Introduction
Every tax season, finance teams across India find themselves buried under the same pile of problems mismatched TDS credits, unverified vendors, GST to expense mapping exercises that should have been done months ago, and lastminute foreign remittance paperwork holding up critical payments. The tools exist. The knowledge exists. Yet the struggle continues, year after year.
The reason is not negligence. It is complexity and the pace at which that complexity has grown.
Over the last five years, India’s direct tax compliance framework has undergone a quiet but significant transformation. Form 26AS is no longer just a TDS statement. Section 206AB has placed the burden of vendor ITR verification squarely on the deduct or. Clause 44 now demands a level of GST to direct tax data integration that most finance systems were never built to provide. And 15CA/CB filings continue to catch treasury teams off guard when payment deadlines collide with documentation requirements.
The Changing Face of Direct Tax Compliance in India
As another financial year draws to a close, finance and tax teams across India are preparing for what has become one of the most demanding periods in the corporate calendar. Audits and investor reviews are no longer the primary concern keeping CFOs awake at night. It is the sheer volume and complexity of direct tax compliance activities now spread across multiple systems, deadlines, and regulatory frameworks that is the real challenge.
Most organisations are not struggling because they lack commitment to compliance. They are struggling because India’s direct tax compliance landscape has changed dramatically over the last five years, and internal processes have simply not kept pace.
As explored in How Technology Simplifies Direct Tax Compliance Across Multiple Jurisdictions, new provisions, revised thresholds, real-time data requirements, and cross-functional dependencies have combined to create an environment that is genuinely difficult to manage for mid-sized and large organisations alike.
Key changes since 2020 include: updates to Form 26AS extending well beyond TDS credits; the introduction of Annual Information Statements (AIS) and Taxpayer Information Summary (TIS); mandatory GST wise bifurcation of expenses in tax audits under Clause 44; and tightened regulations on foreign remittances under FEMA and the Income Tax Act.
KEY CONTEXT India’s Income Tax Department processes more than 7 crore TDS statements annually, cross-referencing them with GST returns, banking data, and SFT filings. Discrepancies now trigger automated notices often within days of a return being filed. The era of quietly correcting mismatches in the next filing cycle is over.
Figure 1 below illustrates the indexed growth in compliance touchpoints. While GST and other regulatory compliance have grown steadily, direct tax compliance complexity has risen sharply driven primarily by expanded data reconciliation requirements and vendor-level checks.
| Year | Direct Tax (Index) | GST / Indirect (Index) | Other Regulatory (Index) |
| 2019 | 100 | 100 | 100 |
| 2020 | 115 | 120 | 108 |
| 2021 | 148 | 138 | 115 |
| 2022 | 175 | 150 | 122 |
| 2023 | 210 | 162 | 130 |
| 2024 | 240 | 170 | 136 |
| 2025 | 268 | 176 | 142 |
Figure 1: Growth in Compliance Touchpoints (Base Year 2019 = 100) | Source: Cygnet.one Research, Industry Surveys
Form 26AS Reconciliation: Far More Than a TDS Matching Exercise
Ask any tax manager about Form 26AS reconciliation and the response will likely include the phrase ‘it takes forever.’ For organisations with high transaction volumes, 26AS reconciliation has become a multi-week exercise consuming significant human effort and still frequently producing unexplained mismatches. As our detailed guide on tax determination accuracy explains, errors at the transaction level do not stay isolated they compound into reconciliation problems that surface months later.
What Form 26AS Contains Today
Many finance teams still treat Form 26AS as a TDS credit statement. While that was true historically, the revised Form 26AS introduced in 2020 is now substantially more comprehensive. It includes:
- TDS and TCS credits with greater granular detail than before
- Specified Financial Transactions (SFT) reported by banks, mutual funds, and registrars
- Income tax refund information
- Demand and payment details
- TDS defaults and pending proceedings
- Information from other government agencies
This means reconciliation now requires matching TDS returns, books of accounts, GST returns, and AIS data much of which is derived from sources the company has no direct visibility into.
The Real Reconciliation Challenge
The core issue is not awareness it is that reconciliation remains deeply manual at most organisations. Data arrives from the TRACES portal, SAP or Tally systems, standalone TDS tools, and Excel sheets maintained by individual accountants. None of these connect automatically. As highlighted in Manual Tax Determination,this manual assembly process introduces hidden risk adjustments may not be applied consistently, and version control breaks down under deadline pressure.
