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Who can apply for Lower deduction certificate?

In order to overcome tax evasion measures adopted by taxpayers, Indian Income Tax laws provide for deduction of tax on income of any person or on sum payable to any person at the time of credit or at the time of payment at the rates in force under provisions of Income Tax Act, the concept of TDS was introduced by Indian government with an intent to collect tax from the every source of income and to keep track of income of beneficiary in future. However, this concept of deducting tax at source itself is creating complication for those taxpayers whose actual income tax liability is less than the TDS which has been deducted by the payer as per Chapter-XVII or may not have any taxable income. Considering the complication faced by taxpayers, government has introduced the concept of lower deduction certificate.

Who is eligible to apply for lower deduction certificate? As per the provisions of Income Tax Act, if the actual income tax liability on the taxable income of the assessee is less than the amount of TDS deducted by the payer, then the assessee can file an application for LDC i.e. Lower Deduction Certificate with the Income Tax Authorities as per rule 28 of the Income Tax Rules.

What is required to be done for filing an application for issuance of certificate? A person shall be required to make an application in Form No. 13 electronically, through digital signature; or electronic verification code. The Principal Director General or the Director General of Income-tax (Systems) shall lay down procedures, formats and standards for ensuring secure transmission of data and uploading of documents and he shall also be accountable for evolvement and implementation of appropriate security, archival and retrieval policies in respect of the furnishing of Form No.13. It is suggested that the applicant should file complete and correct details while furnishing Form-13.

When lower deduction certificate shall be issued? When the Assessing Officer is satisfied that existing and estimated tax liability of a person making an application under rule 28 justifies the deduction of tax at lower rate or no deduction of tax, then the Assessing Officer shall issue a certificate for deduction of tax at such lower rate or no deduction of tax accordingly. When such certificate is given, the person shall deduct income-tax at the rates specified in such certificate or deduct no tax, until such certificate is being cancelled/ revoked by the Assessing Officer.

How existing and estimated tax liability shall be determined by the Assessing officer? The following shall be taken into consideration by Assessing Officer for determining the existing and estimated tax liability:

Tax payable on estimated income of the previous year relevant to the assessment year;

Tax payable on the assessed or returned (or estimated income of last 4) previous years

Existing liability as per the Income-tax Act, 1961;

Advance tax payment (tax deducted at source and tax collected at source for the assessment year relevant to the previous year till the date of making application under rule 28).

To whom certificate will be issued? The certificate shall be issued directly to the person who is responsible for deducting the tax and whose name has been mentioned by the person while making an application for issue of such certificate. However, if the number of persons responsible for deducting the tax exceeds one hundred and the person making such application do not possess the details of such persons at the time of making application then such certificate for deduction of tax at lower rate may be issued to the applicant who made an application for issue of such certificate, authorizing him to receive such amount of income or sum after deduction of tax at lower rate.

What is the validity period of lower deduction certificate? The Lower deduction certificate shall remain valid for such period of the previous year as specified therein, unless it is cancelled/ revoked by the Assessing Officer before the expiry of the prescribed period. Also, it shall be valid only with respect to the person responsible for deducting the tax and named therein and to the applicant who made an application for issue of such certificate.

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Clause 44 of Form 3CD – Break up of Total Expenditure

BDT had introduced the new clause, i.e., Clause 44 for Form 3CD, updated in the tax audit form.

Under this clause, a break up of total expenditure needs to be provided, including purchases made during the year. This clause is abeyance until 31st March 2022 vide CBDT Circular No. 5/2021 dated 25.03.2021. However, this clause is now applicable for the Assessment year 2023-24, i.e., the Financial year 2022-23. Therefore, let us understand the reporting requirement of this clause. Firstly, Let’s recapitulate about tax audit and its applicability. All assessees who are liable to tax audit as per section 44AB shall require to fill out Form 3CA or 3CB along with Form 3CD. Form 3CA or Form 3CB is a report that an auditor needs to sign considering the opinion provided for a tax audit. However, Form 3CD is a statement of particulars, which is quite comprehensive and contains all the details concerning various tax provisions.

