Advance tax: Why the new proposed rule shouldn't be a worry for business class

Suppose you are a prosperous real estate broker but do not bother about your tax liabilities and you are caught with an unreported income of Rs 30 lakh per year. In addition to being slapped with a possible 300 percent penalty for brazen tax evasion, you would also have to brace yourself for penal interest at 1 percent per month or part thereof on tax not paid under section 234C of the Income-tax Act. You are supposed to have discharged 15 percent of your income tax liability by 15 June of the ongoing financial year, 45 percent by 15 September, 75 percent by 15 December and 100 percent by 15 March.  In other words you are expected to pay your tax either by way of advance tax or TDS even before the financial year closes if you are a businessman or a professional.

There is some relaxation to the above inviolate and seemingly draconian rule---if you are paying tax under the presumptive tax scheme, you can pay your entire tax by 15 March i.e. a fortnight before the financial year ends and for others for the first two quarters, 80 percent accuracy is enough.  In other words, no interest is payable if 12 percent and 36 percent respectively of the tax liability is discharged on or before 15 June and 15 September respectively in deference to the fact that these are early days and one should not be expected to estimate his tax liability with 100 percent accuracy so soon as events are yet to unfold fully.

Representational image. Reuters

Representational image. Reuters

What has suddenly changed so as to warrant an angry reaction from the business class? Well, the Central Board of Direct Taxes (CBDT) has proposed to introduce a new rule asking companies with annual income of Rs1 crore and professionals with Rs 50 lakh income per year to report estimates of current income, tax payments and advance tax liability on a voluntary basis.

The estimate of income up to 30 September has to be given by 15 November, which gives assessees about 45 days to make an estimate. In case, the income estimate is less than the income for the previous corresponding period by Rs 5 lakh or 10 percent, whichever is higher, the assessee has to give another estimate of income as on 31 December before the end of the following month.

Those protesting this proposed new rule are working themselves up into frenzy. After all this is voluntary.  Secondly, companies already estimate their income each quarter for the fear of short payment of advance tax installments.  What has changed is the need to submit to taxman’s scrutiny your company’s estimates. Even if the voluntary regime later on becomes a mandatory one, there is no need for any fear because if anything your work is going to be more systematic and not callous now that the estimates are going to be scrutinised by the tax officials.  Plus there is no additional penalty prescribed under the new proposed rule.

Businesses have always resented the draconian advance tax regime.  Let us say your business picks up in the second half as it invariably happens in our country thanks to post monsoon bonhomie and vibrancy in the economy.  And suppose your company paid an income tax of Rs 100 crore for the relevant year.  Even if this is honest computation overall, the taxman is going to ask you to cough up interest if you had not paid 45 percent of Rs 100 crore i.e. Rs 45 crore by 15 September.  The latitude shown by way of agreeing to 80 percent accuracy is not enough often especially in businesses that experience a last minute surge, as it were, in its annual fortunes may be due to seasonal or other reasons.  Suppose in the above example your profits were just Rs 20 crore actually till 15 September, you would still be required to pay 1 percent interest per month for short payment of advance tax because you have got your estimates wrong beyond the 80 percent leeway.

It is wrong to impute the results of the full year to its parts as well given the vicissitudes of any business.  But this is not something new.  So, why the hullabaloo over the proposed new requirement?


Published Date: Sep 22, 2017 04:31 pm | Updated Date: Sep 22, 2017 04:31 pm


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