Tax Deduction at Source - Why ?????

Why was TDS introduced?
The concept of tax deduction at source (TDS) was introduced by the Income Tax Department to collect the taxes from the persons who would otherwise escape the tax net. According to the scheme of TDS, the persons responsible for making payment of income are required to deduct the tax at source. They have to remit the deducted amount to the Government’s Treasury within the stipulated time. This scheme is governed and regulated by the Income Tax Act, 1961 and the rules made there under.

What’s the logic?
The Income Tax Law governs the taxation of a person who earns income. If a person earns income, then it is the duty of that person to pay the tax as per the prevailing law.

For the income tax liability of another person, why should any other person deduct the tax, and remit to the government. It is the duty of the Income Tax Department to collect the tax from the assessees and not the common person’s duty to act as an agent of Income Tax Department in the tax collections.

All Costs – No Benefits!

Just because another person may not pay his tax honestly, the Department has shifted the duty of collecting taxes on the common persons. This shift of duty cost a huge amount.

The following are the associated costs and monetary exposures.

--> Printing & Stationery for TDS Certificates, Correspondences, Returns, etc.
--> Cost of Human Resources, The man hours spent for preparation of TDS Certificates, filing returns, remittances of deducted tax - his salary, welfare costs, etc.
--> The expenses incurred for deploying a professional like chartered accountant for the consultancy – Professional Charges, Consultancy Charges, etc.
--> The opportunity cost of utilizing the time spent for TDS compliances – That time could have been usefully utilized for other core business purposes leading to profits to the business. The loss of revenue on account of spending time in unnecessary activities is very important.
--> No one is perfect in this world, and even if there are some mistakes or faults committed in TDS compliance it would cost the assessee dear.
--> Every deductor should have a TAN (TDS Account Number). If there is a failure to apply for TAN, then there is a penalty of Rs.10,000/-
--> You are required to deduct the tax at source. If there is a failure to deduct the tax, penalty equal to the sum not deducted will be levied. As if that is not enough, interest @ 15% p.a. is to be paid.
--> Even if the tax is deducted at source properly, if there is a delay in remitting the same, then there is a penalty equal to the sum not deducted and interest @ 15% p.a. is to be paid.
--> If all the formalities are done correctly, but the TDS Certificate is not issued in time, there is a penalty of Rs.100/- per day of delay. Fortunately or unfortunately this penalty is restricted to the maximum of the amount of TDS involved.
--> If throughout the year the going was smooth in relation to TDS compliances but at the end of the year, if there is a delay in submitting the TDS Return, again there is a penalty of RS. 100 per day of delay.
--> So long as money is concerned, you can pay the fines, etc and get relieved. BUT this is not the end. A person can be put behind the bars atleast for 3 months rigorous punishment and maximum upto 7 years with fine for the failure to deposit the tax which you had deducted. This loss of reputation and damage to the esteem cannot be measured in terms of money. So the cost incurred in this regard is INFINITY.
--> To file the return, these days, the assessees are required to file their returns in electronic media. i.e. e-TDS. To comply with that one needs to buy a e-TDS software which costs around Rs.2000/-
--> Apart from the cost of software, the data has to be keyed in, for that purpose your valuable human resource will be used for the data entry which will again result in loss of man-hours for unproductive activities.
--> Not to be ignored, the depreciation of the assets used for purposes of TDS compliances will have to be considered.

Depending on your organizational structure and volume and nature of activities you can estimate the cost and risk your organization is exposed to because of the additional burden of deducting taxes of other persons and remitting to the government in addition to paying your own taxes.

Just calculate the cost & risk of exposure in monetary terms as per the above 8 points and do not be startled if they all add up to Rs.0.5 Lakh or Rs.1 Lakh or Rs.10 Lakh or MORE.

Soon to realize, late to regret.

If I earn income, I should pay the tax as per the Income Tax Law prevailing. If someone else earns income, that other person should pay the tax as per the Income Tax Law. Where is the question of any one else intervening and deducting taxes at source????

