WHAT IS ADVANCE TAX?

Advance tax means income tax should be paid in advance instead of lump sum payment at year end. It is also known as pay as you earn tax. These payments have to be made in instalments as per due dates provided by the income tax department.

Total estimation is used for the calculation of advance tax.

WHO SHOULD PAY ADVANCE TAX?

• If the total tax liability exceeds Rs 10,000 in a financial year in case of salaried, freelancers and businesses, then advance tax shall be payable.
• Senior citizens whose income does not come out of any business or profession, are exempt from paying advance tax.
• In case of Presumptive income under Section 44AD for Businesses & for Professionals, the taxpayers have to pay the whole amount of their advance tax in one instalment on or before 15th March of any financial year. Although, they can pay all of their tax dues till 31st March.

ADVANCE TAX DUE DATES

Advance Tax has to be paid in different installments.  The due dates for payment of advance tax are as follows:

STATUS	By 15th June	By 15th September	By 15th December	By 15th March
All assessee (other than eligible assessee as referred to in section 44AD/44ADA)	Minimum 15% of Advance Tax	Minimum 45% of Advance Tax	Minimum 75% of Advance Tax	100% of Advance Tax
Taxpayers who opted for presumptive taxation scheme of section 44AD/44ADA	Nil	Nil	Nil	100 % of Advance Tax

INTEREST UNDER SECTION 234B

Interest under section 234B is applicable in two of the following cases:

1. When the tax liability after reducing TDS for the financial year is more than Rs.10,000 and advance tax hasn’t been paid, or
2. The advance tax is paid, but the amount paid is less than 90% of the ‘assessed tax’.

• Interest is calculated @ 1% on (Assessed Tax less Advance Tax).
• Part of a month is rounded off to a full month.
• The amount on which interest is calculated is also rounded off in such a way that any fraction of a hundred is ignored.

Example

Assume that Saurabh needs to pay a total tax of Rs.1,00,000. And, TDS of Rs 85,650 has already been deducted from his income. Saurabh paid Rs.5,000 on 25th March and he paid the balance amount at the time of filing his return on 17th July. Let’s check whether Saurabh needs to pay interest under section 234B.

• First let’s calculate assessed tax.
• Assessed tax = Rs 1,00,000 (total tax) – Rs 85,650 (TDS) = Rs 14,350
• Saurabh should have paid at least 90% of the assessed tax or 90% of Rs 14,350 which is Rs 12,915 before 31st March. However, he paid only Rs 5,000.
• Therefore, Saurabh is liable to pay interest under section 234B.
• Rs 14,350(Assessed Tax) – Rs 5000(Advance Tax) = Rs 9350.
• Interest will be calculated as : Rs 9350 x 1% x 4 months (April, May, June, July) = Rs 374
• Rs 374 is the interest payable under section 234B by Saurabh.

INTEREST UNDER SECTION 234C

Income Tax Department strives to make it as easy and convenient for citizens to comply with advance tax payments. So, one has the option of paying it in 4 instalments quarter-wise over the financial year.

However, if there is still any default, there are consequences in the form of interest penalty. Section 234C deals with the interest to be levied on the defaulters of payment of Advance Tax installment.

The interest for late payment is set at 1% on the amount of tax due. It is calculated from the individual cut-off dates shown above, till the date of actual payment of outstanding taxes.

The interest under this section is charged according to the scheduled installments. The taxpayer has to pay interest if he/she has paid the advance tax

• Less than 12% of assessed tax before 15th June
• Less than 36% of assessed tax before 15th September
• Less than 75% of assessed tax before 15th December
• Less than 100% of assessed tax before 15th March/31^st March

Example

Mr. X has the total tax liability of Rs.1,00,000. This tax is to be paid in 4 installments. The calculation of interest to be charged for delay will be calculated as follows:

Due Dates	Advance Tax to be paid	Advance Tax actually paid	Shortfall	Months for which interest is charged	Penal Interest
15th June	15,000 (15%)	5,000	10,000	3	10000*1%*3= 300
15th Sept	45,000 (45%)	25,000	20,000	3	20,000*1%*3 = 600
15th Dec	75,000 (75%)	35,000	40,000	3	40,000*1%*3 = 1200
15th March	1,00,000 (100%)	50,000	50,000	1	50,000*1%*1= 5000

CRITERIA UNDER WHICH ADVANCE TAX INTEREST IS NOT PAYABLE

In case, there is any shortfall in the payment of advance tax due if it is on account of underestimation or failure to estimate the amount of capital gains or speculative income (lottery income, gambling income, etc), then the interest would not be payable.

Also, interest would not be payable if the taxpayers pay his dues before the end of the financial year.

FAQs

Q1. Does an NRI have to pay advance tax?

• An NRI, who has an income accruing in India and the tax liability is in excess of Rs 10,000, is liable for payment of advance tax.

Q2. A senior citizen only has interest and pension income. Should he/she pay advance tax?

• Resident senior citizens who do not have income arising out of business or profession, are not liable for advance tax.

