Apr 5, 2008

Why standard withholding tax do not meet the India Localization Requirements.

I have had a number of queries as to why standard withholding tax feature in Oracle Apps do not handle India Localization Tax Deducted at Source (TDS) scenario.

The following are the reasons why standard withholding tax is not applicable for India Local Requirements.

1. In India, the concept of threshold limits is used in calculating the TDS. For example, I could say that the threshold limit on deducting TDS on a single invoice is Rs. 5000. This is called 'Single Invoice Threshold'. This means that for any invoice with value less than that amount, the TDS will not be applicable.
2. Along with the above, I could set up that TDS will be applicable only if the total value of all invoice exceeds a threshold limit, say 20000 (Cumulative Threshold). This remains alongwith the statement above.
3. Once the cumulative threshold is exceeded, all the invoices that were skipped earlier will come under the purview of TDS.

Simple illustrative example of above.

Let us say:

Rule 1: Threshold limit on single invoice: 5000, the TDS percentage: 5%
Rule 2.Cumulative Threshold Limit: 10000, TDS percentage 10%

1. Book invoice for Rs.1000. There is no TDS since both the above rules are not applicable.
2. Book another invoice of 5000. Rule 1 applies. System creats a TDS credit memo on the supplier for Rs.250 and a TDS invoice on tax authority for Rs. 250 thereby moving the liability from the vendor to the tax authoriry.
3. Book another invoice of Rs 3000. No TDS since the above rules do not apply.
4. Book another invoice of 1000. The cumulative threshold is reached. From now on, every invoice is charged TDS @10%. Hence, for this invoice, the system first creates a TDS credit memo of Rs. 100 on the vendor and a TDS invoice on tax authority for Rs. 100.
5. Along with the above, the system will create another TDS credit memo of Rs. 650 on the vendor and a TDS invoice of Rs. 650 on the tax authority. (Calculation: 10% of 10000 is 1000. TDS already paid Rs. 350 [250+100]. Balance 650).

The standard withholding tax do not handle such scenario.

5 comments:

Varsha said...

Thanks! This was really helpful. But I didn't understand the 4th point. Why is the TDS for Rs 100 calculated?

Ramaswamy VK said...

Varsha,
That is the TDS @10% on the current invoice. The calculation is as follows.

Total TDS on 10000 @ 10%=1000
TDS already paid on the single threshold invoice:(Point 2) @ 5% =250
TDS paid on the last invoice of 1000 @10% = 100
Total TDS paid = 350
TDS remaining to be paid= 650 (Point 5)

Note: I have modified the point 4 to make it easier to understand. I have also added Point 5 to bring more clarity

Prem said...

Hi,I am Prem,your article is fine,but i want go deeper.

For cumulative multiple slab,what will be situation ?

What will be set up?

Prem said...

hi,

As per your information,if book another invoice of 1000. The cumulative threshold is reached. From now on, every invoice is charged TDS @10%.

In this case,user will never put any tax as it is below 5000,then there is no question of putting 10% on it,then how is it possible? Wll system calculate automatically?

Ramaswamy VK said...

Hi Prem,

Once the cumulative threshold is reached, the system will automatically calculate the TDS for all the invoices. The user do not have to enter any tax information. The tax information will default from the setup.

If the user wants to block an invoice from calculating TDS, then he has to delete the tax information automatically created in the Invoice line dff. But this will not be logical and legal.

I don't know if you have read my other post on TDS.

You can get some very good references to TDS / India Localization in metalink

Ram