We had a case where our 26AS showed a TDS credit of ₹18 lakhs that did not appear in our books. It took three weeks to trace the issue to a single vendor who had incorrectly mapped our PAN while filing their own TDS return. The reconciliation itself was correct it was simply done against the wrong entity.
| Reconciliation Level | Data Sources Required | Volume | Risk if Missed |
| TDS Credit Matching | TRACES 26AS, Books, TDS Returns | High | Tax demand + interest |
| AIS vs Books Reconciliation | AIS Portal, Income Statement | Medium-High | Scrutiny notice risk |
| SFT Transaction Matching | Bank SFT Data, Investment Records | Low-Medium | Unexplained income flag |
| TCS Credits (e-commerce) | Marketplace TCS Certs, GSTIN Data | Medium | Lost credit, cash flow impact |
| Advance Tax Reflection | Challan Records, 26AS | Low | Usually traceable |
Figure 2: 26AS Reconciliation Levels, Sources and Risk
Section 206AB: A Perpetual Vendor Verification Nightmare
When Section 206AB was introduced through the Finance Act 2021, the intent was clear to encourage more taxpayers to file their Income Tax Returns by applying higher TDS rates to ‘specified persons’: those who had not filed their ITR for the two preceding assessment years and whose aggregate TDS/TCS exceeded ₹50,000 in each of those years. In theory, a straightforward mechanism.
The Deductor’s Dilemma
The compliance burden falls entirely on the company making the payment. If you pay a vendor who qualifies as a specified person and deduct TDS at the normal rate instead of the higher applicable rate, you are in default. The responsibility to verify is yours. The consequences interest, disallowance of expenses, and penalties are also yours. The Cygnet Direct Tax Compliance suite automates this vendor ITR status check in bulk, directly from TRACES, eliminating manual verification entirely.
Six Key Challenges for Deductors
Scale of Vendor Base
Companies with 1,000 or more vendors cannot manually verify each one on the portal. The TRACES bulk-check facility helps, but it requires structured data inputs that most accounts payable systems cannot generate easily.
Dynamic Status Changes
A vendor’s 206AB status can change throughout the year. Someone verified as compliant in April may become a specified person by October if they miss their ITR deadline. A one-time check at onboarding is not sufficient.
One-Time and Spot Vendors
One-time vendors are onboarded quickly under business pressure, leaving no time for proper TDS classification before the first payment is released.
ERP Integration Gaps
Most ERP systems do not natively connect to the Income Tax portal for real-time 206AB status checks. Vendor master updates happen manually and are almost always delayed.
Interaction with Section 206AA
Where both Section 206AA (PAN non-furnishing) and Section 206AB apply simultaneously, the rate interaction requires careful analysis and separate treatment in the TDS return.
Audit Trail Requirements
During tax audits or in response to notices, companies must demonstrate that 206AB status was verified before every payment. Without systematic record-keeping, producing this evidence is nearly impossible.
| Payment Category | Section | Normal TDS Rate | Section 206AB Rate |
| Professional Fees | Sec 194J | 10% | 20% |
| Contract Payments | Sec 194C | 2% | 5% |
| Commission | Sec 194H | 5% | 10% |
| Rent (Plant and Machinery) | Sec 194I | 10% | 20% |
| Interest | Sec 194A | 10% | 20% |
Figure 4: Normal TDS Rates vs Section 206AB Applicable Rates
Clause 44 of the Tax Audit Report: Where Direct Tax Meets GST Data
Of all the compliance challenges in this blog, Clause 44 best illustrates the growing convergence of India’s direct and indirect tax systems. Inserted into Form 3CD of the Tax Audit Report, Clause 44 requires businesses to provide a detailed break-up of total expenditure categorised by GST applicability and ITC eligibility. The concept is straightforward. The execution, particularly for companies with multi-GSTIN structures, is not.