Now coming to clause 44; newly inserted by CBDT. Under this clause, the assessee requires to provide details of expenses in the following format: S.No.The total amount of expenditure incurred during the yearExpenditure in respect of entities registered under GSTExpenditure relating to entities not registered under GST  Relating to goods or services exempt from  GST

Relating to

Entities falling under the composition schemeRelating to other registered entitiesTotal payment to registered entities  1234567                     

Let’s understand the reporting requirement under each column:

Column 1: Serial number.

Column 2: Total Amount of expenditure incurred during the year: The assessee requires to mention the amount of all expenditures incurred during the year, including purchases made during the year. However, there might be some confusion about whether the expenditure of capital nature is to be reported or not. Therefore, since the word used is ‘expenditure,’ it is advised that the capital expenditure may also be registered separately in Column no. 2 in the format prescribed.

Column 3: Expenditure relating to goods or services exempt from GST: Under this column, all expenses exempt from GST must be reported here.

Column 4: Expenditure relating to entities falling under the composition scheme: Reporting under this column applies to transactions entered with the Composition scheme as per section 10 of the CGST Act, 2017. Generally, while accounting transactions, small and medium taxpayers do not mention GSTIN on those invoices where input is ineligible as per section 17(5) or in case of purchase from persons registered under composition levy. Thus, reporting such expenditure may be categorized as “Expenditure relating to entities not registered under GST.”

Column 5: Expenditure relating to other registered entities: Under this column, assessees must report the amount of all inward supplies from registered dealers, other than supplies from composition dealers, and exempt supplies from registered dealers. Possibly, the assessee may have both inward supplies (i.e., taxable and exempt) from the same registered person; thus, exempt inward supplies must be reported under column 3. Finally, the only value of taxable inwards supplies should be reported under column 5.

Column 6: Total payment to registered entities: Under this column, the assessee must report the “Total payment made to registered entities.” Therefore, a question may arise whether we must report the total payment made to the registered person during the year or the total expenditure booked in the books of accounts. However, considering the harmonized interpretation of the column heading, i.e., “Total Payment to registered entities,” we should report the total amount of columns 3, 4, and 5, which is the value of expenditure booked as per books of accounts.

Column 7: Expenditure relating to entities not registered under GST: Under this column, the assessee must report the amounts of inward supplies of goods or services received from the unregistered person during the year. It should be ensured that the total of Columns 6 and 7 should tally with the amount reported in column 2.

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Compliance with TDS and TCS for E-commerce Operators

In recent years, e-commerce platforms have boomed excessively, and so did the various technicalities for the e-commerce operators. As a result, they must follow different TDS and TCS policies to save themselves from paying unnecessary expenses. This article will cover various TDS and TCS compliances for e-commerce operators under the Income Tax Act 1961 and the Goods and Services Act, 2017. Listed below are some similar TDS (source deductible) provisions under Income Tax and TCS (source tax) under GST:

TDS under section 194-O of the Income Tax Act: In accordance with this section, when an e-commerce business sells goods or provides e-commerce services via an electronic or digital site or platform, the e-commerce operator must, when crediting a sale or service amount or both to an e-commerce participant* (or paying the amount to the participant, whichever is earlier), deduct Income Tax at the rate of 1% on the gross amount of the sale or service. Exemptions: The e-commerce operator is not required to deduct TDS if the amount paid or credited to an individual/ HUF during the financial year does not exceed INR 5 lakh if ​​he/she has provided his or her PAN or Aadhaar. If the e-Commerce participant does not provide his or her PAN or Aadhaar, TDS must be deducted at a rate of 5%, in accordance with the provisions of Section 206AA. TDS deducted by e-commerce operators need to be submitted to the government on the 7th (April 30 in the case of March) of the following month, where the same needs to be deducted. The quarterly TDS returns are also required to be submitted by the e-commerce operator.

TCS under section 52 of the Goods and Services Tax (GST) Act: According to this section, the e-commerce operator is required to collect a value of one percent (0.5% CGST + 0.5% SGST or 1% IGST) of the total value of the taxable goods being made, where the operator must collect consideration for these assets. A separate registration is required to obtain for collecting TCS under Section 24 (vi) of the CGST Act, 2017. The “net value of taxable supplies” refers to the aggregate sales of goods, services, or both made by all the registered persons through the e-commerce portal reduced by the aggregate amount of taxable goods, services, or both returned to suppliers within the specified month. It also does not include the value of taxable supplies on which the total tax is payable by the e-commerce operators themselves. Under GST, there is no specific exemption, but TCS should be collected on the net value of taxable supplies. Therefore, will be no TCS if the goods or services are exempted. The tax amount collected by the operator must be paid to the government within ten days of the following month in which the tax was collected.

