The base corporate tax rate in India is almost 25 per cent including cess for majority of the companies. Which means for every ₹ 1000 of profit, the company ends up paying at least ₹ 250 towards income-tax. This is not even including all other additions to income that lead to paying an effectively higher tax. The sheer volume and complexity of the tax legislation also makes it a difficult task to manage your exposure to tax. Is there anything you can do about it? Are you paying the optimal level of tax?

Here are seven tips to mitigate tax risks and pay the legally right amount of tax for your business:

• Deductions based on actual payment: There are certain provisions in the income-tax act law that allow deductions only if the payment is actually made before the due date of filing return and not simply booking the expense such as section 43B. The net profit of a company is calculated on the basis of the accrual system of accounting. The payment-based deductions will have to be kept track of separately and claimed accordingly.

• MSME Supplier payments: Payments to MSME suppliers need to be kept track of especially because such payments also qualify as a payment-based deduction. Further, the MSME Act contains penal provisions for delayed payment to MSMEs.

• Tracking statutory compliances: The business entity should develop a mechanism to ensure that all statutory compliances such as TDS, TCS, PF, etc. are completed in a timely manner. Due dates have to be tracked and returns should be filed on a timely basis. Not complying with the same may lead to payment of unnecessary fines, penalties, late fees, etc.

• ERP configured for compliance: The accounting system or ERP used by an organization should be configured for compliance to automate as much as possible – GST rates can be applied automatically; TDS deduction and TDS rates can also be applied based on the necessary criteria. In some cases, the ERP can also be used to file the statutory returns. This prevents human errors and ensures timely compliance. Furthermore, the organization should ensure that input tax credits, TDS credits, TCS credits, etc. are tracked and duly claimed. A reconciliation should be prepared on a timely basis.

• Advance tax dues: Most businesses are liable to pay advance tax every quarter based on their estimation of the income for the year. The company should be able to forecast as accurately as possible to ensure that there is a balance between amount paid as interest for short payment of advance tax and excess working capital locked up in the form of advance tax.

• Depreciation: The depreciation booked in the accounts will vary with the depreciation as per the income-tax act most of the time. Ensure that at the time of purchasing the asset, there is clarity about the rate of depreciation and the block of assets to which the asset belongs. Further, there are provisions for additional depreciation benefits based on where and when the unit is set up and whether the unit is a manufacturing unit.

• Set-off and carry forward of losses: The financials usually do not keep a track of earlier tax losses carry forward that can be set-off against your current income. The entity has to keep track of business losses that have been incurred in the past and declared in the income-tax returns. Further, the business losses need to be separated from losses attributable to depreciation. If the income-tax return is not filed by the due date, no losses will be allowed to be carried forward. Hence there should be a mechanism to keep track of due dates and ensure timely filing of returns.

Conclusion

The above tax planning strategies can be applied in general to any business organization; however, every industry may have its own taxation pain points that may need to be evaluated on a case-to-case basis. If the management places enough emphasis on compliance, it can potentially lead to freeing up of working capital that may be needlessly locked. Further, having a stellar track record with regards to statutory filings also boosts the confidence of potential lenders, financial institutions, etc. Contact us at info@blcindia.in to know more.