It's time to estimate Advance Tax

Former Member, CBDT Winner of PMs Award for Excellence in Public administration. This is the time of the year when one has to start worrying about payment of instalments of Advance Tax. The first instalment of Advance Tax becomes due on 15th September for all non-corporate taxpayers, though it will be the second instalment for corporate taxpayers. Nearly 85% of direct taxes in India are collected as pre-paid taxes i.e. before filing of the return of income after the end of the relevant financial year. Pay as you earn Advance tax is one of the three modes of realization of pre-paid taxes laid down in the Income tax Act - the other two being Tax Deduction at Source (TDS) and Self Assessment Tax (SAT). This is based on the concept of "PAYE" or "Pay As You Earn". The logic is that it is easier for a taxpayer to pay his tax liability in instalments and close to the time of earning of income. Of the three modes of pre-payment of income tax, the liability for Tax Deduction at Source is on the deductor i.e. the person who is paying the amount subject to TDS (e.g. the employer paying salary or the person paying interest or contract payments or commission etc) and not on the recipient of the amounts in question. The liability for the other two types of pre-paid taxes i.e. Advance Tax and Self Assessment Tax is however on the taxpayer himself. Out of these two, Self Assessment Tax is payable after the close of the year and before the due date for the filing of return of income, i.e. at a time when the financial year is over, the annual accounts have been closed and the taxable income is known. Therefore, it becomes much easier to estimate the amount to be paid as Self Assessment Tax. Advance Tax, however, poses different set of difficulties. This has to be paid on the basis of estimated income of the year while the financial year is yet to be over and the income subject to income tax is still to be earned / determined. Applicability of provisions related to payment of Advance Tax The provisions related to payment of Advance Tax are applicable to all categories of taxpayers. According to Section 208 and 209 of the Income Tax Act, Advance tax is payable during a financial year in every case where the amount of tax (after reducing any tax deducted or deductible at source) in respect of the total income of the assessee which would be chargeable to tax in the immediately following year is ten thousand rupees or more. In other words, the liability to pay advance tax comes into play only if the tax due on the estimated income of the current

year exceeds ten thousand rupees after adjusting any tax already deducted at source or required to be deducted at source. Thus, in case of persons having income only from such sources as are subject to Tax Deducted at Source such as salary, interest, commission etc., there would be no requirement to pay Advance Tax as in their case the entire amount of pre-paid tax is deductible by way of TDS. Estimation of Income subject to Advance Tax The total income of an assessee that has to be taken into account for estimating the Advance tax liability includes income under all heads of income arising to him during the year namely Salary, House property, Profits from business or profession, Capital gains and Other Sources. For this purpose, a taxpayer is entitled to take into account any deductions or reliefs admissible to him under the Income Tax Act (for example, investments in provident fund or insurance etc). If the difference on tax due on such estimated annual income under all these heads and any tax deducted or deductible at source exceeds ten thousand rupees then payment of advance tax becomes due. The tax rates for calculation of Advance Tax are separately provided in the relevant schedule of the annual Finance Act for different categories of taxpayers. Due dates and prescribed percentages of Advance Tax Section 210 of the Act says that every person who is liable to pay advance tax shall, of his own accord, pay on or before the due dates, the appropriate percentage of advance tax on his current income, calculated in the specified manner. A taxpayer liable to pay advance tax is required to estimate his current income and pay advance tax thereon. There is no requirement to submit any estimate or statement of income to the assessing authorities. The due dates and prescribed percentages of advance tax payable by such due dates are as underIf the last day for payment of any instalment is a bank holiday, payment can be made on the next immediately following working day. It has also been clarified that if any amount is paid by way of advance tax on or before the 31st March of the relevant financial year, it will also be treated as advance tax. Advance tax payments can be deposited through challan no. 280 in any of the over 12000 branches of authorised banks. Particulars of these are available at the website of Income Tax department at http://incometaxindia.gov.in, and of NSDL at http://tin.nsdl/com/. Corporate taxpayers and those taxpayers who are subject to compulsory audit under Section 44AB have to deposit it through electronic mode only as per Board's circular number 5 of 2008 dated 17.7.2008. Revision of instalments of Advance Tax In case a person who has paid any instalment or instalments of advance tax later and finds that his estimated income of the year needs to be revised -whether upward or downward, he can increase or reduce the amount of advance tax payable in subsequent instalments and accordingly

pay the balance amount in the remaining instalment(s). There is no requirement of filing a revised estimate of advance tax in such situations also. Consequences for non-payment or short payment of Advance tax Non payment of Advance tax by a taxpayer who was liable to pay advance tax attracts mandatory levy of simple interest at the rate of one per cent for every month or part of month on the amount of assessed tax less any Tax deducted at Source. The period for computation of interest begins from 1st April of the following year to the date of determination of income under section 143(1). In cases where a regular assessment is made, this period extends up to the date of such assessment. Similarly in cases where the Advance Tax paid is less than ninety per cent of the assessed tax, the taxpayer becomes liable to pay simple interest at the rate of one per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under section 143(1) on the amount by which the Advance Tax paid falls short of the assessed tax. In cases where a regular assessment is made, this period gets extended up to the date of regular assessment. The assessed tax for this purpose is calculated after reducing Tax deducted at Source, if any. In both the above situations, if before the determination of total income under section 143(1) or the completion of a regular assessment, a taxpayer pays any Self Assessment Tax under section 140A, then interest for the period up to the date of such payment is calculated on the entire shortfall; and thereafter, on the amount by which the Advance Tax together with the TDS and the Self Assessment Tax so paid falls short of the assessed tax. Consequences for deferment of instalments of Advance tax Section 234C lays down the method for computation of interest in cases where a taxpayer is liable to pay Advance Tax does not deposit the prescribed percentage of Advance Tax by the due date of the respective instalment. The rate of interest is same i.e. one percent per month. In case of corporate taxpayers, if the Advance Tax paid on or before 15th June is less than 15 % of tax on the returned income; or if the Advance Tax paid on or before 15th September is less than 45% of tax on the returned income; or if the Advance Tax paid on or before 15th December is less than 75% of tax on the returned income, then, the company becomes liable to pay simple interest at the rate of one per cent per month for a period of three months on the amount of the shortfall. Further, if the Advance Tax paid by the company on or before the 15th March is less

than tax due on the returned income, then it becomes liable to further pay simple interest at the rate of one per cent on the amount of the shortfall. Similar provisions related to interest liability on deferment of instalments of Advance Tax exist for non corporate taxpayers also, with necessary modifications in respect of the due dates and percentages, considering that these taxpayers have to pay Advance Tax in three instalments whereas corporate taxpayers have to pay Advance Tax in four instalments. The point to note is that although penalty provisions for the defaults related to Advance Tax have since been done away with, the interest liability under Section 234B and 234C has become very steep. This is even more so where both these provisions are attracted simultaneously in the same case i.e. where Advance Tax paid is short and the instalments have been deferred. Therefore, it is advisable to keep clear of these.