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In this blog post, Manisha Nayak, a fourth-year BLS LLB student from Government Law College and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses advance tax.

 

What is advance tax?

“Advance Tax” name itself suggests the tax that is to be paid up in advance. Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as “pay as you earn tax”. These payments have to be made in instalments as per due dates provided by the income tax department.

Who should pay the advance tax?

Not every citizen of India has to pay the advance tax. It is applicable to certain citizens of India with some conditions. Advance tax applies to all taxpayers, salaried, freelancers, and businessmen. Senior citizens, who are 60 years or older, and do not run a business, are exempt from paying advance tax. So if the total tax liability of a person is INR 10,000 or more in a financial year then he has to pay advance tax.

Change in the Advance Tax Scheme

Till the fiscal year of 2015-16, the first advance tax payment date for individuals used to be September 15th but Budget 2016 made the first instalment payable 3 months earlier i.e. on June 15th 2016 fiscal onwards. The taxpayers who are liable to pay advance tax, as per the new amendment have to pay the first instalment by June 15 else pay 1% simple interest per month on late payment.

This has significantly increased the income tax compliance burden on individual taxpayers. As per amendments made in Budget 2016, individuals (except for exempted categories) will now have to estimate their income for the full financial year as early as June 15, compute the income tax that would be payable on that income and pay 15% of that or else get ready to forfeit interest on late payment at a taut rate of 1% simple interest per month. 

Taxpayers who opt for presumptive scheme where business income is assumed at 8% of turnover were exempted from advance tax for FY 2014-15 and FY 2015-16. Nevertheless, starting FY 2016-17, such taxpayers have to pay whole amount of their advance tax in one installment on or before 15th March. Presumptive scheme is covered under section 44AD and 44AE. Starting FY 2016-17 businesses with turnover of INR 2 crores or less can opt for this scheme. This scheme has been extended to professionals such as doctors, lawyers, architects etc. starting FY 2016-17, if their receipts are INR 50 lakhs or less.

Computation of the Advance Tax

The Advance Tax is to be calculated as per the Section 209 of the Income Tax Act, 1961.

Section 209 lays out different conditions to be followed to compute the advance tax for different kind of persons.

Instalments of advance tax and due dates

As per Section 211(1) Advance tax on the current income calculated in the manner laid down in section 209 shall be payable by—

  1. all the assessees, other than the assessee referred to in clause (b), who are liable to pay the same, in four instalments during each financial year and the due date of each instalment and the amount of such instalment shall be as specified in the Table below:

Due date for Advance Tax payment in case of assessee (other than companies)

Due Date Tax Amount Liable to pay
On or before 15th September Not less than 30% of such advance tax
On or before 15th December Not less than 60% of such advance tax as reduced by the amount, if any paid in the earlier installment
On or before 15th march The whole amount of such advance tax as reduced by the amount, if any paid in the earlier installment or installments

 

Due date for advance payment in case of companies

Due date Installment Payable
On or before 15th June Not less than 15% of advance tax
On or before 15th September, 2016 Not less than 45% of advance tax as reduced by the amount paid in the earlier installment
On or before 15th Dec, 2016 Not less than 75% of advance tax as reduced by the amount paid in the earlier instruments
On or before 15th March, 2017 The whole amount (100%) of the advance tax as reduced by the amount paid in the earlier installments

 

Impact of proposed change

For those individuals whose sole or main source of income is salary, the impact of this change would be slight or nil because most of their tax payable would be deducted as Tax Deducted at Source (TDS) by the employer. It is the employer’s responsibility to deduct and deposit tax on the salary paid to its employees within the time limits prescribed by the Income Tax Rules. In case an employee has a little non-salary income such as taxable interest on bank savings account etc. then this can be declared to the employer with a request to add it to salary income computation and deduct tax on this additional income also. In this way, the employee need not bother about paying advance tax on his own. However, in case the salaried individual wants to inform their employers about their ‘other income’ and get the advance tax paid via TDS they would still have to do the exercise of computing estimated income prior to the four advance tax instalment dates.

However, taxpayers with substantial income other than salary (which normally employees do not prefer to disclose to employer) will definitely be impacted as they would be required to pay advance tax on this other income (not declared to employer). For taxpayers who calculate and pay advance tax based on estimated income the adverse impact of this change would increase with increase in variation (quantum as well as degree) of actual income from estimated and vice versa. For tax payers who are unable to take out time from their busy schedules (a substantial number fall in this category) to calculate and pay advance tax, the adverse impact would be in the form of significant increase in interest payable on the deferment of advance tax payment.

Practically a majority of people find it very tedious to calculate and pay advance tax therefore even earlier a large number skipped the first or the first two advance tax payment dates and paid only by the third, therefore advancing the payment schedule by one quarter will increase compliance burden for them as well as the payment on deferment of advance tax. Individuals also have to bear the unnecessary burden of additional professional fee if they have engaged a professional (chartered accountant) and he increases the fee due to extra compliance.

What if we do not Pay Advance Tax?

If a person has to pay advance tax and If he fails to pay the Advance Tax or, if he has paid less than the stipulated tax, then he would be penalized and would be liable to pay extra under Sections 234A, 234B, 234C of the Income Tax Act. So there is no escaping Tax.

The interest is calculated at 1% simple interest per month on the defaulted amount for three months. The interest penalty would continue up to the next deadline. If even after the last deadline of 15 March, the tax is not paid, then the 1% would be on the defaulted amount for a month, until the tax is fully paid.

Sections triggered under penalty of the Income Tax Act, 1961

Under section 234A, the liability arises only when the return is filed after the due date which for AY 2016-17 is 5 Aug. Ex: Due Date for current year, which is Assessment Year 2013-2014 or Financial Year 2012-2013 is 5 Aug 2016.

Under section 234B of the Income Tax Act, 1961

Interest is payable Liable tax amount Interest Rate Period
An assessee who is liable to pay advance tax has failed to pay such tax On assessed tax 1% for every month or Part of month From 1st April of the Assessment year to the date of determination of total income or where regular assessment is made to the date of such regular assessment.
An assessee who has paid Advance tax but amount of advance tax paid is less than 920% of assessed tax Assessed tax minus advance tax 1% for every month or part of month From 1st April of the Assessmnet year to the date of determination of total income or where regular assessment is made to the date of such regular assessment.

 

Under Section 234C of the Income Tax Act, 1961 (In case of a non-corporate assessee)

Interest is payable Interest rate Liable tax amount Period
If advance tax is paid on or before September 15 is less than 30% 1% for every month or part of month 30% on tax amount minus advance tax paid 3 months
If advance tax is paid on or before December 15 is less than 60% 1% for every month or part of month 60% on tax amount minus advance tax paid 3 months
If advance tax is paid on or before march 15 is less than 100% 1% for every month or part of month Tax amount minus tax paid. Nil

 

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