WHY ADVANCE TAX (ROMANCING THE ADVANCE TAX)

WHY ADVANCE TAX...(ROMANCING THE ADVANCE TAX )

Why paying advance tax is important

Every individual has certain responsibilities under different laws and when it comes to the Income Tax Act then one of the primary responsibilities is to pay the required tax on the income earned during the year.

There are various ways in which the tax will be paid and this covers self assessment tax, tax deducted at source, advance tax and tax on assessment. The area of advance tax is important for several reasons. Here is a look at this particular area.

What is advance tax?

As the name suggest advance tax is the tax that is paid in advance for the income of a particular financial year. The normal expectation is that tax has to be paid only when the income is earned but under the tax provisions the tax payer has to actually estimate the income for the entire year and based on this pay advance tax at specific time intervals.

For an individual there is a separate schedule that they need to follow for the advance tax payment. The first part consists of estimating the income for the year and the tax that will have to be paid on this. After this by 15 September 30% of the tax for the year has to be paid.

The figure goes to 60% of the tax by December 15 and then 100% of the tax by March 15 of the financial year. Thus for example if the tax for the year is estimated at Rs 40,000 in December then Rs 24,000 has to be paid by the 15th of the month. It could be that due to higher income the tax payment estimate could go up to Rs 50,000 by March so by this time the remaining Rs 26,000 would have to be paid

Payment only under certain circumstances

There is a need to pay advance tax only when the advance tax payable is Rs 10,000 or more during the year. This might seem to look like a loop but the way in which it works is that the working needs to be done and if the tax shortfall is Rs 10,000 or more than this will trigger the advance tax provisions. If the tax to be paid is less than this then there is no need to pay advance tax.

It is important to note that in the entire working the existing tax deduction at source will have to be reduced from the estimated tax liability to see whether the requirement of the advance tax is triggered for an individual. Thus there could be a situation where a person has to pay Rs 1.2 lakh of tax on his estimated income for the year but if the entire amount is already being deducted at source then there is no need for any advance tax payment.

In another case where the tax to be paid is Rs 15,000 for the year but no amount is deducted at source then the advance tax requirements will have to be met.

Basic requirement under the law

One of the reasons why advance tax payment is important is due to the fact that it is the responsibility of the tax payer to estimate the income and then calculate the estimated tax to see whether they need to pay advance tax.

Here the tax department does not have to demand that the individual pay the advance tax till the assessment is done but the onus is on the individual so when this is the case they will need to deal with the situation by completing their responsibilities effectively.

A reason for this situation is that it is not possible for the tax authorities to estimate the income of a person till it is earned and this figure will be better known by the person earning the income.

Interest cost

Another reason why an individual should pay advance tax is that failure to do so will leave them open to a financial hit in the form of an interest cost. One provision says that failure to pay advance tax will result in an interest payment right till the time of assessment. Further another section also says that if 90% of the advance tax is not paid then interest would be applicable. The interest cost is 1% per month so the figure is high.

Thus the individual could be open to a situation where they face a large hit in terms of the interest payments on their tax liabilities. Since this can be a large figure so to avoid this problem it is better to pay the advance tax as per the requirement.

Completing tax payment requirement

When any income is earned by the individual then there has to be income tax paid on this figure. In the case of advance tax this becomes just another form in which the individual will pay off their tax liabilities.

The term advance tax is just a term for the payment of tax and it could have been called something else but still the tax would have to be paid. So the payment is just a completion of the obligation of paying taxes and hence it should be completed properly. This makes it essential to complete the process as per the schedule laid down by the Income Tax Act.