TDS Flow in Accounts Payable - Oracle Apps India Localization

Review this article before you read this.

Introduction

Organizations are expected to withhold a percentage of the payments that they make to their suppliers and remit the amount thus collected with the tax authorities at the end of every specified period. This process is known as Withholding Tax or Tax Deducted at source.

The suppliers in turn receive a certificate to the extent of the amounts thus remitted and they will file the same with the Tax Authorities as a part of their Income tax declaration.

While withholding tax calculation in majority of countries is effective at the time of making payments to the suppliers, in India the Tax Deducted at Source (TDS) is effective at the time of accepting the supplier invoice itself. This makes the tax calculation, management and tracking of TDS much more complicated.

This document discusses an end-to-end scenario, where the TDS is calculated at the time of entering a supplier advance (Prepayment) and netting off the same against the invoices entered in the Oracle Applications Accounts Payable module.

1. When prepayment invoice is generated in AP.
In Oracle Apps, you enter a Supplier Prepayment as a Supplier Invoice of type 'Prepayment'. In this example, we are entering a prepayment of Rs.55000. Accounting entry generated is as follows.

2. System Creates TDS Credit Memo on supplier (Assuming 10% is the rate)
At the time of validating the above invoice, the system creates two additional documents. One, it creates a credit memo on the supplier (discussed in this step) and two, it creates a TDS invoice on the Tax Authority, thus moving the Tax from the supplier to the Tax Authority (discussed in step 3 below). For this purpose, Tax Authority has to be created as a Supplier in the ERP system

In this example, TDS rate of 10% is assumed.

The rate gets picked up from the tax master where we have defined the tax as type 'Tax Deducted at Source'.

3. System Creates TDS Invoice on Tax Authority (TDS Supplier)

This is already discussed above.

4. Making the payment to the supplier on the prepayment invoice created above.
You will net off both the prepayment invoice (step 1) and the credit memo (step 2) when making the payment to the supplier.

5. Making the payment to the tax authority on the TDS Invoice

6. Enter Standard Invoice on Supplier (Raising invoice of 40000)
Here we are entering a standard invoice on the supplier and netting it off with the prepayment created above. The invoice amount is Rs. 40000. At the time of validating this invoice, the system will create TDS Credit Memo and TDS Invoice as discussed previously (Steps 2 and 3).

Accounting entry for the invoice.

7. TDS Credit Memo on the above invoice

 8. TDS invoice on Tax Authority

 

9. Attaching Prepayment created above to the current invoice.

10. TDS Return Invoice on supplier to reverse the original TDS Credit memo on the Prepayment.
This is a bit complicated to explain. If you make payment to the tax authority on this TDS invoice (created in Step 8), you would have made a total payment of 5500+4000 to the tax authority. This is wrong. Actually you don't have to pay anything on this invoice since you have already paid the TDS on the prepayment. To reverse the TDS Credit memo and the TDS Invoice created above (in step 7 and 8), the system creates a Reversal Invoice on the supplier and a Credit memo on the tax authority to the extent of Rs.4000

11. TDS Return Credit Memo on Tax Authority to reverse the Original TDS Invoice on the Prepayment

Note that TDS Control A/c is an intermediate account which gets netted off at the end of a TDS Credit Memo and a TDS Invoice. This account is set up when you set up the tax master.

This is diagrammatically explained in the table below.