Income Tax Compliance
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Importance of tax compliance
Tax compliance means the willingness of a taxpayer to abide by the applicable tax laws, file tax returns and pay due taxes within the stipulated time period. In this context, it is important to remember that tax compliance requires people to follow any tax law with its spirit and text.
Objectives of tax compliance
For a company, the major objectives of tax compliance are:
Monitor taxation laws and interpret the effects of changes in rules and regulation for the business.
Implement company-wide practice of following tax compliance procedures.
Document and maintain records of business transactions for tax estimation purpose.
File tax returns and pay taxes within the stipulated time limits for avoiding legal repercussions.
Assess and improve tax compliance practices through regular internal audits.
Tax compliance for businesses is crucial for the below reasons:
Legal necessity:
It is legally obligatory for any business to comply with the tax laws as per the jurisdiction in which the business is operational. Intentional or unintentional, any failure to abide by the applicable tax laws is tantamount to a breach of law. It may attract legal ramifications, like penalties, fines, and, in certain cases, imprisonment.
Managing company reputation:
Information on legal proceedings against a company for tax avoidance can tarnish its business reputation. This can cause a serious deficit of trust among investors, vendors and customers. Lack of investors’ trust may dry up the flow of fresh capital into the company.
Avoiding disruptions to business operations:
Legal ramifications for any non-compliance of tax laws can increase the cost of doing business. The tax authority may seize business assets and block the company’s bank accounts. The cost of fighting complex tax litigations in courts can be prohibitively high. It can disrupt the regular business operations of small companies. So, tax compliance always leads to cost savings for businesses.
Corporate Social Responsibility:
Every company is responsible for making contributions to the societal goals of the region it is serving. Voluntary tax compliance portrays a company’s commitment to its corporate social responsibilities as the government uses tax revenue to fund developmental programmes.
Business growth and expansion:
An established practice of voluntary tax compliance may help a company build a reliable tax forecasting mechanism and minimise being overly concerned about tax implications. Ultimately, it facilitates business growth and smooth expansion into new territories.
What is direct tax compliance?
Taxes that an entity must pay directly to the respective governments are categorised as direct taxes. The liability of paying such taxes cannot be shifted to any other entity. These are progressive taxes, which means the amount of tax increases as the taxable income goes up.
Common examples of direct taxes in India are:
Income taxes on individuals and corporates.
Capital gain tax.
Security transaction tax.
Dividend distribution tax.
Gift tax.
Wealth tax.
Each of these taxes is applied and levied based on the respective tax legislations. Direct tax compliance means:
1. Following applicable direct tax laws by their texts and spirits.
2. Voluntary disclosure of taxable income and activities.
3. Payment of legitimate tax within the stipulated time as per the laws.
What are the tax compliance procedures?
Companies should not practise voluntary tax compliance on an ad hoc basis; it causes more problems than it can solve. Tax laws are constantly evolving with changes in regulations and legislation. A lack of standard procedures in tax compliance complicates monitoring, interpreting, and adhering tax laws.
Actual steps of voluntary tax compliance may vary depending on the business and the industry. However, we can outline the standard tax compliance procedures. They are:
1. Monitor, identify and interpret applicable tax laws and regulation - Tax legislations and regulations are changing. It is essential for businesses to stay updated on the latest tax laws and their implications. It’s a full-time job and requires the support of expert minds.
2. Document and maintain financial records for taxation - Every transaction in business can have tax implications. So, it’s important to document business transactions and maintain those records judiciously. This is an integral part of the tax compliance procedure.
3. Calculate the tax liability accurately and file necessary tax returns - Based on your interpretation of existing tax laws, it is now time to calculate taxes you owe to the government. File tax returns and make the payment within the time limits.
4. Conduct internal tax audits for identifying gap areas in tax compliance - Internal examination of tax accounting and returns is important for voluntarily maintaining tax compliance. It helps businesses to find out gap areas in the above-mentioned steps of tax compliance procedure. It is also essential to implement suggestions made in tax audit reports.
5. Reply to tax notices and orders - Tax notices and orders are ways to maintain communications between the tax authority and taxpayers. Failure to reply to tax notices within a stipulated timeline may attract legal complications.
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