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Being a good tax citizen means three things:
- Complying with all requirements that a citizen is expected to and required to do as required under the law.
- Taking maximum advantage of the provisions contained in the law with respect to planning your income and expenditure.
- Not doing anything which can lead to questions being raised by the Tax officer.
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This section is divided into two sections - one which is applicable to Self employed businessmen / professionals and second which is applicable commonly to everyone.
Practical Tips to being a good tax citizen
Ready Tax Tips – Salaried / Other Individuals
Find below some of the tips which would make your tax filing and tax assessment a lot easier. The major tips that he / she need to look at are:
PAN
- Obtain PAN with correct details and do not hold more than one PAN as the Income Tax Act is empowered to punish you with a penalty of Rs. 10,000.
- In case you have shifted residence, changed names etc, update the PAN records in the Income Tax department (ITD) database
- Mention PAN in all your correspondences (including income tax returns) with the ITD.
- Provide a copy of your PAN card to your employer and any other entities such as banks etc who might be deducting tax at source from your income (such as salary / interest / rent / commission). This would enable them to credit the tax so deducted correctly in your account with the ITD.
- Register your PAN with the ITD so that you could view your tax credits online. You could register your PAN by visiting the following link.
https://onlineservices.tin.nsdl.com/TIN/PanRegistration.do
Tax Saving Investments
- Declare your tax investment plan to your employer so that they do not deduct excess tax from your salary.
- Complete your actual tax investments through the year so that you are not required to rush at the end of the financial year thus straining your finances.
- Obtain a tax estimation statement from your employer and plan out your tax investments (such as PPF, Life insurance etc) for the year in advance.
Declarations
- Tax documents include all such documents that were the basis for preparation of your income tax returns such as Form 16 (TDS Certificate issued by your employer), proof of tax investments (life insurance premium receipts, PPF investments, ELSS MF investments etc), proof of all deductions claimed (donation receipts, mediclaim premium receipts, rent receipts etc), bank statements (mention comments along side transactions so that you do not forget the nature of such transactions), Form 16A (TDS Certificate issued by any entity giving you any form of income such as interest, rent, commission etc), Computation sheet for the income declared & tax thereon, income tax return filed for that year, any other document / information relevant from the perspective of taxation.
Source of Income
- In case you have income from other heads such as capital gain, interest, rental income etc., keep records & documentary evidences to prove these income / loss and declare these income / loss in your income tax returns.
- In case you have income from other heads, then take professional advice to determine if you need to pay any advance tax. Pay advance tax on / or before the dates specified by the ITD.
File Returns
- File your tax returns on time. In case of individuals not covered by tax audit requirements, the last date for filing income tax returns is July 31. For example the income tax return for financial year 2008-09 is to be filed on or before July 31, 2009.
- In case you missed the deadline of July 31, you can still go ahead and file your tax returns on or before March 31 without any penalty i.e. continuing on the above example the returns can be filed without penalty on or before March 31, 2010. All returns filed thereafter may be liable to a penalty of Rs. 5,000.
Penalties
- File your tax returns on time. In case of individuals not covered by tax audit requirements, the last date for filing income tax returns is July 31. For example the income tax return for financial year 2008-09 is to be filed on or before July 31, 2009.
- In case you missed the deadline of July 31, you can still go ahead and file your tax returns on or before March 31 without any penalty i.e. continuing on the above example the returns can be filed without penalty on or before March 31, 2010. All returns filed thereafter may be liable to a penalty of Rs. 5,000.
- Do not give or repay loans in cash in excess of Rs.20,000 as you may be imposed with a penalty of amount equal to the loan given / repaid in cash.
Self Employed Businessmen / Professionals
- Take time to evaluate and understand the form of entity that is best suited for you - Proprietary concerns and HUF enjoy advantage of a slab rate of income tax while other entities have to pay tax at a flat rate.
- Obtain a PAN in the name of the business separately - Even though you may have a PAN in your personal name, it is necessary to obtain a PAN in the name of your business enterprise which could be a Partnership firm, HUF, Company (public or private, Not for profit), Society, Association of Persons (AOP).
This would not apply in case you are carrying out the business as a proprietary concern. In this case, your personal PAN will hold good for your business too.
- Obtain TDS Account Number (TAN) - Every business enterprise is required to deduct tax at source from payments it makes to its service providers under different provisions of the Income tax law. This is applicable to all Partnership firms, Companies & Societies. In case of Proprietary concerns, HUFs and AOPs, the liability to effect TDS arises, if your total turnover (in case of business) or gross receipts (in case of profession) exceeds Rs. 40 lakhs per annum.
