India’s taxation structure provides for two types of taxes: Direct and Indirect taxes. Income Tax and Wealth Tax are Direct Taxes whereas Sales Tax, Service Tax and Excise Duties are Indirect Taxes. In Budget 2015, Wealth Tax has been abolished and at present Income Tax is the only Direct Tax which is levied by the Central Government in India. In our present day economy, Income Tax plays a vital role as a source of revenue and a measure for removal of economic disparity.
Every enterprise is required to adhere to Income Tax norms, but many emerging firms think filing taxes is not for them. This may be because they think their size of operation is inconsequential, their income is low and at times ignorance about rules.
Let us take the example of a partnership firm, engaged in the business of readymade garments. It is in a growing stage and has complete business focus, but it does not consider it important to comply with Income Tax Act, as the partners of the firm are not aware about this. However, it is almost certain that in due course of time it will receive notices from Income Tax department demanding tax, interest, late fee and penalties for various non-compliances like non-deduction of TDS, non-filing of TDS returns, non-payment of advance taxes etc.
Further, it is possible that the auditor will also object to such noncompliances in his tax audit report and disallow various expenses in income-tax return. At the year-end partners will realise, the firms profit will now be utilised for payment of interest, late fee and penalties of Income Tax Act. “Non compliance with Income Tax Act, is like setting barriers in the growth of business,” says Khandelwal R Sethi & Company, Chartered Accountants, Partner, Naval Sethi.
How to comply with Income Tax Act
Compliance with Income Tax can be divided into two parts, Compliance with TDS and other compliances.
Compliance with TDS
TDS is Tax Deduction at Sources, which is also known as withholding tax worldwide. Normally, collection and recovery of Income Tax is the responsibility of the Income Tax Department; however, through various provisions of the Income Tax Act, the government has shifted the burden of collection of Income Tax to the point of source of the income. Hence, while making any payment/credit to the parties, you as a firm will be called a ‘deductor’ and you have to deduct tax at source and pay the collected tax to the credit of government.
Deduction and payment of TDS: There are some identified expenses/payments against which government has prescribed a specific rate of deduction. After deduction of TDS, it should be deposited to the credit of government on or before 7th of next month through online banking, by cheque or cash by presenting the challan at designated banks.
If a deductor fails in deducting TDS or deducts an amount less than the required amount, the deductor is liable to pay an interest at 1% per month or part of the month, till the date on which TDS is deducted. Further, any failure to deposit TDS, after deduction of TDS is also liable for interest on delayed payment at the rate of 1.5% per month or part thereof. Hence, SMEs should deduct TDS carefully and pay it on time.
Filing of TDS Return & Issuing TDS Certificates: Every deductor who is liable to deduct TDS should obtain TAN number to file his TDS return, which is to be filed quarterly on or before 15th day of next month of the quarter (In case of Quarter ending March, return can be filed on or before 15th May).
After filing TDS return deductor has to issue TDS certificates to the parties within 15 days of due date of filing TDS return, which can be downloaded from income tax site.
On the other hand, if a person fails to file TDS return on or before the due date prescribed in this regard, then he shall be liable to pay, by way of late fee, a sum of Rs. 200 for every day during which the failure continues and if the TDS certificate is also not issued on or before prescribed date, then deductor is also liable to a penalty of Rs. 100 for every day during which the failure continues.
Hence, it is clear why SMEs should comply with TDS provisions as specified above to reduce their unnecessary burden of interest, penalties and late fees to their profits.
Advance Tax: As per section 208, every person whose estimated tax liability for the year is Rs. 10,000 or more, shall pay his tax in advance, in the form of “advance tax”. Advance tax is to be paid in different installments. The due dates for payment of different installments of advance tax are as follows:
Paying taxes: Why SMEs should comply with income tax provisions
Non-payment of advance tax will attract interest u/s 234 A/B/C, hence enterprises should deposit their advance tax on timely basis.
For example, If a company’s expected tax liability is Rs 1 lakh, then it should pay its first installment of advance tax on or before June 15, that is, Rs. 15000, and then the second installment will fall due on September 15. By September 15, he should pay 45% of his liability in advance, that is, Rs. 45,000. Assuming that he has already paid Rs. 15,000 as advance tax by June 15, he should pay balance of Rs. 30,000 on account of advance tax by September 15. Accordingly, the company should pay its third and fourth installment on or before the due dates.
Filing of Income Tax Return: As per section 139 of Income Tax Act, Every Company and person requiring audit u/s 44AB should file their income tax return on before September 30. In any other case, the return should be filed on or before July 31.
Ashish Agarwal & Company, Chartered Accountants, Partner, Ashish Agarwal, an Income Tax consultant says, “It is good for small businesses to comply with Income Tax Act, because it provides a positive mind to run your business.” On the other hand, tax returns are one of the key documents needed to raise money from any formal financial institution.