TDS Blunders: The Costly Mistakes Businesses Make and How to Correct Them
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When it comes to tax compliance, mistakes can be expensive, especially with Tax Deducted at Source (TDS). A single error in TDS payments or filing can disrupt a business’s financial flow, trigger audits, and incur penalties and interest. While TDS compliance might seem like a routine task, overlooking the details can lead to substantial losses. In this article, we explore common TDS mistakes, share real-life examples, and clarify how to correct these errors to help businesses steer clear of costly consequences.
1. Using Incorrect TANs: A Small Slip with Big Implications
One of the most common TDS blunders is using the wrong TAN (Tax Deduction and Collection Account Number). It might sound like a minor mistake, but it can lead to mismatches in records, delays in crediting TDS to the deductee’s account, and ultimately, errors in the company’s own tax filings.
Example: A mid-sized company mistakenly used its branch TAN instead of its corporate TAN while filing its quarterly TDS return. This minor slip resulted in credit mismatches for all deductees under that TAN, leading to a round of corrections, delays in returns, and penalties for incorrect filing.
How to Correct: File a revised TDS return with the correct TAN as soon as the error is noticed. Inform deductees about the correction to manage their expectations regarding credit mismatches. Consider consulting with a tax advisor if this error has caused issues across multiple transactions to ensure all records are appropriately updated.
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2. Incorrect Challan Details: A Costly Mix-Up
TDS payments rely on accurately filling out challans with the right assessment year, challan type, and payment code. Incorrect details on challans—especially when multiple TDS challans are involved—can mean that payments don’t get credited where they should.
?Example: A business that paid TDS under the wrong assessment year faced unnecessary complications. The mismatched payment wasn’t credited to the right period, forcing them to make duplicate payments to avoid penalties. The result? An excess payment that the company had to later claim as a refund—a lengthy process.
?How to Correct: Submit a correction request through the TDS CPC portal to update the assessment year, challan type, or payment code as needed. If the error has led to double payments, apply for a refund of the excess payment through the tax department’s refund process. Keep all documentation as proof of the original error and correction.
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3. Misjudging Section Codes: A Costly Misstep
Different types of TDS deductions fall under various sections—like Section 194C for contractor payments and Section 194J for professional fees. Incorrectly categorizing deductions can lead to penalties and re-filing costs.
Example: A company paid TDS on contractor services under Section 194J (professional fees) instead of 194C. As a result, they incurred additional interest and penalties when tax authorities flagged the discrepancy during an audit.
How to Correct: Amend the TDS return by selecting the correct section code and filing it as a revised return. Be prepared to pay any interest or penalties due to incorrect classification. This will help avoid further discrepancies in future audits.
4. Calculating TDS Amounts Incorrectly: The High Cost of Miscalculations
Over-deducting or under-deducting TDS is another common error, usually resulting from miscalculating applicable rates. Under-deduction leads to interest charges, while over-deduction can upset the deductee.
Example: A company mistakenly deducted 5% instead of 10% on a substantial vendor payment, thinking it qualified for a lower rate. The error was noticed later, incurring not only a higher interest rate on the underpaid TDS but also damaging their vendor relationship.?
How to Correct: If TDS was under-deducted, immediately deposit the shortfall along with applicable interest. For over-deductions, notify the deductee, and the excess amount can be adjusted in the next TDS cycle. Keep records of the correction to ensure transparency in case of inquiries.
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5. Late Payments: An Avoidable Expense
Late TDS payments can incur interest at 1.5% per month until the amount is deposited. For businesses, this can add up quickly, especially if payments are repeatedly delayed.?
Example: A small business that was late in depositing TDS payments every month accumulated interest that compounded to over ?50,000 by year-end—a significant, avoidable expense.
How to Correct: Deposit the late TDS amount with the applicable interest as soon as possible. Calculate the interest at 1.5% per month (or part thereof) on the delayed amount. Once paid, update your TDS records and inform relevant stakeholders to minimize disruption.
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6. Delayed Filing of TDS Returns: The Penalty Adds Up Fast
Filing TDS returns late is another common pitfall that carries a penalty of ?200 per day. This fine accumulates quickly, especially if returns are delayed by weeks or months.?
Example: An expanding business didn’t file TDS returns for two quarters on time, thinking the delay was manageable. However, the ?200 daily penalty added up to nearly ?12,000 by the time they filed—money that could have been saved with timely filing.
How to Correct: File the delayed TDS return immediately and pay the accumulated ?200-per-day penalty. If the delay was due to unavoidable circumstances, you may consider applying for a waiver, though approval is rare. Document the reason for delay and the steps taken to prevent recurrence.
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7. Incorrect PANs of Deductees: An Expensive Oversight
When deductees' PANs are entered incorrectly, the default TDS rate jumps to 20%, often far above the standard rate. This can lead to disgruntled deductees and affect credit allocation.
Example: A corporate mistakenly entered the wrong PAN for a large payment to a vendor. Instead of the standard rate, the vendor was deducted at 20%, leading to complications and adjustments in their returns.
How to Correct: Correct PAN details in the TDS return by submitting a correction statement. The higher TDS rate may not be reversible, but by amending records, future errors can be prevented. Notify the affected deductee about the correction for transparency.
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8. Not Issuing TDS Certificates: A Legal Requirement
Businesses are required to issue Form 16 or Form 16A to deductees by the due date. Failing to do so not only attracts penalties but also hampers deductees in their own tax filing process.
Example: A company that missed the deadline to issue Form 16A to its contractors faced complaints and a potential penalty when the contractors couldn’t file their own taxes properly.
How to Correct: Issue the TDS certificates (Form 16 or Form 16A) immediately upon realizing the delay, even if past the due date. Communicate with the deductees, explaining the delay, and assure timely issuance in the future to maintain goodwill and compliance.
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9. Ignoring Rectification Notices: Don’t Let Defaults Linger
The TDS CPC portal may display defaults such as short deduction or short payment notices. Many businesses ignore these notifications, which can lead to further penalties or legal action.
Example: A business ignored TDS default notices for months, thinking they were irrelevant. The oversight eventually led to more significant penalties and an audit request from the tax department.
How to Correct: Log in to the TDS CPC portal and respond to any default notices immediately. Make the necessary corrections by paying any outstanding amounts, filing a revised return, or adjusting future payments as instructed in the notice. Proactively monitor for additional notices in case of further action.
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How to Avoid These Costly TDS Mistakes
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And finally, As said by Vishnu Gavkare chai pike kaam karneka! Taking a moment to recharge and focus can prevent small, costly mistakes. Sometimes, all it takes is a cup of chai and a clear mind to spot potential errors before they become expensive problems!