Draft notification for introduction of proposed Rule 39A dealing with the reporting of estimated income and advance tax liability
Issue/Justification
With a view to create a mechanism for self-reporting of estimates of current income, tax payments and advance tax liability by companies and persons to whom tax audit is applicable, on voluntary compliance basis, the government has proposed to introduce new Rule 39A and Form No. 28AA in the Income-tax Rules, 1962 (the Rules).
The draft notification states that the taxpayer being a company and person to whom tax audit is applicable shall furnish an intimation of estimated income and payment of taxes as on 30 September of the previous year, on or before 15 November of the previous year. If the income estimated as on 30 September of the previous year is less than the income of the corresponding period of the immediately preceding previous year by an amount of INR5 Lakh or 10 per cent, whichever is higher, then the taxpayer shall be required to furnish an intimation of estimated income and payment of taxes as on 31 December of the previous year, on or before 31 January of the previous year.
The erstwhile regime
The erstwhile provisions under the Income-tax Act, 1961 (the Act) (viz. Section 215), required the taxpayer to pay advance tax on the basis of his own estimate (including revised estimate). Up to Assessment Year (AY) 1988-89, there was a similar requirement of furnishing an estimate of advance tax in Forms 28A and 29. These requirements gave the assessing authorities discretionary powers to charge interest and also to levy penalties for the same default, which has also been mentioned in the Circular No. 549 . This led to a lot of litigation and consequent delay in the realization of the dues.
With a view to fulfill the rationale to simplify the aforesaid provisions and also to remove the discretion of the assessing authorities, which had led to litigation and consequent delay in realization of dues, the Direct Tax Laws (Amendment) Act, 1987, substituted the above provisions by a simple scheme of payment of mandatory interest for defaults mentioned therein.
The provisions of Section 234B of the Act have replaced the erstwhile provisions of Section 215 and Section 217 of the Act, applicable from the AY 1989-90 to levy interest for failure to deposit advance tax up to 90 per cent of the tax liability on assessed income before the end of the previous year. The provisions relating the charge of mandatory interest are contained in the new sections 234A, 234B and 234C of the Act.
Under the erstwhile provisions of Section 215/217 of the Act, the rate prescribed was 15 per cent per annum. The Direct Tax Laws (Amendment) Act, 1987, has increased this rate to 24 per cent under Section 234B of the Act. Similarly, the rate of 15 per cent under the erstwhile Section 216 of the Act was increased to 18 per cent under Section 234C of the Act. A co-joint reading of the above-referred rationale along with the introduction of Section 234B/234C of the Act seems to suggest that on one hand the taxpayers’ compliance rigors have been reduced by way of introduction of the new set of provisions and on the other hand, to compensate the same, the interest rates have been increased.
Under the Act, the taxpayer has been paying advance tax on his own accord in accordance with the estimated income of a particular year without being required to disclose the method of computation. On the other hand, the tax officer also has the power under Section 210 to require the taxpayer to pay a particular sum of advance tax based of his own calculation.
Additional compliance burden on the taxpayer as well as the tax department
Companies listed on the recognized stock exchange are required to submit the quarterly and year-to-date standalone financial results to the stock exchange along with limited review report or audit report as applicable. There is already a compliance procedure which needs to be adhered to in case of listed companies. Further, in today’s times where business acquisitions and mergers are the norm of the day, the business models and resultant profitability may change post such divestment/acquisition during the year which may render the mid-year reporting redundant.
This additional reporting under the Rules will further increase the compliance burden on the listed companies which are already reeling under the pressure of newly introduced legislations like Ind-AS, Goods and Services Tax (GST), Income Computation Disclosure Standards (ICDS), etc.
This additional compliance in the form of furnishing intimations will increase the compliance cost of the taxpayer. Further, the taxpayers may have to spend more time and resources to report such estimation of present year as well as comparable earlier years.
This will also involve increase in the additional work for the tax department in the process of gathering information and processing the same through data mining techniques which has been submitted on a mere estimate basis.
‘Ease of doing business’ in India
The government has introduced several measures in the recent years to ensure that India’s rankings get a boost in the overall ‘Ease of doing business’ index as released by World Bank and other similar organizations’.
The proposed rule could act as an impediment in the process of paving the way for a conducive environment of ‘Ease of doing business’ in India and may impact India’s rankings on the “Doing business’ index.
Even in the largest economy like USA, the taxpayer has the freedom of computing advance tax on own accord based on estimated income without disclosing to the tax authorities.
Rationale for providing this additional information
The draft notification states that it is proposed to create a mechanism for self-reporting of estimates of current income, tax payments and advance tax liability by certain taxpayers. The notification does not provide an appropriate rationale/ reasoning apart from stating that the objective is to create a mechanism for self-reporting. Further, though it appears from the draft notification that the requirements are part of voluntary compliance it seems that the requirements are mandatory in nature for the specified taxpayers.
It is important to note that the mechanism requires the taxpayer to provide details of estimated income, tax liability for the previous year as well as for the year immediately preceding the previous year. The taxpayer is also required to provide details of turnover, profit etc. for the same period as well as for the year immediately preceding the PY and for the PY ending 31 March (estimated) and for the year immediately preceding the corresponding PY.
The type of information asked for is quite cumbersome and there does not seem to be an appropriate rationale for asking the taxpayer to provide such information. More likely than not, there is a possibility that the tax officers may use this scheme causing vinconvenience to the taxpayers and may lead to the taxpayer community ending up providing repetitive information. Further, this may lead to unwarranted litigation.
Managing the information in a secure manner
The information provided by the taxpayers need to be maintained in a secure manner. This kind of information could also create volatility in the stock price in case of the listed companies if sensitive information is not managed securely.
Further, the tax officers may assume additional powers which could then be used for verification and the assessment process will indirectly start before furnishing the return of income.
Suggestion
In view of aforesaid, it is suggested that the draft notification which the government proposes to introduce should be done away with as this would only lead to additional burden of compliance on the taxpayers.
