MODULE 4

FINANCIAL MANAGEMENT
TAX DEDUCTED AT SOURCE

Tax deducted at source is one of the modes of collecting Income-tax from the assessees.
Such collection of tax is effected at the source when income arises or accrues. Hence, where any
specified type of income arises or accrues to any one, the Income-tax Act enjoins on the payer of
such income to deduct a stipulated percentage of such income by way of Income-tax and pay
only the balance amount to the recipient of such income. The tax so deducted at source by the
payer has to be deposited in the Government treasury to the credit of Central Government within
the specified time. The tax so deducted from the income of the recipient is deemed to be payment
of Income-tax by the recipient at the time of his assessment.
The person responsible for deducting Tax at source is liable to issue a certificate to the
person from whom the tax is deducted, so that the person can submit the same to Income Tax
authorities.

BASIC CONCEPTS OF TDS

It is important to understand some of the terminologies & concepts of TDS:

SCOPE AND APPLICABILITY

At present, incomes from several sources are subjected to tax deduction at source. Some
of such income which are subject to T.D.S. are :

 Salary
 Interest on securities, Debentures
 Deemed Dividend
 Interest other than interest on securities
 Winnings from Lottery or Crossword Puzzles
 Winnings from horse races
 Payment to contractors (Other than Advertisement)
 Payment to contractors (Advertisement Contractors)
 Payment to Sub-contractors
 Payments to non-residents
 Payment to non-resident Sportsmen or Sports Association
 Payment in respect of deposit under NSS
 Payment on Account of Re-purchase of Units by Mutual Fund or UTI
 Payments in Respect of Units to an Offshore Fund
 Payment of Compensation on Acquisition of Immovable Property
 Insurance Commission
 Commission etc. on sale of Lottery tickets
 Commission, brokerage etc
  Rent of Land, Building or Furniture
 Rent of Plant, Machinery or Equipment
 Royalty Agreement is made on Or After June 1, 2005
 Short-Term Capital Gains U/s 111A
 Fees for professional or technical services
 Fees for Tech. Services Agreement is Made on Or After June 1, 2005
 Income in Respect of Units of Non-Residents
 Income from foreign currency bonds or shares of Indian company
 Income of Foreign Institutional Investors From Securities

What is TAN?
TAN is the Tax Deduction Account Number issued by the Income-tax Department to all
persons deducting tax at source. TAN has to be quoted in all relevant challans, tax deduction
certificates, TDS returns and other notified documents. To obtain TAN, all persons or
organisations are required to apply in Form 49B to the TIN Facilitation Centres of National
Securities Depository Limited.

Who has to Deduct Tax ?

Any person making the payments to third parties as specified in scope and applicability section
are required to deduct tax at source.

Who is a Deductee ?
As per Income Tax Act, the Tax will be deducted at source based on the prescribed rate on
payments made to the third parties, who are Assessees (includes individual & HUF as covered U/
S 44AB) carrying on business of following types. Such Tax will be deducted at time of payment
or credit, whichever is earlier.

 Individual
 Hindu undivided Family (HUF)
 Body of Individual (BOI)
 Association of person (AOP)
 Co-Operative society
 Local Authority
 Partnership firm
 Domestic company (Indian company)
 Foreign company
  Artificial Judicial Person

Configuring TDS in Tally

The TDS module in Tally is integrated with financial accounts and takes care of all the
TDS and eTDS requirements of your business, right from voucher entry to report generation.
Tally completely automates your TDS management and accurately computes Tax to be deducted
at source & TDS payable amount, TDS payment challans, TDS Certificates, Statutory Returns
and other related MIS reports.

