There is a problem when an individual taxpayer follows an accrual basis of accounting and declares the income in their income tax return (ITR) in the year when it is generated. The TDS on such income is deducted only in subsequent years. This causes the individual to not be able to claim TDS credit because the income reporting year and TDS deducting year are both different.
For example: A consultant billed their client for payment of fee on FY 2021-22 (AY 2022-23). The consultant following accrual accounting method recorded the income in FY 2021-22 (AY 2022-23) when the invoice was raised, however the actual payment of fee was done on FY 2022-23 (AY 2023-24). TDS was deducted when the payment of fee was done, i.e. on FY 2022-23 (AY 2023-24).
This why the tax deducted at source (TDS) mechanism needs to be addressed in the Interim Budget 2024, voices industry leaders.
What has the government done to address this issue of TDS?
To allow individuals to claim TDS credit if it is not deducted in the year when the income occurred, the government notified a specified Form.
“To allow legitimate TDS claims, in cases where credit of TDS is reflected in the subsequent year, the government recently allowed taxpayers to claim the credit of TDS within two years from the end of financial year when TDS was deducted by submitting Form 71,” says one of the industry expert.
According to the industry’s pre-budget memorandum, “Availability of TDS credit only in the year in which corresponding income is offered to tax leads to undue hardship to the deductees from whom TDS was rightfully deducted and is also reflected in Form no. 26AS.”
Form 71 is to be filed online, but the decision to give TDS credit based on such submission of Form 71 is likely to be taken by the assessing officer (AO) on a case-to-case basis. “Now taxpayers can make an online application using Form 71 to the AO within two years from the end of the financial year in which such TDS was deducted. This process may involve manual verification of records for income offered in earlier year ITRs by the AO, CPC is not likely to be involved in said process. Further the AO is likely to accept or reject application for giving TDS credit and after providing the opportunity of being heard if rejected,” says another industry expert.
What experts suggested that the government should do
However, the Form 71 option might require manual intervention from the assessing officer (AO) while most of the refunds are now processed by the Centralised Processing Centre (CPC). Experts opine that it becomes a tedious exercise for the affected taxpayers to get the TDS refund.
“In such cases though, income is offered for tax however no credit of TDS is available online in the Form 26AS. Currently online functionality to claim the TDS which is deducted in subsequent years is not available,” according to Industry experts.
To facilitate an online window for such taxpayers, Industry experts have given the following suggestion to the government: “Section 199 read with Rule 37BA be accordingly modified to give option to the assessee to claim TDS credit on such income either in the year when the Income was reported in ITR or as per 26AS year in which TDS is appearing in Form 26AS provided income of the same is offered for tax in either of the year.”
Experts also suggest that an online functionality be made available. Rahul Singh, senior manager, advisory and research, Taxmann gives the following suggestion to the government: “There is no such online functionality to claim TDS which is deducted in subsequent years. Individuals are required to file Form 71 with the assessing officer (AO) and correct the assessment order to get the credit of TDS. Thus, it is suggested that the government should bring an online functionality to give an option to the individual to claim TDS credit either in the year when the income was offered for tax or in the year in which TDS is appearing in Form 26AS provided income of the same is offered for tax in either of the years.”
There is also a concern about the overall time limit of 2 years for claiming TDS credit which many experts fee to be too short. “The difficulty faced by taxpayers is already addressed by inserting section 155 (20). Nevertheless, this amendment which has come into effect from October 1, 2023, has the limitation of being available only for a period of two years from the end of the tax year in which such TDS was deducted. Hence, the issue persists for past years beyond this limitation period of two years. If the suggestion to the government is to be accepted and implemented then it will address both cases which are currently pending in rectification or litigation and cases where there is no such pendency,” says another expert.
The Industry experts are also of the same opinion that the time limit for claiming TDS credit is short. He suggests extending the time limit for submitting Form 71. “The general rule, and the logical one too, is that TDS credit should be available only in the year in which the corresponding income is offered to tax. While the time limit of 2 years for making an application is practical, it is hard to argue that it is not restrictive in nature as it presumes that cases of discrepancy will bubble up within a 2-year period. To my mind, there should not be any time limit for claiming TDS credit; however, in the interest of practicality, the government can widen the time limit to coincide with the time available for making rectification applications i.e. 4-year period,” he says.
The Industry experts also have given another suggestion to the government about process of claiming TDS credit. They have suggested that the TDS credit may be allowed to the deductee irrespective of the assessment year in which the corresponding income is offered to tax.
Source from: https://economictimes.indiatimes.com/wealth/tax/budget-2024-should-allow-past-years-tds-credit-to-be-claimed-online-current-method-difficult-industry/articleshow/106759528.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst&from=mdr