Claiming of Past Year’s TDS Credit: Industry demands Streamlined Online Process in Budget 2024, says current method Troublesome

TDS Credit and ITR Mismatch caused by allowing TDS Claims of past years in Form 71 is troublesome, says industry experts, seeking amendments to the TDS Mechanism
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Industry leaders are urging the government to address the TDS mechanism in the Budget 2024, seeking a solution to a major issue while allowing the claim of Tax Deducted at Source ( TDS ) for income in subsequent years after filing the income tax returns. This discrepancy leads to a mismatch between income tax returns and reported TDS.

When an individual taxpayer adheres to the accrual basis of accounting and reports income in their income tax return ( ITR ) for the year it is generated, a challenge arises. The Tax Deducted at Source ( TDS ) on this income is deducted in subsequent years, causing a misalignment between the income reporting year and the year in which TDS is deducted. This situation hinders individuals from claiming TDS credit.

For instance, consider a consultant who invoiced their client for a fee payment in FY 2021-22 ( AY 2022-23 ). Following the accrual accounting method, the consultant recorded the income in FY 2021-22 ( AY 2022-23 ) when the invoice was raised. However, the actual fee payment occurred in FY 2022-23 ( AY 2023-24 ), and TDS was deducted during that period ( FY 2022-23, AY 2023-24 ).

To tackle this issue, the government has introduced a specific form to enable individuals to claim TDS credit when not deducted in the income occurrence year. “To facilitate legitimate TDS claims, the government recently permitted taxpayers to claim TDS credit within two years from the end of the financial year when TDS was deducted by submitting Form 71,” explains an industry expert.

However, the submission of Form 71 may require manual assessment by the assessing officer ( AO ), deviating from the automated process at the Centralized Processing Centre ( CPC ) for most refunds. Experts suggest that this manual intervention makes it cumbersome for affected taxpayers to secure TDS refunds.

Industry experts propose modifications to Section 199 and Rule 37BA, allowing taxpayers to choose when to claim TDS credit – either in the year of income reporting or the year when TDS appears in Form 26AS, provided the income is offered for tax in either year. Furthermore, they advocate for the introduction of an online functionality for claiming TDS deducted in subsequent years.

Concerns are raised about the 2-year time limit for claiming TDS credit. Experts recommend extending the time limit for submitting Form 71 to address cases beyond the current limitation period. They emphasize the need for a more practical and extended timeframe, aligning with the period available for making rectification applications, ideally a 4-year period.

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