------------- Sanjay Kadel, Chartered Accountant

Auditing Thru tally! Some Useful Techniques

Audit thru tally! Some useful techniques.

Today no one worries about tallying the accounts. The technology blessed accounting application softwares like tally have made the job of tallying easier, faster and accurate. Though the quantitative numbers are taken care of, the most important thing is the qualitative factors of accounting. These can be ensured by the same technology and these needs to be effectively utilized by the auditors. Some techniques are suggested below;



Security and Confidentiality of accounting data
Like in the manual system, the books of accounts were kept under lock and supervision, in the computerized system, there should be user names and passwords to open and modify accounts. In fact, in the latest versions of the software, different levels of users and access controls can be defined.



Built-in Audit Feature
First of all, the built-in audit feature (Tally audit feature in Tally) should be enabled when the company is created. However, even later, the tally audit feature can be enabled. (Gateway of Tally Alt+F3 Alter Select the Company Set to yes the concerned part).



By enabling the Tally Audit feature, an auditor can track changes in the accounts following his previous review. Two types of changes are important, which can be identified by enabling this feature changes in transactions or vouchers and changes in ledger masters.



You can view the List of new or modified vouchers. Even, the details like, entered by whom and / or altered by who will be shown. It is left to the administrator or auditor to accept or reject the changes.

You can also view the list of new or modified ledger accounts and review it and accept or reject the changes.



If he is satisfied with the authenticity of the changes, he accepts the appropriate changes by pressing F7 or all of them by pressing Alt+F7. Once the changes are accepted, they are removed from the audit list and would not be available again.



The audit lists can be viewed by following the path given hereunder; (Gateway of Tally Display Statement of Accounts Tally Audit)



Ratio Analysis
The most important and most effective technique of audit is the ratio analysis to ensure the reasonability of the accounting. For instance, exorbitant or unusual gross profit ratio or net profit ratio could indicate the incorrect classification of the expenses as direct and indirect. Similarly other ratios can be analyzed and compared with the expected norms and standards for the company concerned. (Gateway of Tally Ratio analysis)



Check the configurations
It is possible that the options in configurations may have been changed for the accounting conveniences but which are unwarranted. For instance, the configuration of the voucher entries may be changed to allow cash/ bank in the journal vouchers. But it is most undesirable, because, the type of voucher may not truly reflect the nature of transaction. (Gateway of tally F 12)



List of Ledger Accounts & Stock items
First of all identify the list of ledger accounts and stock items and the group in which they are grouped so as to represent the nature of accounts appropriately in the final statements like balance Sheet and Profit and loss accounts.

Extracting customized reports
Tally comes with the user-friendliness to spool any type of report with any sets of conditions. Alt + F12 i.e. Range Button is an auditors favorite tool to extract the reports. For instance, in the cash book, the cash payments exceeding Rs.20000/- can be easily extracted; vouchers having narration containing XXX can be spooled easily; and others depending on your query can be easily extracted. (Wherever possible, Alt + F12)



A particular ledger account or the balance sheet or the profit and loss account can be viewed in the columnar form - monthly, weekly or yearly, etc. and the comparison and trend analysis can be done very easily and quickly.

Cash Entries authenticity
One can go in the cash book and display for each day, the total debits, total credits and the closing balance. Such report can then be reviewed for verifying whether any negative balance exists on any day. At any cost, the Cash balance cannot be negative. (Cash book ledger view F6)



Bank Reconciliation Statement
The Bank Account (Ledger account display) can be used to reconcile the bank book with the banks statement of accounts in the accounting application program itself.



Sorting Data
The ledger account when viewed, the transactions are by default sorted chronologically, but they can be sorted even amount wise or ledger name wise, so as to ease your search of data. For instance, you may like to sort the data amount wise, descending and vouch in detail only the huge amounts first and those concerning small value in the next priority. (F 12 options)



While viewing some reports, like balance sheet or profit and loss account, the percentages option can be used to efficiently analyze the data and make expert judgments. (F 12 options)



Stock related reports for review
Movement analysis reports can be extracted. (Gateway of Tally Display Inventory Books Movement Analysis)

Details of Purchase Bills pending can be extracted including the quantity, rate and value

Details of Sales Bills pending including the quantity, rate and value

The Stock Summary can be reviewed for identifying negative stocks as on any date. (Gateway of Tally Stock Summary)



Exception Reports
One can view the negative Stocks in the stock register

The ledgers showing negative balances can be identified very easily



A list of overdue receivables and overdue payables can be extracted. The Aging analysis of the stocks, debtors and creditors can be done at the touch of the button, instead of breaking heads for long hours.