- Evaluate the applicability of other legislations to your business enterprise - Apart from Income Tax law, there are certain other tax legislations that would be attracted for businessmen / professional. Important among them are listed below:
- Value Added Tax
- Central Sales Tax
- Excise Duty
- Service Tax
- Profession Tax
- Shops and Establishments
- Open a separate Bank account in the name of your business enterprise - The first step to be taken before transacting any business is to open a bank account in the name of the business entity. This applies also to proprietary concerns, they are advised not to operate their personal bank account for transacting business and open a bank account with a separate business name. In case of proprietary concerns, if you have decided not to have a separate business name, then too open a separate bank account in your personal name for routing business transactions (list of documents required for opening bank account).
- In case you decide to operate a proprietary business in your personal name and open a bank account to that effect, do not deposit any personal cheque in this account, nor incur any personal expenditure out of this account. Otherwise, you will be required to prove that the deposit is not out of your business income. In case of expenditure, you would be leading the tax officer into your personal expenditure, which is avoidable.
- Take care to see that the source of initial capital that you introduce into the business is well established. You may have to establish the source of capital to the tax officer. This means that the money that you introduce into the business should be out of tax paid income or in case is borrowed, the lender has lent it out of his tax paid income.
- Pay your liability of VAT, CST and Service Tax in time - Non payment of taxes before certain due dates could result in the same being disallowed as a business expense. So it is important to pay them off on time.
- Preserve every supporting for claiming business expenditure - Supporting can be in the form of expense bills, fuel bills, credit card statements, bills for purchase of assets etc. File them separately for record and accounting.
- Maintain books of accounts under double entry system - Maintaining proper books of accounts under double entry system would help a long way in understanding the flow and movement of funds within your business system.
- In case you need to acquire assets for your business, do it before September 30th of the financial year- Assets put to use after this date would be eligible for depreciation at only 50% of the normal depreciation otherwise available.
- Do not make any payment for expenditure in cash to a person exceeding Rs. 20,000 per day. Such expenditure would not be allowed as deductible expenditure.
- Where your customers effect tax at source from your bills, follow up with them for TDS certificates- Every person who deducts tax at source is obliged to issue a TDS certificate indicating the tax deducted and giving details of deposition of tax into government treasury. Amount mentioned in the certificate can be reduced from your total tax liability only if the certificate is available.
- In case a customer is not paying and becomes sticky, start corresponding with him in writing - Any trade receivable which turns bad is allowed as an expenditure only if the tax officer is convinced that you have taken adequate steps to recover the money and yet it has become bad.
- Do not forget to deduct tax on all payments for services which are liable for tax deduction at source - Any payment for services which is subject to deduction of tax at source will be allowed as a business expenditure only if tax at applicable rate is deducted from such payment and deposited with the government treasury within the stipulated time.
- Plan your remuneration from the business - In case of every form of business entity other than proprietary concern & HUF, salary paid to director (who may or may not be an employee) is deductible as a business expenditure. However, this income would be subjected to tax in your hands. So use this for planning your income and taxes.
- Pay your advance tax - The Income Tax law requires you to pay at least 90% of your taxes in advance before the end of the financial year. This has to be paid based on an estimation of your income and profits thereon, in installments as provided under the law. Non-payment / Short payment of such advance tax would attract interest on the unpaid taxes.
- Always decide on the character of a transaction in advance before executing the same - Do not execute a transaction and then start thinking of an explanation. Remember that every transaction needs to be explained. So think of the nature and character of the transaction and then go ahead with executing the same.
- Paying remuneration to immediate relatives - In case you intend giving remuneration out of your business to any of your immediate relatives, then be careful about justifying the same. In case person receiving the remuneration is found not to be possessing the requisite qualification for undertaking that kind of an assignment, the entire amount paid to the relative can be disallowed as an expenditure. Or the amount may be clubbed with your income and taxed in your hands.
- Avoid business in cash to the extent possible - In case of cash dealings, it is difficult to substantiate the source of generation of cash and the extent of cash dealings.
- File your income tax returns on time - You have to file your tax returns on time, otherwise interest would be attracted on the unpaid taxes followed by penalty for late filing after a certain period of time. In case of loss in your business or under any other source of income, as calculated as per the law, such loss will not be allowed to be carried forward and set off against future income unless the return is filed on or before the due date.