TDS Calculation when the transaction for a particular vendor exceeds the threshold limit

Business Scenario

• AS per Indian Income Tax Act 1961 section 194JA and 194JB etc. where TDS is calculated on the whole amount cumulatively which were previously nontaxed if any particular transaction exceeds the threshold limit.
• If the TDS threshold exceeds TDS should be calculated on the whole amount including previous transaction and current transaction.

For Example, when threshold limit is INR 3700000, lets suppose INR 3000000 transaction is already posted and in next transaction INR 1000000 is booked.

In this case TDS will be calculated on 4000000 in second transaction that is cumulative basis.

Note: If Transaction amount in second transaction < TDS calculated on cumulative basis, then the excess amount of TDS will be shown as negative in vendor transaction.

Configuration

1. Go to Tax Module > Setup > Withholding tax > Withholding tax component Groups, Setup the TDS Section in a group.

2. Then, Tax > Setup > Withholding tax > Withholding tax components, for each TDS section, there may be multiple parts/subsections/rates, here we define these separately.

3. Then, Tax > Indirect taxes > Withholding tax > Withholding tax authorities, before defining withholding tax authority we need to create a Vendor for the same to whom the TDS amount will be submitted.

4. Tax > Indirect taxes > Withholding tax > Withholding tax settlement periods, here we define when TDS will be settled.

IMPORTANT CONFIGURATION FOR THE SCENARIO:

5. (a) Tax > Indirect taxes > Withholding tax > Withholding tax codes, fill all the required details, like TDS payable main account and etc.

(b) Tax > Indirect taxes > Withholding tax > Withholding tax codes > click on Values, Here define date range and the rate of TDS for each date range.

Note: this is not mandatorily required since we define the value in the threshold reference. (Even not required)

6. (a) Now go to Tax > Setup > Withholding tax > Threshold definitions, create a new threshold definition, and Click on Threshold Designer.

(b) Tax > Setup > Withholding tax > Threshold definitions > Threshold Designer, define threshold limit (upper limit and click new and create lower limit)

Note: there is another setup for threshold limit which will serve the purpose of the scenario (Tax > Setup > Withholding tax > Withholding tax Components > Threshold)- for this, we have to mandatorily required to define Withholding Tax Code Value. But we are not discussing that here.

7. (a) Again go to Tax > Indirect taxes > Withholding tax > Withholding tax codes,

first enable threshold hierarchy and click on Threshold References

(b) Tax > Indirect taxes > Withholding tax > Withholding tax codes, create new threshold reference and fill account type for which it will be applied and fill Threshold Value which we just created in step 6.

Now, Click on Threshold Designer

(c) Tax > Indirect taxes > Withholding tax > Withholding tax codes > Threshold Designer,

As per our above example, For first range 0-3700000 put TDS rate value @0% and for second range 3700000-Maximum put TDS rate value @2%.

Setup for First range 0-3700000:

Setup for second range 3700000-Maximum: (Important setup here: Mark Calculate Previously nontexed transaction YES and Calculate Tax YES)

Result

1. Create a new invoice journal (Accounts payable > Invoices > Invoice journal), here we created a new voucher with vendor and Ledger offset account with a value of 4000000 (threshold limit is 3700000).

Click on Withholding Tax to know the TDS calculated:

TDS Calculation,

(2% of 4000000) = 80000

For Invoice under 3700000 i.e under the defined threshold:

Testing Scenario for Learner:

Section 194J (Fees for Professional or Technical Services): If payment for professional service exceeds Rs.30000 in a year, then TDS would be deducted (it includes previously nontaxed transaction).

Happy Learning!

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