Reporting of estimated income tax return – An Analysis [Proposed Rule 39A]

Notification

CBDT issued draft notification on 19 September 2017 for comments and suggestion which are invited from stakeholders till 29 September 2017. That is the final notification will be issued shortly afterwards.

This proposed rule places additional compliance burden on the taxpayers to furnish Estimated Income and Tax Liability as on 30^th September. The due date for furnishing this intimation is 15^th November.

However, if the estimated income is less than the income of preceding corresponding period by a specified amount, then Estimated Income and Tax Liability as on 31^st December should be furnished before the due date of 31^st January.

Rationale

The rationale for introducing this provision is given by CBDT in the press release which comprises of two reasons:

1. First reason given from the taxpayer’s perspective is that the taxpayers arrive at a reasonably accurate estimate of their current income and advance tax liability, so that the additional burden on account of interest for default/deferment of advance tax can be avoided.

2. Second reason given by CBDT is from macro perspective and appears to be more legit, is that a reliable and advance estimate of tax revenues for the year would provide much needed perspective for planning and prioritizing the Government expenditure.

The primary reason which is not listed in the press release, but which seems to be more credible reason is that the government may want to keep an eye on the taxpayers with fluctuating tax liabilities which may indicate high risk of tax avoidance. These risk areas may be used for selecting the cases for scrutiny assessment by tax officials.

Analysis and Issues

1. As per the rule, “estimated” income and payment of taxes “as on” 30^th September / 31^st December is required to be furnished. This may suggest that the estimated total income for entire year and consequent tax liability may be required to be furnished.

However, according to the form provided along with the rule, the income and tax liability “for the period ending” on 30^th September / 31^st December is required to be furnished which may not require the “estimation”, since the data for computation of income for the period which is already ended may be readily available.

Thus, the rule and the form appear to be in contradiction with each other.

2. Another issue that may require clarification is that whether the intimation is also required to be furnished for period ending 30^th September if the case falls under situation where the intimation is required to be furnished for period ending 31^st

The words used in rule suggests that, if income estimated as on 30^th September is less than the specified amount than the intimation is required to be furnished only for period ending 31^st December.

However, this may require taxpayers to maintain sufficient evidence to justify non-furnishing of intimation for period ending 30^th September to avoid litigation with tax authorities.

Whether ‘Voluntary compliance’?

As per draft notification, these additional compliances are “mandatory” to company and every taxpayer which is subject to tax audit as per the notification. Ironically, the press release by CBDT is titled as “Voluntary” Reporting of Estimated Current Income and Advance Tax Liability. Further, the press release read as:

“… it is proposed to create a mechanism for self-reporting of estimates of current income, tax payments and advance tax liability by certain taxpayers (companies and tax audit cases) on voluntary compliance basis.”

What details you will submit?

The form notified for this intimation includes:

Income Tax related details – Income from different heads of income, gross total income, tax liability, MAT liability, MAT credit, TDS, Advance Tax, etc. for period ending 30^th September or 31^st December as applicable (‘specified period’).

Financial Information of Business – Sales Turnover/Gross Receipts, expenses, interest, depreciation and profit before tax. This financial information is to be provided not only for ‘specified period’ but also for the entire year on an estimated basis.

Reasons for decline in Tax paid – The form also mandates to specify point-wise reasons if estimated tax of current year is less than the tax paid in preceding year.

In a nutshell, taxpayer needs to explain reasons for paying less tax and also provide its financial information of business in addition to income tax related details.

Conclusion

Thus, this additional reporting requirement not only places the additional compliance burden on the taxpayers but also calls for the broader tax management on part of taxpayers to avoid tax litigations originating from wide variances between “estimated income” reported in the intimation and “actual income” reported in the Income Tax Return at end of the year.

For deeper discussions on how this issue can affect your business, you can reach us at ersteadvisory@gmail.com

Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.