The e-commerce operator is required to submit an electronic statement called GSTR-8 for the purpose of reporting the tax collected and supplies made through an e-commerce platform. GSTR 8 contains details of all the outward supplies of goods and/or services delivered by suppliers through its marketplace net of return and collected during the calendar month. GSTR-8 must be submitted within ten days from the end of the relevant calendar month. In addition, an annual return/ statement called GTSR-9B is also required to be filed by the e-commerce operator by December 31 after the end of the financial year in which the work is performed, and the tax is collected from the source.

E-commerce operators must integrate the TDS provision under the Income Tax Act 1961 and the TCS under the Central Goods and Service Tax Act, 2017 in the same function. E-Commerce Participant – Any person resident in India who provides goods, services, or both, which may include digital products as well, through an electronic facility, on a digital platform, or on an electronic trading platform. We hope that the article simplified the TDS & TCS provisions on e-commerce operators for you to understand and grasp. However, if there is still any lingering doubt or query, let our experts help you out.

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Section 194Q:- TDS on the purchase of goods

Under this blog we are going to understand a new section inserted by government to cover the transactions of purchase of goods under the purview of TDS provisions. This article covers the briefing of Section 194Q, its applicability, transactions covered under, rates and important due dates, other important points and relative practical examples. The government inserted Section 194Q to the Income Tax Act, 1961 in the Finance Act of 2021 and becomes applicable from July 1, 2021. The government’s motive in enacting this law is to have a check on and create a trail of high-value sales and purchases of goods. There are several other provisions of various sections under the Act that talk about the deduction of tax at source on various transactions; however, the deduction of tax on the sale of goods has been made applicable by introducing the Section 194Q into the Income Tax Act, 1961.

New Regulations According to this section, a buyer conducting a transaction of purchase of goods shall deduct the TDS of the seller with whom the transaction of purchase of goods has been conducted, if the products purchased by the buyer from that seller exceeds an annual value of Rs.50,00,000/-.  Let’s go through an example to understand this, suppose if you buy goods from ‘X’ and your annual purchases from ‘X’ is more than Rs.50,00,000/-, then you must deduct TDS on purchases above the amount of Rs.50,00,000/- limit. Suppose if you have bought goods amounting Rs. 60,00,000/-, the TDS should be deducted on the amount Rs. 10,00,000/- i.e., (Rs. 60,00,000- Rs. 50,00,000) considering the threshold limit of Rs. 50,00,000/-

Who is obligated to deduct TDS? Any person who buys goods from any resident seller (deductee) and the value of those goods is more than the threshold of Rs.50,00,000/-. However, the following persons are not obliged to deduct TDS:

New business —This section does not apply to the year the business is formed or incorporated.

Turnover limit – This section will not apply to person who had a gross receipts/ turnover amounting less than Rs. 10 crores in the financial year immediately preceding the year in which goods are purchased.

Non-resident — Provisions for this section do not apply to non-resident buyers. However, if the purchaser has a Permanent Establishment (PE) in India, this section may apply.

What kind of transactions would not be covered under this section?

Tax is deductible under any of the provisions of this act.

Tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.

Purchase deals amounting less than Rs 50 Lacs.

Securities and commodity transactions that are conducted via recognised stock exchanges and clearing organisations.

Imported goods :- It is evident from the provision that a buyer is only liable to deduct TDS on sum payable to resident sellers only. Therefore, any goods purchased from the seller located outside India shall remain out of the provisions of this section.

Due dates for depositing tax liability: TDS to be deducted earlier of the amount credited or paid to the seller. Under section 194Q, TDS shall be deposited by dates as follows:

For period April- February :- 7th of the subsequent month

For month of March :- 30th April

Rate of TDS TDS is to be calculated at a rate of 0.1% on the amount exceeding the amount of Rs 50 lakh in a financial year from a seller from whom the buyer has purchased goods amounting more than Rs 50 lakh. However, in case the seller is not holding a valid PAN, the rate of tax deduction shall be 5% instead of 0.1%.

