Tax Withholding Category refers to Tax Deducted at Source (TDS).

Under this system, individuals or entities responsible for making payments are mandated to deduct tax at source at specified rates. Rather than receiving tax on income at a later stage, the government requires payers to deduct tax in advance and remit it to the government.

To access the Tax Withholding Category list, navigate to:

Home > Accounting > Taxes > Tax Withholding Category

1. Prerequisites

Before creating and using a Tax Withholding Category, it is advised to create the following first:

1. Supplier
2. Customer

2. How to create a Tax Withholding Category

In BizCentric, Tax Withholding Categories for most cases are available by default, however, you can create more if needed.

1. Go to the Tax Withholding Category list and click on New.
2. Enter a unique name, eg: Section 194C Individual.
3. Enter a Category Name (Dividends, Professional Fees, etc,.).
4. Enter a Tax Withholding Rate against a Fiscal Year.
5. You can set the threshold for a single invoice or sum of all invoices.
6. Select an account against your Company to which tax will be credited.
7. Add more companies and accounts as needed.
8. Save.

Under accounting details, the TDS account is added for each Company in the system.

2.1 Assigning Tax Withholding to Supplier

After saving, it can be assigned to a Supplier:

2.2 How does the threshold work?

Let’s consider a scenario involving a Supplier subject to a Tax Withholding Category.

For instance, suppose a tax rate of 5% is applicable to an invoice where the Single threshold is set at 20,000, and the Cumulative threshold is 30,000. If an invoice is generated with a total of 20,000, the Single threshold will be triggered, resulting in a 5% tax charge.

However, if the invoice amount totals 15,000, no tax will be levied as it does not surpass the threshold. Subsequently, if another invoice is issued against the same supplier with a total of 15,000, although it does not exceed the Single threshold, taxes will be deducted. This is because the sum of the previous invoice and the current one amounts to 30,000, which matches the specified Cumulative threshold.

3. Using Tax Withholding

3.1 Use in Purchase Invoice

In the example provided, we’ve chosen ‘TDS – 194C – Individual’, which features a single threshold of 30,000, a cumulative threshold of 100,000, and a tax rate of 1%.

When the Supplier’s tax withholding field is configured, upon selecting that Supplier, a checkbox will appear in the Purchase Invoice, allowing the user to decide whether to apply tax or not.

• Let’s proceed to create an invoice amounting to 90,000. Upon saving the invoice, the system automatically computes the tax and includes it in the taxes table.
• To observe the impact of the Cumulative threshold, let’s generate an invoice totaling 10,000 and submit it. Despite the invoice amount not exceeding the Single threshold (30,000), tax has been imposed. This occurrence arises because the combined sum of the previous and current invoices reaches 110,000, surpassing the Cumulative threshold. Consequently, tax is applied based on the rate specified in the Tax Withholding Category.

Note: On submitting the invoice, three GL Entries are created:

1. First for debit from the expense head
2. Second for credit in Creditors account
3. Third for credit in the account selected in Tax Withholding Category.

3.2 Deducting Tax at source on Advances

3.2.1 Deduction Advance TDS against Purchase Order

1. Configure the Tax Withholding Category for the supplier and generate a Purchase Order accordingly. It’s essential not to select the “Apply Tax Withholding” option in the Purchase Order, as the PO needs to be generated for the entire amount.
2. Subsequently, initiate a Payment Entry against the Purchase Order. Within the Taxes and Charges section of the Payment Entry, activate the “Apply Tax Withholding” option and input other necessary details. Save and submit the entry.
3. Proceed to create a Purchase Invoice based on this order. Enable the “Set Advances and Allocate (FIFO)” feature to ensure that the payment linked to the corresponding order is automatically allocated. If the tax paid on advance equals or exceeds the tax amount in the invoice, no tax will be withheld in the Purchase Invoice. Tax will only be withheld for any excess amount, if applicable.

3.2.2 Deducting TDS against advances paid (Using Payment Entry)

1. Select “Payment Type” as “Pay”
2. Select “Party Type” as “Supplier” and the appropriate supplier
3. Enter paid amount, paid amount should be the amount before TDS deduction
4. Under the Taxes and Charges section check “Apply Tax Withholding Amount” and select Tax Withholding Category
5. Click on Save. TDS will be auto applied
6. Submit the entry
7. Same will also be visible in TDS payable monthly report

3.3 Setting up TCS – Section 20C(1H) for eligible customers

In this scenario, we’ve established a Tax Withholding Category named “TCS – Section 20C(1H)” and linked it to an eligible customer.

• Initially, we configured the Tax Withholding Category, setting the cumulative threshold to 50 Lakhs in accordance with the scheme’s requirements.
• If a Customer is anticipated to surpass the sales threshold of 50 Lakhs in the current Fiscal Year, we can assign the Tax Withholding Category “TCS – Section 20C(1H)” to automatically compute TCS on the sale of goods against the customer’s invoices.
• Let’s generate an invoice amounting to 50 Lakhs for the eligible customer. Upon saving the invoice, the tax is automatically calculated and added to the taxes table.
• Given that the invoice surpasses the Cumulative threshold of 50 Lakhs, we observe that tax has been levied accordingly. It’s noteworthy that, as per the scheme, TCS is calculated on the amount exceeding the threshold, which equates to 0.075% of 10 Lakhs.

3.4 Advanced options in Tax Withholding Category

1. Consider the Entire Party Ledger Amount: In many scenarios, the threshold needs to be computed based on the entire party ledger amount rather than the sum of the net total of specific invoices. Enabling this option will cause the cumulative threshold to be evaluated against the sum of the grand total of all invoices associated with a particular Supplier/Customer.
2. Only Deduct Tax On Excess Amount: Enabling this option will result in tax deduction solely on the amount exceeding the threshold, rather than the entire amount. For instance, if the cumulative threshold is 50,000 and the total cumulative amount reaches 52,000, the tax will only be applied to the excess amount of 2,000, not the entire 52,000.
3. Round Off Tax Amount: Enabling this option will round off the calculated tax amount to the nearest integer value using the normal rounding method.

4. Related Topics

1. Tax Rule
2. Supplier
3. Customer