Its eTDS features further assist you to file your mandatory tax returns in electronic format
as specified by the Income Tax Department. It helps in minimizing error-prone entry of
information, incorrect remittances and also provides accounting for interest & penalties (if any)
for smooth & effective functioning of your business. To enable TDS in tally go to:

Gateway of tally> F11: Statutory features

 Set Enable Tax Deducted at Source (TDS) to Yes

 Set Set/Alter TDS Details to Yes and press Enter

In the Company TDS Deductor Details that appears:

 Specify Tax Assessment Number (TAN) of the Company (TAN is a ten-digit

alphanumeric number, issued to the deductors by the Income Tax Department).
 Specify the Income Tax Circle / Ward (TDS) details of the deductor
 Specify the Deductor Type as Others for the Deductor Types other than government (if
the deductor is a government body, select Government as the Deductor Type)
 Specify the Name of person responsible and his/her designation details as shown

After entering all the necessary details press enter to accept.

TDS STATUTORY MASTERS

The statutory masters contains details in respect of TDS nature of payments, Deductee
Types, rate of TDS for each nature of payment and period of applicability. These masters are
loaded automatically soon after enabling TDS in Tally. Tally conforms to all statutory
provisions and in case of any changes / amendments in income Tax laws, the same can be
updated by downloading the Stat.900 file from the Tally Website.
LEDGERS RELATED TO TDS

TDS Ledgers can be created under any of these main group heads:

1. Duties and Taxes

2. Sundry Creditors

3. Sundry Debtors

4. All Current Assets (except Bank, Cash-in-hand and Stock-in-hand), Misc. Expenses
(Assets), Loans and Advances (Assets) group or sub groups of these main groups

5. Unsecured Loans

6. Loans (Liability) (except Bank OD A/C, Bank OCC A/C)

7. Secured Loans

8. Unsecured Loans

9. Branches/Division

10. Reserves & Surplus

11. Capital Account

12. Fixed Assets

CREATING A TAX LEDGER

The Tax ledger can be created under the group Duties and Taxes to calculate TDS at
voucher entry levels. It is needed to specify the Type of Duty/Tax only for Ledgers created under
Duties and Taxes.
To create a Tax Ledger for TDS:
Gateway of Tally →Accounts Info. → Ledgers → Create

CREATING A PARTY LEDGER

To create a Party ledger grouped under Sundry Debtors or Sundry Creditors, Go to

Gateway of Tally → Accounts Info. → Ledgers Create

1. Enter the Name of the Ledger

2. Select Sundry Debtors or Sundry Creditors from the List of Groups in the Under
field.
 3. If required, set Maintain balances bill-by-bill to Yes

4. Set Is TDS Applicable to Yes

5. Enter the Mailing Details and Tax Information.

VALUE ADDED TAX IN TALLY

VAT is an indirect tax on goods, introduced in lieu of sales tax. VAT is a multi point tax
as against sales tax, which is single point tax under the sales tax, the value of goods to be taxed at
each stage is computed as basic cost+ profit margin+ VAT paid at the earlier stage. Double
taxation included in sales tax ie tax on tax. VAT is implemented to avoid double taxation.

ADVANTAGES OF VAT OVER SALES TAX

• As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents repeated
taxation of the same product.

• Simple and Transparent: In the Sales tax system the amount of tax levied on the goods
at all stages is not known. However, in VAT, the amount of tax would be known at each
and every stage of goods sale or purchase.

• VAT has the flexibility to generate large and buoyant revenues, as it levies tax on value
additions.

• Zero rating of tax on exports is possible in case of VAT

• Fair and Equitable: VAT introduces uniform tax rates across the state so that unfair
advantage cannot be taken while levying the tax.

• Procedure of simplification: Procedures related to filing of returns, payment of tax,

furnishing declaration and assessment are simplified under the VAT system so as to
minimize any interface between the tax payer and the tax collector

• Ability to provide same revenue to the Government with lower rates of tax

• Tax does not become a cost of doing business.

VAT RATES

There are 550 categories of goods under the VAT system. They are classified into the
following four groups, depending on the VAT rate:

VAT @ 4%

The largest number of goods (270) comprising of basic necessity items such as drugs and
medicines, agricultural and industrial inputs, capital goods and declared goods are under 4%
VAT rate.

