Do you suppose the revenue tax penalties in India are a bit too harsh?

We typically hear from tax officers that the penalties in India for not submitting tax returns in time are pretty low, being simply ₹5,000, and going as much as ₹10,000 if the tax return is just not filed by 31 March following the taxable monetary 12 months. This is, after all, along with curiosity payable at 1% monthly on the unpaid taxes. Is this reality of penalties being low actually true or are there different much more extreme penalties?

The most extreme consequence of not submitting a tax return in time is that you just lose the advantage of carry ahead of any losses that you could have incurred, which couldn’t be set off towards the identical 12 months’s revenue. For most people, these losses are within the nature of capital losses; for these carrying on enterprise or occupation (together with derivatives buying and selling), there could possibly be a loss incurred within the enterprise or occupation. Effectively, you lose the tax defend that you’d have gotten once you would have recouped these losses to your portfolio by features in subsequent years. The taxes that you find yourself paying within the subsequent years on the features is the actual penalty in such a case.

Further, if you happen to have been entitled to a tax refund, usually you’ll have gotten 6% each year curiosity on the refund from 1 April earlier than the due date, until the difficulty of the refund. If you file the return late, you lose the curiosity for the interval from April until the month wherein you filed the return.

If you have got earned overseas revenue and have paid overseas taxes on such revenue, as a resident of India, your overseas revenue can be taxed in India, however you might be entitled to deduct the overseas taxes paid towards your Indian revenue tax legal responsibility. Unfortunately, the regulation requires you to file a type earlier than you file the return, claiming credit score of such overseas taxes. If you neglect to file that type in time, it’s possible you’ll not get credit score for the overseas taxes paid by you, although the overseas revenue is taxed in your fingers, and by regulation, you might be entitled to a deduction out of your Indian taxes.

Charitable entities need to bear a lot harsher penalties for such delays in submitting their returns. A charitable entity is entitled to exemption on its revenue (together with donations obtained) if it spends such revenue on charity. However, if it doesn’t file both its audit report or its revenue tax return in time, it has to pay tax on its gross revenue, with none deduction for the spending on charity. Even if it has already spent its whole revenue on charity, it finally ends up having to pay revenue tax over and above that.

Businesses that are entitled to tax holidays additionally endure extreme penalties if they don’t file related audit experiences in time. They lose the advantage of the tax vacation or deduction for the 12 months if they don’t file the related audit experiences in time.

These penalties are due to this fact rather more harsh than a mere penalty. Are such harsh penalties actually warranted? In the previous, the excessive courts have diminished the impression of such harsh penalties in relation to submitting of audit experiences, by holding that what’s essential is the provision of the audit report, though it’s obtained late, and that as long as the audit report is filed, the advantage of the tax vacation or deduction can’t be denied. Unfortunately, in relation to the late submitting of tax returns, there was no such aid granted by the courts.

However, a simply and truthful tax regulation ought to be certain that the punishment matches the magnitude of the offence. Can a taxpayer who recordsdata his return late by a day or two be equated with one other who recordsdata it a lot later, or doesn’t file it in any respect? Today, each face the identical punishment of shedding the advantage of carry ahead of your complete loss. In some international locations, such because the USA, the penalty relies upon upon the interval of delay and is capped.

The tax authorities ought to severely think about changing the prevailing provision on complete prohibition of set-off of losses by one which gives a graded denial of carry ahead of losses, linked to the quantum of delay, with a cap on the whole denial of loss. For occasion, a taxpayer might lose the advantage of carry ahead of 5% of his capital losses or enterprise losses for each month of delay, topic to an total cap of 25% or 50% of such losses.

Similarly, charitable entities can face graded denial of exemption linked to the quantum of delay, as a substitute of full denial of exemption for even a day’s delay. In case of delay in submitting of audit experiences additionally, such a graded strategy needs to be thought-about, which can be much less harsh on small misdemeanours.

Such graded denial of advantages will present some aid to the hassled taxpayers, who already need to face a lot compliance, and at instances, have to actually wrestle to satisfy their compliance necessities for no fault of theirs.

Gautam Nayak is accomplice, CNK & Associates LLP.

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