Q3. Can an assessee claim deduction under 80C while estimating income for determining my advance tax?

• Yes. An assessee can consider all the deductions under 80C (whichever applicable within the limit) while estimating the income for the financial year for computing your advance tax liability.

Q4. How can we make payment for advance tax?

• Advance tax payment can be made using Challan 280 just like any other regular tax payment.

Q5. What happens if an assessee misses the deadline for payment of the last installment of advance tax, i.e., on 15th March?

• Payment of advance tax can be made on or before 31st March of the year. Such payment will still be treated as advance tax only.

DEFINITION OF BUSINESS

According to section 2(13) of the Income Tax Act, the term “business” is defined as any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

The term `Business’ means an activity being carried on continuously and systematically by a person with the application of his labor or skill with a view to earn income. The expression “business” does not necessarily mean trade or manufacture only, it has a much wider meaning. Business simply means any economic activity being carried on for earning profits. In any business, repetition of transactions or continuity of similar transactions is not a necessary element. Transactions may not be regular in nature.

The following activities have been considered as ‘Business’:

• Advertising agent
• Clearing, forwarding and shipping agents
• Couriers
• Insurance agent
• Nursing home
• Stock and share broking and dealing in shares and securities
• Travel agent

DEFINITION OF PROFESSION 

The term ‘Profession’ is defined under Section 2(36) of the Act Profession also includes vocation which is only a way of living. “Profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.

 Classification of any activity as ‘business’ or ‘profession’ will depend on the facts and circumstances of each case.

As per Section 44AA of the IT Act, the following have been considered as ‘Profession‘:

• legal,
• medical,
• engineering,
• architectural profession,
• the profession of accountancy,
• technical consultancy or
• interior decoration.

Further under Rule 6F and other professions notified thereunder, the following activities can also be considered as a ‘Profession‘:

(i) Authorized Representative,

(ii) Company Secretary,

(iii) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, lyricist and dress designer,

(iv) Information Technology.

DIFFERENCE BETWEEN BUSINESS AND PROFESSION

FAQs

1. Are Nursing Homes and Hospitals a Business or a Profession?

• If Nursing Home or Hospital is owned by an Individual then it will be treated as ‘Profession’. But if it is owned by a Company or a firm then it will be treated as ‘Business’ because an artificial body like a company or a firm cannot possess any personal skills required to practice in a profession.

2. Teaching institutes are Business or Profession?

• Same logic will be applicable in case of teaching institutes. Teaching is a profession as specified skills are required to teach any student/class. But in case of a teaching institution, it is an artificial body, and hence, it will be considered as a business. But a teaching institution can be considered as a Profession if it is owned by an individual.

WHAT IS LIMITED LIABILITY PARTNERSHIP?

Limited Liability Partnership (LLP) is a combination of a corporate structure along with the flexibility of a partnership. LLP is governed by Limited Liability Partnership Act, 2008. Nowadays, LLP has become very popular of business as many entrepreneurs are willing to opt for it.  An LLP is a separate legal entity and the liability of its partners are limited to the agreed upon contribution in the LLP. An LLP can enter into contracts and hold property in its own name. Just like partnership deed, LLP is also operated on the basis of the LLP Agreement. Limited liability partnerships are taxed at the rate of 30%.

ADVANTAGES

• Limited Liability (from the partner’s point of view): Partners in an LLP have limited liability which implies that the partners are liable only to the extent of their contribution. Partners are not responsible for any misconduct by other partners, and they are not liable to pay off the debts of the LLP from their personal assets.
• Flexibility: Since LLP is operated by LLP Agreement, it has greater flexibility in the management of the business in comparison to a company.
• Separate Legal Entity: LLP is a separate legal entity from its members. It can hold property, and buy assets in its own name.
• Corporate Ownership: LLPs have corporate ownership without having to comply with all the compliances as in a company. It means that LLPs can appoint two companies as their members, rather than having to appoint at least one director as in the case of a company.
• Perpetual Succession: Perpetual succession in an LLP means that it is not affected by the death, insolvency, retirement or any other change of the partners.
• Easy Formation: As compared to a company, forming an LLP is less complicated and less time consuming. It has fewer legal compliances.
• Capital Requirement: There is no minimum cap as for the requirement of capital. LLP can be formed with any amount of capital.
• Audit: Audit of an LLP is not mandatory. Although, if the turnover of an LLP exceeds the certain prescribed limit, then LLP shall require to get the tax audit.

DISADVANTAGES

• Taxation: In an LLP, the rate of taxation is flat 30% irrespective of the turnover, while a company is taxable at the rate of 25% if the turnover is upto Rs.250 crores.
• Limited Liability (from point of view of LLP): Partners are the real owners of the LLP. They can operate in their own ways. And since the liability of the partners are limited, LLP would have to suffer any loss even if the fault is of the partner/member.
• Public Disclosure: Financial Accounts have to be represented as public records. Personal income of the members also has to be disclosed.
• Capital Requirements: LLPs does not have the concept of equity investments. Investors cannot fund an LLP without becoming a member. So, it would be difficult for an LLP to fulfil the capital requirements.

