With a sigh of relief, we can now safely say that we are all done with the income tax activities such as investment proof submissions and claiming our tax-free allowances for the financial year 2017-18. It is time now for the employers to issue Form-16 (or tax certificate) to its employees. This certificate contains the statement of income paid to the employee, tax exemptions provided as well as the relevant taxes deducted and further remitted to the Government. Also, it has to be signed by an appropriate authority like a CEO or CFO or whoever is in charge of disbursing salaries for the organization. The last date for employers to issue the same is June 15th, 2018 and after that, each employee has to file the tax returns on or before July 31st, 2018.
What is a Form 16?
As briefly mentioned above, the organization issues the form to individual employees. It reflects all types of income or perquisites paid to an employee as per their employment contracts or as per Company policies. The form generally has four parts to it:
- Part-A (summary of income paid, taxes deducted and remitted by each quarter and by month)
- Part-B (summary of salary paid)
- Form-12BA (value of perquisites) and,
- Annexure to Form-16 (break up of salary and exemptions)
The income tax department issues Part-A through their portal called TRACES (Tax deducted at source (TDS) Reconciliation Analysis and Correction Enabling System). The employer has to download the same from the portal. Along with that, employers will have to generate the other three annexures (Part-B, Form-12BA, and Annexure) from their own payroll systems or such database and issue it to employees. This will further help the employees to file their tax returns based on the information available in the said forms.
8 Tips to ensure an Error-Free issuance of Form 16
As we have seen, Form-16 is a certificate signed off by the authorized signatory with an undertaking that the facts mentioned therein are true and correct to the best of their knowledge. Hence, it is vital that the data mentioned in the certificate is accurate. If your organization does Form 16 through a manual process without a software, these are 8 tips that will help you to avoid errors while issuing your Form 16.
Here are a few tips on what to check before issuing the certificate.
- Declaration and investment mismatch: First things first. We are aware that any investments done by employees will help in reducing their tax liability. Once done, how does the paymaster ensure that the investment submissions by employees have all been taken into consideration before computing their final tax liability for the year? Here, a strong maker-checker balance of such data must be performed to ensure that the inputs are accurate.
- 3-way Reconciliation of salary cost and taxes paid: It is necessary to reconcile the salary cost and tax liability between the pay register, the books of accounts and the challans / tax receipts. The pay register will be source document for all the values pertaining to income paid and taxes withheld from employees. Consolidate all the monthly pay registers to arrive at the annual values – this can be done either quarterly or annually. Match these numbers to the books of accounts to ensure they tally. Once this is assured, match the taxes remitted to the Government by using the challans or tax receipts. Another way to check for the data in the income tax portal is the Form 26AS, which contains a summary of income paid, taxes withheld and subsequently remitted to the government, along with reference numbers. There should not be any difference in all three reconciliations and if at all any, it should be justified or explainable. The purpose behind this reconciliation is to ensure that whatever taxes have been withheld have not only been accurately accounted for but also remitted to the government. Any short remittance should immediately be remitted to the government (along with interest and penalty, if applicable) and the challans / tax receipt incorporated in the form.
- Check for PAN errors: There is a possibility that PAN (Permanent Account Number) provided by the employee could be wrong or numbers interchanged. There is also a possibility that the employee provides the PAN correctly, but it is wrongly entered into the system by the paymaster. Either way, it will appear erroneously in the Form 16 too. Incorrect PAN will lead to the wrong credit of the taxes deducted and remitted by the organization. Therefore, a strong validation of all such data should be performed. There are government approved websites like UTI or NSDL where PAN can be validated.
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- Headcount reconciliation: As per income tax rules, the Form 16 has to be issued to all employees who have received income and taxes deducted during the financial year. Therefore, not only employees who are still active in the organisation but ex-employees who have left the organisation are also bound to receive the Form 16. In view of this, a headcount reconciliation of all such employees has to be performed in order to ensure that the number of forms issued match exactly to that HC number.
- Other important details required on Form 16: It is very important to check the financial year and assessment year on the form. Both should be for the current and relevant year. The full name and address of the employee should be mentioned. Also, it is mandatory to state the PAN and TAN (Tax deduction and collection account number) of the organisation on the Form 16, apart from the employee’s PAN. Additionally, the salary ward to which the organisation belongs should be mentioned clearly. The Part-A of the form which is issued by the income tax department will display all these details, including the serial number of the form. Part-A of the form is auto-generated and will be downloaded by the employer or paymaster at the end of the year.
- Check authenticity of the form: It is mandatory for the employer or paymaster to sign each form and stamp it with office seal before distribution to employees. This is in case the process of issuing the Form 16 is a manual process. However, in this age of digitization, many organisations have automated this process where the Form 16 is issued electronically via email or can be accessed through a portal. Additionally, the form can contain a Digital Signature, where employees can authenticate the certificate by following certain steps and then the signature of the authorized signatory is automatically affixed on the form. If such a process is already in place, the paymaster has to ensure that the electronic signature opens correctly as and when the employee opens the form. It will be a good idea to attach a simple user guide to help employees on how to open the digital or electronic signature.
- Sampling check of forms for correctness: In large to medium sized organisations, it will be a huge task to check each and every form for accuracy. Hence, it will be a good idea to select a sample (maybe 25% of the forms) and check them thoroughly for any errors or omissions. For those groups of employees whose income is in the higher bracket, it will be wise to check each one of it 100% as the impact of an error is high.
- Resubmission & Correction of forms: In spite of all precautions taken to ensure the accuracy of the data, there could be a possibility of errors creeping in the form inadvertently. Keeping this common issue in mind, the income tax department allows organisations to correct their data on the forms. The correction depends on the type of error and there are options to choose from on the portal. Once the corrections are made and accepted by the department, the forms can then be downloaded once again for either distribution or for records
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