Steps for calculation of TDS

Purchase above Rs 50 lakhs in a financial year from a seller

TDS to be deducted after deducting the threshold limit of Rs 50 lakh from the total value of purchase.

The threshold limit is Rs 50 lakh per seller, which means a seller-wise deduction in every financial year.

To conclude the understanding of Section 194Q, let us consider a practical example to understand how the TDS under this section shall be calculated:- Suppose, if a buyer has purchased goods amounting of Rs 80 lakh from a seller, then firstly he has to deduct Rs 50 lakh from it as an initial deduction provided under Section 194Q and then calculate the TDS on the remaining amount of Rs 30 lakh at 0.1%. So, the TDS to be deducted in this case would be Rs 3,000.

TDS= (80,00,000 – 50,00,000)*0.1%= Rs 3,000 With the reading of this blog, we got briefed about the provisions of Section 194Q. We understood the nature of transactions covered under this section, on whom the applicability of this section arises, how the value of transactions shall be driven and the calculation of TDS shall be made, and when the TDS deducted should be deposited.

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SA 701: Communicating Key Audit Matters

In this article, we would like to give you a short gist on how to communicate the key audit matters in an Independent Auditor’s Report. This SA deals with the auditor’s responsibility to communicate Key Audit Matters in the Auditor’s Report. It is intended to address both the auditors’ judgment as to what to pass on in the Auditor’s Report and the form and full reporting of such matters.

What are Key Audit Matters? While auditing the financial statements, the matters which were of most significant influence in the auditors professional judjement are known as Key Audit Matters.

Purpose of SA 701 The purpose of communicating the key audit matters is to enhance the communicative value of the audit report by providing a greater transparency on how the audit was performed. Describing key audit matters provides additional information to the intended users of the financial statement, also to make them understand the matters which in the auditor’s judgment were of most significance for the audit of current period.

Applicability of SA 701 This SA applies to the following:

Listed entity

Instances when the auditor decides in his judgement to communicate the key audit matters and

Required by any law or regulation

However, SA 705(Revised) states that when disclaiming an opinion on the financial statements, the auditor is not required to describe the key audit matters in the auditors report.

Determining Key Audit Matters

Assess the areas with higher risk of material misstatement or significant risk assessed in accordance with SA 315.

The effect on the audit of important events or transactions that occurred during the phase of audit.

Significant auditors judgment relating to areas in the financial statement that involved significant management judgment including the accounting areas that have high uncertainty

Examples of Key Audit Matters

Provision for losses and contingencies

Assessment of Impairment

Matters relating to revenue recognition

Taxation Matters

Explanation to the Key Audit Matters The Auditor shall explain in brief each key audit matter, under a separate section of the auditor’s report under the Key Audit Matter paragraph.

Other Important points to be considered Communicating the key audit matters cannot be considered as a substitute for:

Disclosure by the management in the applicable reporting framework such as disclosures in Schedule III of The Companies Act, 2013 and Third Schedule of the Banking Regulation Act, 1949.

Disclaiming a modified opinion when required by the circumstances of a specific audit engagement

When there is a significant doubt on entity’s ability to continue as going concern

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Why is Business Understanding Important for the Auditor?

For decades, the auditor’s understanding of a business and its environment has provided the basis for risk assessment and the design of auditing procedures that respond to identified risks. Conducting an efficient audit requires knowledge of how a client’s business operates and understanding the environment in which it competes. The international standards on auditing are more detailed and demand that an auditor be aware of the company’s goals and strategy. They must also be aware of any associated business risks that could be anticipated to increase the chances of significant misstatement. It is crucial to note that the process of identifying risks should begin with gaining knowledge of the nature, characteristics, dynamics, ad environment of the. The risk assessment of the potential effect should come next. The risks include misstatement on the financial statements, as opposed to going in the opposite direction and starting to assess risk by reading the financial statements. This could result in missing relevant and pervasive risks relating to the entity’s industry or its specific circumstances. If the auditor thoroughly understands the client’s business, many issues can be avoided. We frequently come across audit engagements where the auditor does not complete the proper procedures or overlooks audit procedures relating to a particular transaction because the auditor does not have a thorough grasp of the business. When this happens, it’s frequently because the team thought every transaction in an account would go through the same procedure. Don’t carry over old planning work documents from the previous year; instead, take a fresh look at the business side of the organization you are inspecting this year. To re-verify the client, it should include:

Business model

Products and services

Customer base

Competitors, and

Industry,

Control Environment Understanding

The auditor should gain knowledge about the client’s system of internal controls when the engagement team has gained a thorough understanding of the client’s operations. Fundamentally, this obligation is not changing because of new standards; it is still a part of conventional audit procedures. However, the new guidelines give clear instructions on how to go about getting this understanding. Consider including documentation of the following areas this year for the following benefits.