TRADITIONAL PARTNERSHIP V/S LLP

PARTICULARS	TRADITIONAL PARTNERSHIP	LLP
Registration under Act	Indian Partnership Act, 1932	Limited Liability Partnership Act, 2008
Minimum no. of Partners	2 Partners	2 Partners
Maximum no. of Partners	Maximum 20 Partners	No Limit
Liability of Partners	Jointly Liable	To the extent of their contribution
Registration	Not Compulsory	Compulsory
Tax Audit	Required when Turnover/Gross Receipts exceeds Rs.1 crore – Business Rs. 50 Lakhs – Profession	Required only if Turnover > Rs.40 Lakhs; or Contribution > Rs.25 Lakhs

COMPANY V/S LLP

PARTICULARS	COMPANY	LLP
Registration under Act	Companies Act,2013	Limited Liability Partnership Act,2008
Designated Directors/Partners	Minimum – 2 Maximum – 15	Minimum – 2 No Maximum Limit
Minimum no. of members	2	2
Maximum no. of members	200	No Limit
Abiding by	MOA/AOA of the company	LLP Agreement
Tax Audit	Compulsory	Required only if Turnover > Rs.40 Lakhs; or Contribution > Rs.25 Lakhs
Compliances	High Legal Compliances	Less Compliances as compared to company
Registration Costs	Higher as compared to LLP	Low Registration Cost

WHY ASM?

As indicated by the RBI, frauds had arisen as the most genuine concern in the administration of functional risk, with 90% of them situated in the credit portfolio of banks. Due to ever increasing frauds and the amount of non-Performing assets increasing drastically in every bank in India, RBI took the stand and introduced new reform, i.e., Agencies for Specialized Monitoring (ASM).

 Indian Bank’s Association (IBA) has impaneled 83 agencies to monitor stressed loan accounts and regulate the cash flows of banks.

WHAT IS ASM?

ASM is an external agency (Chartered Accountants) which is introduced to monitor large credit exposures and huge advances of Banks/Consortium of banks. Consortium refers to the coming together of banks to sanction the limits for a certain purpose. There is always a Lead bank in a Consortium who has the majority power over others.  Lead bank in a consortium of bank will select any particular agency and give the assignment to it for monitoring of account.

An Agency for Specialized Monitoring (ASM) is a mechanism of the bank, which allows it to take several steps to prevent or minimize the number of money laundering cases and misappropriation of funds. ASMs are committed to providing due diligence support in India. In the banking world, the explanation for due diligence support & services involves an in-depth investigation and analysis of the business or person’s credits, assets, and liabilities. A bank before investing or finalizing a transaction in a business initiates acquisition or gives out a loan to a customer to ensure that the deal would be lucrative and safe for the bank.

PURPOSE OF ASM:

With the effect of reporting under ASM, we come to know the problem in advance like inventory buildup, delay in receivables and diversion of funds. All the transactions will be under a strict vigilance. As employees of the banking industry don’t have such expertise in all the sectors and related business transaction, the services of ASM to closely track the activity of complex nature of transaction of borrower is to be tracked on each stage.

APPLICABILITY:

ASM will be applicable to all the debtors where exposure is above Rs.250 crores. The scope of work includes:

• Regular auditing and scrutinizing deviations or fluctuations.
• Monitoring of cash flow and transactions.
• Analyzing of the organization’s work input and output.
• Checking for misappropriation of funds or diversion of funds.
• Ensuring compliance of terms and condition of sanction.
• Extensive analysis of a company’s transactions, operations, and financial health.
• Analyzing of Fund Flow Statement.

ASM is an entity having Chartered Accountants with good domain knowledge, experience and skill in different sectors, industries etc. In case of large exposure or exposure of specialized nature, such agency provides services of inspection, stock audit, cash flow monitoring and end use verification etc.

After bringing ASM to the banking world, Chartered Accountants have to be more careful and work diligently towards the responsibility of reporting under ASM.

FOCUS AREAS:

Under ASM, Chartered Accountants does not have to necessarily check all the transactions, they mainly checks the transactions which are above the exposure limit. The main focus areas are:

REPORTING REQUIREMENTS:

There are some important areas which shall be covered by the firm under ASM reporting, these are-

• Physical verification of stock shall be verified and reported with the help of GR note, e-way bill, etc.
• Bank statements need to be verified extensively and sanction of drawing limit shall be checked.
• Inventory Holding, Working Capital, Debtors, Ageing, Ratios, Shareholding Pattern etc.; all need to be checked thoroughly.
•  Documentation of working papers shall be managed properly by the Agency.
• Any change in the industry and its impact on the client shall also be included in the report.
• Disclosure of any contingencies and legal issues shall be reported.
• And, report shall also specify whether the client has cooperated with the Agency and justifications for the same.

Along with these issues, report shall also include any disaster covered or any value addition or adverse remark by the company and any comment on the overall health of the company, whether good or bad as per the respective Chartered Accountant.