What Clause 44 Actually Requires
In plain terms, Clause 44 asks: for every rupee spent, was this purchase subject to GST? If yes, was GST actually paid? Was that GST recoverable as Input Tax Credit, or was it a sunk cost? This requires the tax auditor and the business to map every expenditure line against its GST treatment. That mapping does not exist naturally in most accounting systems.
| Expenditure Category | GST Applicability | ITC Eligibility | Reporting Complexity |
| Raw Material Purchases | Generally, Yes | Usually Eligible | Moderate |
| Capital Goods | Yes (18% typically) | Eligible over 5 years | High |
| Professional Services | Yes (18%) | Eligible with conditions | High |
| Employee Benefits (food, transport) | Yes | Blocked Sec 17(5) | Very High |
| Motor Vehicle Expenses | Yes | Restricted or Blocked | Very High |
| Exempt or Non-GST Supplies | No | N/A | Low |
| Composition Vendor Purchases | Yes (no ITC passed) | Not Eligible | High |
Figure 4: Clause 44 Expenditure Categories and Reporting Complexity
Why This Is a Data Problem, Not Just a Tax Problem
The accounts payable team classifies expenses by nature ‘office supplies’, ‘travel’, ‘professional fees’. Clause 44 needs classification by GST status. These two systems do not overlap automatically. Building the bridge requires a full review of the chart of accounts, and unless it is maintained continuously, the exercise must be repeated from scratch every audit season.
The biggest challenge we faced was that our accounts payable team coded expenses by nature ‘office supplies’, ‘travel’, ‘professional fees’ but Clause 44 wants classification by GST status. Those two systems do not map onto each other automatically. We had to go through the entire chart of accounts manually.
The challenge is compounded for businesses with multiple GSTIN registrations. Clause 44 reporting happens at PAN level for income tax purposes, meaning data from all GSTINs must be aggregated and reconciled with the consolidated trial balance a process that involves different blocked credit calculations, partial exemption rules, and ITC reversal computations under Rules 42 and 43.
15CA/CB Foreign Remittance Filings: Compliance Under Time Pressure
For companies with international operations, foreign subsidiaries, overseas vendors, or any cross-border payment obligations, Forms 15CA and Certificate 15CB are a recurring compliance exercise that combines time pressure, professional judgment, and regulatory scrutiny in equal measure.
The Regulatory Framework
Under Section 195 of the Income Tax Act, any person paying a non-resident a sum chargeable to tax must withhold tax at source. Form 15CA is the declaration filed by the remitter before the payment is released. Form 15CB is the chartered accountant’s certificate confirming the applicable tax rate, any treaty relief, and the taxability of the remittance. Both documents are required by banks before a foreign transfer is processed.
| Part | Applicability | Form 15CB Required? |
| Part A | Remittances up to ₹5 lakh (aggregate ₹15L in year) | No |
| Part B | Remittances below ₹5 lakh (aggregate below ₹5L in year) | No |
| Part C | Remittances exceeding ₹5 lakh taxable remittances | Yes |
| Part D | Remittances not chargeable to tax under the IT Act | No |
Figure 7: Form 15CA Four Parts and Applicability
Where the Real Difficulties Lie
The first difficulty is characterisation. Before determining the correct TDS rate, the payment must be classified royalty, fees for technical services, business income, dividend, or interest. This determines which section of the Income Tax Act applies, and whether a DTAA between India and the recipient’s country offers a more beneficial rate.
| Challenge Area | % Citing as Significant | Severity |
| Characterisation of payment type | 72% | Very High |
| DTAA analysis and treaty rate determination | 68% | Very High |
| Bank deadline pressure on timing | 65% | Very High |
| Obtaining Tax Residency Certificate from recipient | 58% | High |
| Beneficial ownership verification | 52% | High |
| Volume of recurring remittances | 47% | Medium |
| Coordinating CA for 15CB issuance | 43% | Medium |
Figure 8: Key Challenges in 15CA/CB Compliance | Survey of 200+ Finance Professionals
The second difficulty is timing. Banks require 15CA/CB documentation before releasing remittances, and payment deadlines often leave little room for the characterisation analysis and CA certificate that a proper 15CB requires. The third is variety a company making software licence payments, travel reimbursements, dividends to a foreign parent, and component purchases from an overseas supplier in the same month is effectively handling four separate characterisation exercises, with potentially different treaty articles and TDS rates for each.
