooth comb to find disparities between the declarations made by employees in their yearly I-T returns and the tax deducted at source (TDS) that companies pay. A line-by-line reconciliation of the two sets of numbers is being conducted under various headings, such as medical insurance, home loan repayment obligations, 80c tax-saving investments, and housing rent allowance.

Several companies in Delhi, Mumbai, and other major cities received notices under Section 133C and allows authorities to request information to confirm details, around the beginning of December. According to two people with knowledge of the exercise, the companies are being asked to “confirm the information” or “furnish a correction statement.”

Read also: TDS on Salary : How to calculate TDS on salary as per section 192 of Income Tax

The department’s goal is to identify instances in which tax has escaped due to either the employer withholding less TDS than required or employees requesting refunds through additional investment declarations that were not declared at the beginning of the year but were added when completing the ITRs.

“The section 133C (introduced in 2014-15) has been sparingly used so far. But recently many companies have received notices under this section. This would pave the way for a line-wise verification. It’s a smart use of technology by the department with the system making such granular level verification of the reportings by both sides — the deductors in their withholding tax returns as well as the taxpayers in their ITRs. The department is probably well aware of the limitations — such an exercise is not feasible manually for covering a large number of taxpayers. So, a system-related verification is being done to identify the gaps,” one of the expert said.

An employee list is provided in an annexure to the most recent round of notices.

Garg asserts that it’s critical that only appropriate cases be chosen for examination, either by the organization or its personnel. “With proper validations at the employer level (the deductors), proper claims made by taxpayers, an increase in tax collection, and a broader tax base through an equitable selection of the old and new tax regime for individuals, this could help in a more cautious approach towards withholding tax compliances,” he stated.

Employers are required by law to accurately calculate and report the TDS of all new hires on a quarterly basis. However, historically, businesses have not placed much emphasis on closely examining the statements made by workers; in certain instances, workers might not turn in the necessary paperwork on time; additionally, inadequate validation is carried out by service providers—many of which are software firms—to whom businesses generally contract out the payroll work.

Read also: TDS under section 194Q- Rate, applicability and exceptions

“This is an effective tool to identify wrong claims. The parties receiving the notices should immediately comply as there is a penalty provision applicable for not replying. If data required is voluminous, then adjournment should be sought. Parties should not take it lightly,” another expert said.

It’s interesting to note that a gap in the tax office system won’t be obvious if employees submit false claims and their employers support them. However, any discrepancy between the two sets of data would be apparent right away. But, in the event that the tax office takes up a case, it is likely that all employee records will be examined.

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