Year-end Expense Provisions and Withholding Tax Thereon

Synopsis:

As part of financial year-end book closure activity, Accountants have an important task to make adequate provisions for the expenses for which the entity had received services from vendors but vendors had not submitted the invoices. Such provisions are required to be made in books to comply with the Accounting Principle of accrual basis of accounting. These provisions attract withholding tax (Tax Deducted at Source in Indian context) as per the applicable regulations of Indian Income-Tax Act.

Expense Provisions That Attracts W/H Tax:

All those expense provisions are not subjected to W/H Tax. Accountants while making provisions, categories such provisions into two categories – (a). Provisions assignable to identified vendors; and (b). Ad-hoc provisions where amounts are not assignable to a particular vendor(s). Therefore, identification of a vendor or a person is a pre-requisite condition for deducting income-tax on expense provisions.

Withholding Tax (TDS) – Not Applicable Scenarios:

W/H Tax is not required to be deducted on the ad-hoc provisions made in books based on certain reasonable estimates. Examples of such ad-hoc provisions are – (a). Bonus payable to the employees for the relevant financial year; and (b). Provision against a contingent liability which is not acknowledged as debt by the Company; etc.

Comply with the W/H Tax Regulations:

The following steps are required to be followed in order to comply with the year-end expense provisions and the applicable withholding tax thereon:

1. Prepare a detailed schedule in excel, capturing the details such as - nature of expense, expense head under which it is to be accounted, identify vendor names for the estimated expense provisions, track reference of vendor purchase order against which provision is made, ascertain nature of transaction to decide the applicable W/H tax percentage, and so on.

2. Make a year-end accounting entry in books recording the expense provision and the applicable taxes thereon. Such accounting entry is to be recorded on 31st March of the relevant financial year for which the books are under closure.

3. The sum total of W/H tax as per the above schedule should tie-up to the liability created in books, else should have complete reconciliation to justify the compliance part under CARO reporting requirement.

4. Deposit the withholding tax so deducted on such expense provisions by 30th April. It is to be noted that the year-end withholding tax recorded in books with date as 31st March alone will have due date of 30th April to deposit the W/H tax with the Income-Tax Department.

5. Once the W/H tax is deposited as above, file quarterly return of TDS by 31st May for the period covering January-March and ensure that the TDS liability of 31st March is completely discharged-off.

6. Issue Form 16A to all the vendors / parties within the specified timeline. Regardless of whether Form 16A is issued or not, the vendors / parties rely on the updated AIS report available on Income-Tax Portal which gives TDS data as well and use it for their IT return filing.

Therefore, businesses are required to comply with the accounting principles while recording the expense provisions duly adhering to the statutory obligations associated with the W/H Tax. This will ensure smooth closure of statutory audit without any findings.