EXEMPTED FROM VAT

There are about 46 commodities under the exempted category. This includes a maximum
of 10 commodities that each state would be allowed to select, from a broader approved list for
VAT exemption. The exempted commodities include natural and unprocessed products in
unorganized sector as well as items, which are legally barred from taxation.

• VAT @ 1%

This is for a specific category of goods like gold, silver, etc.

• VAT@12.5%

The remaining commodities are under the general VAT rate 12.5%

FEATURES OF VAT IN TALLY

VAT is completely integrated with Tally. The VAT functionality in Tally supports the
following features, making it easier for computation

• Quick & easy setup.

• Fast & error-free voucher entry.

• Pre-defined list of sales & purchase classifications.

• Complete tracking of each transaction till annual returns.

• Printing of Tax invoice.

• VAT computation report.

• Better VAT-returns management.

• Monthly Return.
ENABLING VALUE ADDED TAX IN TALLY

To enable VAT, press F11: Features (Statutory & Taxation Features) and
• Set Yes to Enable Value Added Tax (VAT)

• The VAT classifications are different for each State in India. In order to activate and view
the various VAT classifications, set the option Set / Alter VAT details to Yes.

• On activating Set / Alter VAT details the screen appears.

• In this screen you have to select the State, the type of dealer and specify the date of
applicability to view the VAT classifications of the required specifications.
• In F11: Features (Accounting Features), set Maintain Bill-wise details to Yes.

VAT CLASSIFICATIONS
It is a list of VAT rates which describes the nature of the business activity and the type of
transaction. These classifications are in-built in the system and will be updated as and when any
statutory changes take place.

Some of the classifications are:

• Input VAT @ 4%
• Input VAT @1%
• Input VAT @ 12.5%
• Output VAT @ 1%
• Output VAT @ 4%
• Output VAT @ 12.5%
• Purchases - Capital Goods @ 4%
• Purchases - Exempt
• Purchases from Composition Dealers
• Purchases - From Unregistered Dealers
• Inter-state Purchases
Depending on the type of business, type of transaction, and statutory requirements
of your state, you need to select the appropriate classifications from the list.You can
define your classification:
• At the time of ledger creation.
• At the time of voucher entry.
CREATING MASTERS

The ledgers that are affected by VAT are:

• Purchase Ledger
• Sales Ledger
• Input VAT Ledger
• Output VAT Ledger
• Party Ledger

VAT REPORTS

There are two types of VAT reports are available in Tally namely

 VAT Computation
 VAT Forms.

VAT Computation shows the VAT payable or refundable.

To know the tax amount to be adjusted, Go to

Gateway of Tally → Display Statutory Reports > VAT Reports →VAT computation

VAT Forms are prescribed format of documents, There are different types of forms
related with VAT as Form 10 VAT Return Form, Form 52 Sales and Form 52 Purchase.

FUNDS FLOW

While Cash Flow Statement is concerned only with cash, Funds Flow takes into account,
the movement of the entire working capital. It includes operational fund, rise and fall in
inventories, creditors and debtors apart from cash and bank. The statement reveals the Sources of
Funds and how they were applied. Thus it shows the movement in sources and application of
funds which impacts the working capital and cash position of the business. Tally tracks
automatically all transactions entered and readily provides a Fund Flow Statement.

To access the Funds Flow

1. Gateway of Tally → Display → Cash/Funds Flow →Funds Flow

2. Select any month.
3. Press enter.
RECEIVABLES TURNOVER

Receivable turnover is known as efficiency ratio or activity ratio that measures how many
times a business can turn its accounts receivable into cash during a period. In other words, the
accounts receivable turnover ratio measures how many times a business can collect its average
accounts receivable during the year. A turn refers to each time a company collects its average
receivables. If a company had Rs.20,000 of average receivables during the year and collected
Rs.40,000 of receivables during the year, the company would have turned its accounts receivable
twice because it collected twice the amount of average receivables. This ratio shows how
efficient a company is at collecting its credit sales from customers. Some companies collect their
receivables from customers in 90 days while other take up to 6 months to collect from customers.
In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Companies
are more liquid the faster they can convert their receivables into cash. Accounts receivable
turnover is calculated by dividing net credit sales by the average accounts receivable for that
period.

