The Income Tax (I-T) department is meticulously scrutinizing TDS claims by employees and declarations by employers, comparing figures under various heads such as house rent allowance, medical insurance, home loans, and tax-saving investments. Any disparity can attract scrutiny, affecting both employers and employees. They are currently conducting a line-wise reconciliation of numbers under various heads, such as house rent allowance, medical insurance, payments on home loans, tax-saving investments under 80c, etc.
In early December, authorities served notices under Section 133C to several companies in Mumbai, Delhi, and other major cities. This section, introduced in 2014-15, empowers authorities to request information for verification purposes. The companies are now required to either ‘confirm the information’ or ‘furnish a correction statement,’ as informed by two individuals familiar with the ongoing exercise.
Tax Department Enhances Scrutiny
The department aims to track cases where companies deduct less TDS or employees claim refunds through unreported investment declarations. Section 133C, introduced in 2014-15, has been rarely used, but recently, many companies received notices under this section, facilitating line-wise verification.
The department utilises smart technology to conduct granular-level verification of reporting by both deductors in their withholding tax returns and taxpayers in their ITRs. Since it is impractical to do manual verification for such a large number of taxpayers, the department employs a system-related verification to identify gaps, according to Rahul Garg, Managing Partner at Asire Consulting, advising on tax and regulatory matters.
In the recent round of notices, an annexure lists employees. According to Garg, it’s crucial to scrutinize the right cases at the company or employee level. This approach ensures a more cautious withholding tax compliance, accurate validations by employers (deductors), correct TDS claims by taxpayers, increased tax collection, and expanded tax base through a fair selection of the old and new tax regimes for individuals.
Employers’ Responsibility in TDS Compliance
The law places the responsibility on employers to accurately compute and report TDS every quarter for their hires. Traditionally, companies have not closely verified employee declarations, with some employees failing to submit actual documents on time. Moreover, service providers, often software companies handling payroll outsourcing, lack adequate validation.
Rajesh P. Shah, partner at the CA firm Jayantilal Thakkar and Company, emphasised.
“This is an effective tool to identify wrong claims. The parties receiving the notices should immediately comply as there is a penalty provision applicable for not replying. If the data required is voluminous, then adjournment should be sought. Parties should not take it lightly,”
Discrepancies in Employee TDS Claims
If employees make fraudulent claims and companies support them, the tax office system may not readily detect the gap. However, any disparity between the two sets of information would be promptly identified. If a case is flagged by the tax office, there’s a high likelihood of scrutinizing records for all employees of the company involved.
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