Budget 2023 #3 - TDS Credit - Pehle kyu nahi kiya?


By CA Vijaykumar Puri ~ Partner, VPRP & Co LLP, Chartered Accountants


black Android smartphone near ballpoint pen, tax withholding certificate on top of white folder
black Android smartphone near ballpoint pen, tax withholding certificate on top of white folder

“So good that the only question remains – Pehle kyu nahi kiya?”

Today, let us look at one of the most beneficial amendments (on a ground level) proposed in the Budget 2023.

Let us take a scenario.

Mr. Raman is running a business providing professional services. He raises an invoice of Rs 1,00,000 on Mr. Modi for providing financial planning services on 25 March 2022.

But Mr. Modi is a busy man. He settles the invoice only on 25 October 2022. He pays Mr. Raman Rs 90,000 (after withholding TDS at the rate of 10% - INR 10,000)

Mr. Raman follows accrual basis of accounting. So, he had to record the invoice dated 25.03.2022 in FY 2021-22 itself and offer it to tax.

Mr. Modi however follows cash basis of accounting. He recognised the expense of Rs 1,00,000 in FY 2022-23 i.e. on the actual date of payment. Consequently, TDS was deposited in Q2 of FY 2022-23.

As per existing Income tax Rules, Mr. Raman can claim credit of TDS (Rs 10,000) only in the year when he offers the income to tax i.e. FY 2021-22.

But the TDS was actually withheld and deposited in FY 2022-23. Thus, the credit will reflect in Form 26AS only in FY 2022-23.

Due to this rule, Mr Raman cannot claim TDS credit in FY 2022-23, since he is not offering the income to tax in that year!

This was absurd – as the taxpayer was paying the same amount twice.

This problem was arising when the assessees were following different methods of accounting or there was a difference in recording the entries.

Practically, what was happening –

1. On advice from their CAs, people like Mr. Raman would defer their invoice date to FY 2022-23 and claim TDS credit in that year; or

2. People would go ahead and claim the TDS credit of INR 10,000 in FY 2022-23 itself. If caught or served with tax notices, they would have to pay the tax.

3. (Rare) On bad tax advice, people would claim fictitious TDS credit of Rs 10,000 in FY 2021-22 itself. This would usually result in direct notice from Income Tax denying the TDS credit (as it was not reflecting in Form 26AS).

As you can see this rule was absolutely unnecessary and unfair. The taxpayer should not pay double tax for some administrative fault.

The validity of this Rule was contested in the Courts as well.

Now, Budget 2023 has rectified this –

Where income is included in the ITR filed by the assessee and tax is deducted in subsequent years, then an application can be filed by the assessee within 2 years from the end of FY in which TDS was withheld.

So, in our example, Mr. Raman can file the form (to be prescribed) with the tax officer by 31 March 2025 (since tax was deducted in FY 2022-23).

What if scrutiny assessment has already taken place or intimation under section 143(1) is already issued? Nowadays, intimations and refunds are processed within 24 hours of filing the returns!

No worries, the law requires the tax officer to pass a rectification order. In that rectification order, the tax officer will grant TDS credit which will be then received by the assessee.

Overall, this is one of the most beneficial amendments on the ground level.

The author concurs with this view and would only point out one thing –

The real efficacy of this provision will lie in the application form (yet to be prescribed) and required supporting documents. Hopefully, it is in faceless mode.

Secondly, the tax officer would want to verify the genuineness of the transaction. Hopefully, this does not require any indemnity bond to be executed (it unnecessarily increases hassle and cost).

After all, this is a routine and recurring issue. It deserves a simple way out.


Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.