BUDGETS

A budget is a plan prepared for the flow of funds in an organisation It contains financial
guidelines for the future plan of action for a selected Period of time. A budget helps to refine
goals and use funds efficiently. It provides accurate information for evaluation of financial
activities, aids in decision making and provides a reference for future planning.

Multiple budgets can be created for specific purposes in Tally Budgets for Banks, Head
offices, Optimistic budgets, Realistic budgets, Pessimistic budgets, and so on can be created.
Departmental budgets like Marketing Budgets, Finance Budgets, and so on, can also be created.
Budget figures can be used in Tally to compare actual and variances In Tally, you can create,
alter and delete a budget.

ACTIVATING BUDGETS IN TALLY

To activate budgets in tally:

 Select F11: Accounting Features

 Set Maintain Budgets and Controls option to Yes
 Press enter to save.
CREATING A BUDGET IN TALLY

To create budgets in tally:

Go to Gateway of Tally Accounts Info > Budgets > Create

 In the Budget Creation screen enter a Name for your budget.

 Select from the List of Budgets for Under field. You can have a hierarchical
setup for budgets, In the List of Budgets, Primary is at the top of the hierarchy and
you can create more primary budgets, Sub-budgets can be created under Primary
budgets.
 Enter the period of the budget in the From and To fields. The period entered can
be a month, a year or any other period.
 In Set/Alter Budgets of, select
 Groups - To create a budget for a Group of ledger accounts
 Ledgers - To create a budget for Ledgers.
 Accept to save.

VARIANCE ANALYSIS

Tally provides complete variance analysis reports. This report provides information of
variance of actual figures from the budgeted figures. The user can get a variance analysis report
once he has activated Budgeting and Control options. This option hence will help the
management in taking critical management related decisions. This will help giving exception
reports to management. The drill down feature can be used to go to the voucher level details to
understand the problem better.

Gateway of Tally → Display → Trial balance/ group statements → select Budget Variances
(Alt+B) → Select type of budget → Accept the screen.

RATIO ANALYSIS

The Ratio Analysis Statement is a single sheet performance report for a selected period. It
provides important values and key performance indicators. It is one report that top management
needs to look at periodically to assess the company's financial health and where it is going in the
short term. To view the Ratio Analysis screen:

Gateway of Tally→ Ratio Analysis

CALCULATING KEY FINANCIAL RATIOS

I. Liquidity Ratios:

Liquidity or short - term solvency measures the credibility of the concern to pay its short
term liabilities. Traditionally, current ratio, quick ratio and operating cash flow ratio are used to
highlight the business liquidity

 Current Ratio = Current Assets / Current Liabilities.

 Quick Ratio = (Current Assets - Inventories) / Current Liabilities.

II. Leverage Ratios:

It measures long term solvency of the company to pay off long term liability.

 Debt Equity Ratio = Total Liabilities/ Shareholders' Equity

It indicates the proportion of debt fund in relation to equity.

III. Profitability Ratios:

It measures operational efficiency of the firm based on assets/investments, on sales, on

capital market information or from owners, point of view.

 Gross Profit Ratio = Gross Profit / Sales * 100

Gross profit ratio is used for comparing product profitability.

 Operating Profit Ratio = Operating Profit / Sales * 100

Operating profit ratio evaluates the operating performance of business.

 Return on investment = Net profit/Capital + net profit

 Return on Working Capital = (Net profit/Working capital)*100

IV. Activity Ratios

 Receivable turnover ratio in days = 365/Debtors Turnover ratio

Thus, Financial Ratios helps to illustrate the strengths and weaknesses of a business and
can also show any unusual fluctuations in financial trend of the business. Ratios are also helpful
tools in financial analysis and forecasting, ratios allow entrepreneurs to set specific goals and to
easily track progress toward those goals. But it is important to select ratios which are applicable
to the business, as there are hundreds of financial ratios available, some of which apply to all
businesses and some of which are industry-specific.