The Shared Root Causes: Why Businesses Keep Struggling
Stepping back from each compliance area individually, several common threads explain why businesses struggle across all four not just one or two of them.
| Root Cause | % Citing | Category |
| Data scattered across multiple systems | 78% | Infrastructure |
| Regulatory change outpacing internal processes | 71% | External |
| Key person dependency | 64% | People / Process |
| Yearend compression effect | 60% | Process |
| Cross team accountability gaps | 55% | People / Process |
| Lack of automated compliance tools | 49% | Technology |
| Insufficient staff training | 38% | People |
1. Data Fragmentation Across Systems
The most consistent thread is that the data needed for each compliance task lives in different systems. TDS data in the TDS tool. Vendor data in the ERP. GST data in the portal. Treasury data in a separate system. Nothing connects automatically, and the manual effort of pulling it all together is time consuming and error prone.
2. Regulatory Changes Outpacing Internal Processes
Tax teams spend enormous energy tracking what has changed new forms, revised rates, updated thresholds. They have less bandwidth to redesign internal processes to reflect those changes. The result: processes built for a simpler era being stretched to handle far greater complexity.
3. Dependence on Key Individuals
In most organisations, direct tax compliance is effectively person dependent. One or two individuals hold the institutional knowledge. When they are unavailable, that knowledge is inaccessible at precisely the moment it is most needed.
4. The Year End Compression Effect
Treating compliance as a yearend or quarter end activity creates an impossible situation: large data quality problems surface exactly when there is least time to resolve them. Compliance should be a continuous discipline, not a periodic scramble.
5. Accountability Gaps Between Teams
Form 26AS reconciliation requires the tax team and AP team to work from the same data. Clause 44 requires the GST team and direct tax team to align. 15CA/CB requires treasury, legal, and a CA firm to coordinate quickly. In most companies, these teams have different reporting lines, different systems, and different priorities which makes cross-functional compliance tasks slower and more error-prone than tasks owned by a single team.
What High Performing Compliance Organisations Do Differently
After working with organisations across manufacturing, financial services, pharma, and technology, clear patterns emerge in how high performing compliance teams approach these challenges.
| Compliance Area | Common Current Approach | Better Practice |
| 26AS Reconciliation | Year-end manual matching in Excel against TRACES data | Quarterly reconciliation using automated tools; exception-based review; vendor communication SOP for mismatches |
| 206AB Checks | Manual TRACES checks before large payments; no systematic tracking | Vendor master enriched with ITR filing status; quarterly re-checks; ERP automatically flags high-risk vendors at payment stage |
| Clause 44 | Pre-audit GLto GST mapping exercise; significant CA and team time each year | Permanent GL to GST classification in ERP; monthly reconciliation; minimal effort at audit time |
| 15CA/CB Filings | Ad-hoc process triggered at point of payment; CA turnaround occasionally delays remittance | Advance classification of regular foreign payments; pre-agreed rates for recurring transactions; agreed SLA with CA firm |
Figure 10: Current vs Better Practice Direct Tax Compliance Comparison
The Role of Technology
Technology does not solve these problems on its own. What it does is make the human work of compliance the judgment calls, exception reviews, and escalation decisions significantly more productive, by eliminating the portions of the process that require no human judgment at all. As Cygnet’s work on making GST compliance faster demonstrates, the right automation shifts teams from firefighting to governance.
Automated 26AS reconciliation tools can match thousands of TDS records in minutes and surface only mismatches for review. Vendor compliance platforms can pull ITR filing status in bulk from TRACES and flag 206AB high risk vendors directly in the ERP. Integrated direct indirect tax platforms can maintain GL to GST mappings continuously, reducing Clause 44 preparation from weeks to days. And structured 15CA/CB workflows with built in DTAA rate libraries can dramatically reduce the risk of mischaracterisation under deadline pressure.
The goal is not to replace skilled tax professionals. It is to redirect their time from data collection and manual matching toward analysis, risk assessment, and strategic advice. When compliance gaps do lead to notices or assessments, ensures those are tracked, responded to, and resolved without adding to the manual burden on an already stretched tax team.
Conclusion: The Cost of Getting This Wrong Is Rising
The Income Tax Department’s investment in data analytics, AI driven scrutiny tools, and cross-system matching continues to grow. The era when a compliance gap might go unnoticed is effectively over. What this means for businesses is that the cost of getting direct tax compliance wrong in 26AS mismatches, 206AB defaults, Clause 44 errors, or 15CA/CB omissions is rising, both in direct financial terms and in management bandwidth consumed by notices and demands.