(Gateway of Tally Display Exception Reports Concerned report)

Exporting Data
The latest versions of the software come with the option of exporting the desired data in the desired format, namely excel, word, html, pure text, etc. very easily. For instance, the specified ledger account can be exported to excel and the calculations and filters used on them. Adding to it, the ledger accounts can be viewed in the columnar form and then exported if so desired to have cross verifications easy.





There may be many more and effective audit techniques thru tally, which can be known by the practice and experience one has with the application software. Technology being an enabler, it must be tried to be utilized to its optimum level. Since, accounting has shifted hands from manual to computerized systems, it is high time for auditing to follow suit.





------------- Sanjay Kadel, Chartered Accountant

Why Form a Company

Types of Company

--> Private Limited Company
--> Public Limited Company
--> Unlimited Company
--> Partnership
--> Sole Proprietorship

Applicable law:

The Indian Companies Act of 1956


Corporate Documents & Registration of a Company

An application for registration should be submitted to the registrar of companies with the following documents:

1. Memorandum of Association;
2. Articles of Association;
3. a declaration signed by a person named in the articles of the proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney entitled to appear before the High Court, or by a chartered accountant practicing in India stating that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with;
4. a list of persons who have consented to act as directors of the company.
5. if the proposed company is a public company, consent of very person prepared to act as a director must be submitted in a prescribed form;
6. information about directors, managing directors and managers and secretary must be submitted in a prescribed form;
7. information about the registered office in a prescribed form;
8. power of attorney in favor of one of the promoters or any other person, authorizing him/her to make corrections in the documents submitted to the registrar of the companies, if it becomes necessary; and
9. applicable registration fee payable to the registrar of the companies.

Advantages of Incorporating in India

Many tax exemptions available to the company set up in Special Economic Zone;
Many tax incentives available to IT companies;
India has got double taxation treaties with many countries;
Only INR 100 000 is required to form a private company;
Skilled and intelligent employees available at nominal rate;
With its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc.

Auditing Starts When Accounting Ends???

Auditing starts when accounting ends???

“Auditing starts when accounting ends” is a question rather than a statement. All the leading books and publications often carry this notion and this is just another statement, which requires a RE-CONSIDERATION in the context of the current auditing practices and the commercial situation prevailing in this modern era.

In relation to auditing it is often said and boasted off that auditing starts when accounting ends. Atleast in connection with the statutory audits this SHOULD be true.
BUT what is found in practice and pursued consistently is not what should be. The audits are being done even when the accounts are not updated and completed. In fact, it is not an unusual situation where you are reviewing the general ledger and the accountant sitting near by in another networked system is updating the accounts.

Today’s accounts are no longer inked; they are in the accounting application’s database. The best practice before commencing the audit is to take out a hard copy of the trial balance. But such practice is of no use and relevance, because it is done just because it is written in your 1990’s audit programme. While the printout you took had lost relevance on the very same day, when the updations were going on, you still hold it as precious audit evidence!!!

You should not have got astonished by seeing the financial results, rather AUDITED financial results released on dot during the first week of April in the news papers or elsewhere, because, while the accounts were being written and updated during March, the statutory audits would have already started. Hence, one should not wonder if the audit report of a concern is out in just 7 days after the close of the financial year.

There is no question of right or wrong or good or bad about the practice of starting an audit before accounting ends. The only caution, which requires a mention, is that the appropriate audit evidences should be in your possession and satisfactory procedures undertaken so as to enable the expression of opinion on the truth and fairness of the financial statements.

------------- Sanjay Kadel, Chartered Accountant