Benefits of auditing to the business

Organizational Control Environment: Understand what processes are in place within the organization beyond the work performed by the engagement team for external audits. What are the ongoing tasks, activities, and processes in place at the company that support achieving financial reporting objectives?

Corporate Risk Assessment Process: How does your company develop its risk assessment? Compare this audit’s risk assessment to your risk assessment. Supporting the request helps clarify the engagement team’s understanding of the organization’s risk assessment process.

Company process for monitoring internal control system: Consider what the company does to ensure that financial reporting is controlled in the absence of external assurance.

Enables the Pursuit of Business Objectives: An effective audit structure helps a business pursue and attain its various corporate objectives. Multiple forms of internal control are required in the business for regulating, monitoring, and detecting regular, irregular transactions.

Understanding of information systems and communication:The surveyed companies are modernizing their strategies and investing in technology improvements to stay competitive. Audits must be adapted to provide investors relevant information and maintain market confidence.

Tips for Auditors to understand Business Process

At the beginning of planning, take time to review the company’s business model.

Use data analytics to understand business transactions better.

Create flowcharts that you can use to reconcile business transactions with annual financial statements. This allows the entire audit team to understand better how transactions are reflected in the financial statements.

Make sure the industry, technology challenges, and business align with the expertise of your engagement team.

Don’t think information arrives magically in financial accounts; instead, ask straightforward questions and maintain your curiosity.

All of these aspects of understanding an assurance client require teams to take the time to revisit their understanding of the entity being audited. Consider talking to people at work you don’t see regularly. Discover new company documents and information and keep up with the latest developments in the industry.

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Section 35D: Amortization of Preliminary Expense

Preliminary Expenses are those expenses that are incurred before starting up an establishment for business or extending a running business or starting up a new unit.

Eligible Deduction/Expenditure Under Income Tax Act, Preliminary Expenditure is considered an expenditure of a capital nature and allowed as a deduction during Five Equal Years, provided the assessee is a:

COMPANY: A Company must be an Indian Company. Others(Individual, AOP, etc):- Others (eg- Individual, AOP, Firm, etc.) must be a resident in India being an ordinary resident or not an ordinary resident.

Preliminary Expenditure Deductions of preliminary expenditure shall be allowed not on the basis of Actual Expenditure incurred but on the basis of a list of expenses mentioned under the Income Tax Act.

List of Preliminary Expenditure Allowed Following are the list of Preliminary expenditure allowed, In Case of A Company:

Drafting expenses of MOA and AOA

Printing expenses of MOA and AOA

Fees for registering a Company

Expenses Incurred for the issue of shares and debentures.

Other than Company (Individual, AOP, FIRM, etc.)

Preparation of Feasibility Report

Preparation of Project Report

Conducting Marketing or any other survey relating to the business of the assessee

Engineering Services relating to the business of the assessee

Drafting legal charges for any agreement between the assessee and any other person relating to the conduct or setting up of the business of the assessee

Other expenses notified by Government from time to time 

In case of other than the company, provided expenses under points (i) to (iv) must be incurred by either the assessee himself or any concern/Agency Which is approved by CBDT, and such expenditure must be incurred before the commencement of business and after commencement of business only for the extension of business or establishment of new unit purpose expenditure are allowed as deduction under PGBP.

Quantum of Deduction If an assessee is a company, then the maximum deduction will be lower of the following two: |Amount of eligible expenditure Or 5% of the cost of the project or 5% of capital employed, whichever is higher. If an assessee is a resident, Individual, Firm, etc., then the maximum deduction will be lower of the following two: Amount of eligible expenditure Or 5% of the cost of the project

Period of Deduction

In case of new business: The period of 5 years would start from the previous year in which the business commences.

In the case of existing business: The period of 5 years would start from the previous year in which the extension of the undertaking is completed or the new undertaking commences operation.