The encouraging reality is that the distance between where most mid-sized companies are today and where they could be is not a gap of intent or expertise. It is a gap of process and systems and that is a solvable problem. Organisations that invest now in continuous, technology supported direct tax compliance infrastructure will not only reduce their risk exposure. They will free their finance and tax teams to focus on work that genuinely matters.
And in today’s regulatory environment, that is an advantage worth taking seriously.
Frequently Asked Questions
Technically, it satisfies the minimum requirement. Practically, it is one of the costliest habits a finance team can develop. By the time you sit down for the year end reconciliation, mismatches have accumulated across twelve months. Vendors who filed with incorrect PANs have moved on. Deductors who delayed their filings are no longer reachable quickly. Chasing corrections under audit deadline pressure is both stressful and often unsuccessful. Quarterly reconciliation catches problems while they are still fixable. Annual reconciliation tends to catch them when they are not.
It is a start, but it has two meaningful gaps. First, you are only covering large payments Section 206AB applies to all payments above the threshold, not just the ones your team remembers to check. Second, a vendor’s ITR filing status is not fixed. Someone verified as compliant in April may have missed their deadline by July, making them a specified person for the remainder of the year. A one-time check at onboarding is a snapshot. What you actually need is a system that updates your vendor master on a continuous basis.
Because the underlying data problem has not gone away. Clause 44 requires every rupee of expenditure to be classified by its GST treatment whether GST was paid, whether ITC was claimed, whether the credit was blocked. That classification does not exist naturally in most accounting systems. GL account heads are built around the nature of the expense, not its GST status. Building the bridge between the two and keeping it current as the chart of accounts evolves, is an ongoing exercise that most companies have not institutionalised. They redo it manually every audit season which is why it keeps feeling like a new problem each year.
You can ask and you should, but you cannot rely on a self-declaration alone. Some vendors genuinely do not know their own filing status for the two preceding assessment years. Others may not understand the implications. And from a legal standpoint, the responsibility for applying the correct TDS rate sits with the deductor, not the vendor. If you deduct at the wrong rate because a vendor provided incorrect information, that does not protect you from interest or disallowance. Verification must come from TRACES.
The less frequently you make foreign remittances, the more dangerous an ad-hoc approach is. Regular remitters build up familiarity with the characterisation analysis, applicable treaty provisions, and their CA firm’s turnaround time. Occasional remitters approach each transaction fresh meaning the risk of mischaracterising the payment, applying the wrong TDS rate, or filing the wrong part of Form 15CA is higher. A documented checklist and a clear process cost almost nothing to set up and can save considerable trouble when the bank is waiting for paperwork and the vendor is following up on a delayed payment.
It adds up faster than most people expect. If you deduct at the normal rate instead of the higher 206AB rate, the shortfall is treated as a failure to deduct tax. You become an assesses in default under Section 201 meaning interest at 1.5% per month on the shortfall from the date the tax was deductible until it is deposited. In addition, the related expense may be disallowed under Section 40(a)(ia) when computing taxable income. On a ₹50 lakh payment where you should have deducted 20% but deducted 10%, the shortfall is ₹5 lakhs and the compounding interest over a two-year assessment cycle is material.
ERP systems execute TDS deductions reliably once the vendor master is set up correctly. The problem is everything that feeds into that setup and everything that changes after it. Whether a vendor is a specified person under 206AB, which rate applies under a particular DTAA for a foreign payment, how a GL account maps to a GST category for Clause 44 none of these are decisions the ERP makes on its own. They require human judgment and real time external data that most ERPs are not built to fetch. The ERP executes well. The judgment layer around it is where the compliance gaps appear.
There is no universal off the shelf solution, but integrated direct tax compliance platforms have matured considerably. The better ones connect to TRACES for 26AS data and 206AB checks, integrate with ERP systems to maintain GL to GST mappings for Clause 44, and provide structured workflows for 15CA/CB filings with built in DTAA rate libraries. The right fit depends on your transaction volume, vendor base complexity, and international operations footprint. More important than the specific tool, however, is building a compliance process that runs continuously rather than periodically technology makes that sustainable at scale.