Why Is Tax Compliance So Necessary For The SMEs?

   Posted on 6th Jun 2017 13:08:11 in Compliances


Direct and indirect taxes are two distinguished tax structures prevailing in India. The Direct taxes include Wealth Tax and Income Tax while indirect taxes comprise of Excise Duties, Sales Tax, and Service Tax. However, wealth tax has been eliminated in the budget announced for the year 2015. Presently, only income tax is levied in the form of direct tax. Income tax has been a vital source to generate revenues for the Central Government of India. Every entity, small or large, has to follow the norms and guidelines specified by the Income Tax Department. But, sometimes new enterprises feel that tax filing is not binding on them. It may be due to the size of their operations or their ignorance towards rules and regulations. But this ignorance may become threatening to their business. For example, a partnership firm, at growing stage, mostly focuses on its business. The compliance with Income Tax Act is not considered at this level. But, after a course of time, you will start receiving income tax notices from the Department. The letters of non-filing TDS returns, non-deduction of TDS, evaded advance tax payments, etc. will start pouring on your office. It will be hard to find a way after auditors mention their objection in their audit report regarding the non-compliance with Income Tax Act. They can disallow some of the expenses in return. This will affect your earnings. At the end, you may realize that all profits made from the business are utilized to pay the late fee, penalties, and interests due to income tax department. It may become a major setback for your business and a barrier to its growth. Compliance with Income Tax Act: Income tax act compliances are divided into two categories – TDS and other compliance. TDS Compliance: Tax Deduction at Source or TDS is well-recognized for withholding tax. Traditionally, the work of collecting taxes is done by Income Tax Department. But later, through an amendment in the provisions of the act, burden of tax collection is transferred to the point of income source. Therefore, while making payment, you have to deduct tax and credit the same to the government. Your firm or company will be recognized as deductor while payee will be called as deductee. TDS Deduction on Payment: Income Tax Department has introduced different rates of deduction for specified payments and expenses. You need to deduct tax according to the ruling. After deduction, TDS amount should be deposited in the government treasury before the 7th day of the next month. It can be done through cheque, cash, or online banking. In the case of failure to deduct or in the event of deducting lesser amount, the deductor will be liable to pay monthly 1% interest on the amount till the date of TDS deduction. Also, failure in depositing the TDS deducted will incur monthly 1.5% interest on an amount that was meant to be deposited to the government. Therefore, it is mandatory to deduct TDS and pay taxes to the government on time, always. Filing TDS Returns and Issuance of TDS Certificates: Deductor has to obtain TAN number to file returns. Firm has to file the returns every quarter on the next month of ended quarter. For example, you can file TDS returns up to or on 15th May for quarter ended in March. After deduction of TDS and filing it duly with the income tax department, firm has to issue TDS certificates to parties from which TDS has been deducted within the timeframe of 15 days. Person failing to file TDS returns in a prescribed period has to pay a late fee which can be as low as Rs. 200 for each day till the time of filing the returns. Also, a failure in providing TDS certificate to the deductee will incur a penalty of Rs. 100 each day till the time it is issued. Hence, to reduce the stress of heavy penalties and interest on TDS deductions, SMEs must comply with TDS provisions proactively and secure their profits in the business. Other Compliances for SME Advance Tax: Under section 208, an individual having an estimated tax liability above Rs. 10000 for a financial year has to pay his income tax in advance. This method is termed as advance tax. All assesses (other than assesses referred under section 44AD) have to pay their advance taxes in four installments in a financial year – 15th June (up to 15%), 15th September (up to 45%), 15th December (up to 75%) and 15th March (100%). However, assessee referred under section 44AD has to pay 100% tax liability untill 15th March in one installment. Under section 139 of income tax act, every individual or company, liable for the mandatory audit under section 44AB, can file returns by 30th September. However, in other cases, it should be filed before 31st July. People need to pay according to the act otherwise non-payment will incur interests under section 234 for the outstanding amount. Hence, without any fail, you must comply with the income tax act and do your business peacefully.

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