Saturday, June 13, 2020

How to Estimate Advance Tax for FY 2020-21 (AY 2021-22)

The first installment for Advance Tax for AY 2021-22 falls due on 15th June, 2020, by which 15% of the total tax liability for the year is to be paid after giving credit for expected TDS.

The estimation of taxable income may be very difficult for businesses in this financial year due to the spread of the pandemic. A more reasonable estimate may be possible by businesses as the year advances. However, the following factors may be considered while estimating your taxable income for the current year.

Factors to Consider for Estimating Taxable Incomes and Advance Tax

- Salary or pension incomes (if any) - partial reduction (TDS is mostly already deducted for employees)

- Rental incomes (may be same unless likely to be affected for vacation or default or discounts/rebates to tenants of commercial properties)

- Fall in rates of interest on interest incomes

Capital losses due to dips in stock markets and liquidation of securities at loss, or pre-mature redemption of deposits due to emergent liquidity needs

For Businesses

- Previous year's incomes with discount factors for sales and gross profits

- Budgeted fixed, semi-variable and variable expenses under present scenario

- Loss of perishable stocks and inventory due to sudden lockdown, quality issues, or reworking costs before sale. The loss of value of stocks may also be due to inability to transport or inability to deliver in time or season change or on account of cancellation of orders

- Increase in working capital interest costs due to lower recoveries from debtors, unsold stocks and working capital facilities' enhancements

- Increase in interest on term loans due to deferred EMIs

- Additional directly identifiable costs for Covid-19 prevention measures such as wages and salaries without work or for less work than normal, sanitizations, PPE kits, etc.

- Productivity losses due to shorter working hours, non-availability of skilled labour

- Hardware and software costs for Work-from-Home facilitation

- Brought forward losses from past years

- Additional medical expenses, mandatory medical insurance for employees

- Expected bad debts due to non-recovery/partial recovery possibilities from some debtors having lost their businesses

- Liquidity pressures due to advances to staff/workers against their retirement benefits/severance pay

Interest u/s 234C on Delayed Payment of Installment of Advance Tax - Unclear Situation

As per section 234C of the Income Tax Act, the liability of interest on shortfall of installment is at the rate of 1% per month for a period of three months on the amount of the shortfall. 

However, as per the relief package announced by the government, the rate of interest to be charged cannot exceed 0.75% per month for the period of delay on all taxes due between 20-Mar-2020 and 29-Jun-2020 subject to the condition that such amount has been paid on or before 30-Jun-2020.

Does this imply that the implied concession provided by the Government read with Section 234C of the Act is for the period of 3 months from 15-Jun-2020 to 15-Sep-2020 (being the due date of next installment of advance tax)? And will the interest be charged @0.75% per month for such delay, or @ 0.75% only for the period from 16-Jun-20 to 30-Jun-20 and @ normal 1% w.e.f. 01-Jul-2020.

Based on the above and the settled cases in various Tribunals, the interest under Sec  234C of the Act can be charged only for the period of default/ delay and not for the period of three months.

In these uncertainties one should carefully decide as per the composition of one’s incomes and conservative business estimates and the liquidity to pay now or to pay with interest (if any) and to gradually review the budgeted estimates in later quarters.