Making March Meaningful – Tax caution before 31^st March Ends

 

March is the best time for the taxpayers to revisit the tax planning & caution list. It’s crucial not only for the person in business but for other categories of the taxpayers as well. Tax Laws keep changing and so various areas which need focus also differ every year. Due planning and consideration can surely help in not only reducing the tax impact but also in timely compliance. This is the most appropriate time for the businesses to review its yearly financial activities so as to optimize the tax calculation favorably. Planning for 31^st March well in advance is always beneficial in deciding the tax liability. Let us revisit our annual feature of Making March Meaningful with the latest changes proposed in Union Budget -23.

 

1. Capital Gain Exemption vs. Budget 2023:
   Union Budget- 2023 has proposed to cap the capital gain exemption [under Sections 54 and 54F] so as to restrict the cost of new house property to Rs. 10 Cr only. Taxpayers selling or already entered into agreement to sell the high value property and wish to claim capital gain exemption may explore the possibility of transferring it before 31^stMarch 2023 ends, as the new provision will be operative from 01.04.2023.

 

2. Life Insurance Policies with aggregate premium exceeding Rs. 5 Lakh:
   Exempt income status to life insurance policies with aggregate premium exceeding Rs. 5 Lakh is proposed to be removed by Union Budget 2023. As a result, only income from policies with aggregate premiums of up to Rs. 5 lakh will be exempt from tax. Since the new provision will be operative on all the policies issued on or after 01.04.2023, policies issued till 31.03.2023 will continue to enjoy the exempt income status. Taxpayers planning to buy high value insurance policies may explore the possibility before 31.03.2023.

3. Plan for payment of advance Tax including surcharge:
   Taxpayers have to pay the tax in advance in four installments i.e., on or before 15th June (15%), 15^thSept (45%), 15^th Dec (75%) & 15^th March (100%). Though minor variation is allowed, still taxpayers have to ensure the payment of tax by 15^th March itself. Under the present scenario, the interest charged by the income tax department is very high as compared to alternative cost of funds. Taxpayers may estimate the tax liability and may compensate for the shortfall in the payment of tax in the last installment of advance tax which is due on 15/03/2021. It may be noted that the rate of surcharge for individual/ HUF has considerably increased as compared to preceding years i.e., it is 10% for income between Rs. 50 Lakh to Rs. 1 Cr, 15% for income between Rs. 1 Cr to Rs. 2 Cr, 25% of tax if income is between Rs. 2 Cr to 5 Cr & 37.50% of tax if income exceeds Rs. 5 Cr. Further, in case the taxpayers have failed to estimate the income or under-estimated the income, taxpayers are advised to compensate it by paying the same before 31^st March so as to avoid the levy of interest u/s 234B.

4. Decision to Purchase or defer the purchase of Fixed Assets:
   Taxpayers may review the profitability of their business for the current financial year and may either plan to prepone or postpone the decision of purchasing the fixed assets, car, machinery etc & resultant deprecation claim. Similarly, in case of newly set up units, the assessee can decide the date of commencement of commercial production as the deduction towards depreciation is mandatory after the assets are put to use (it is not optional but mandatory).

5. Check Annual Information Statement (AIS)/ Form No. 26AS:
   Income tax department is sharing various information received by it from various sources. Every Taxpayer should download & check AIS to verify the significant financial transactions as well the information related to TDS by the deductor. If the amount of TDS is not getting reflected in AIS, taxpayers must do the follow up with the deductor. Similarly, if any entry is found in the AIS which doesn’t belong to the assessee then also efforts need to be taken for its removal from 26AS.

6. Cleanup Your Loan Accounts:
   One issue which is often a matter of unnecessary addition, explanation & litigation during the course of income tax proceeding is unwanted debit and credit balances in the books of accounts. It is always advisable to keep the year end balances of loans, creditors, debtors etc. at a lower level as various compliances emerge due to its pendency in the financial statement as on 31^stMarch. If the amount is not payable or receivable, then it is advisable to square off the same so as to avoid unwanted addition or disallowance during the course of assessment proceeding. Review of the books of accounts is all the more relevant nowadays as there are instances where income may be liable for a tax @ 78% or the penalty amount could exceed the amount of tax. There are instances where the entries of purchase return, sales return, cash payment done but bills not recorded, etc are missing which get noticed while scrutinizing the books afterwards.

7. Minimizing the taxable income by booking loss:
   – Let us consider a case of a taxpayer who has earned Long Term Capital Gain (LTCG) on sale of some of his shares which is taxable as income u/s 112A. It often happens that the taxpayer sells only those shares which are profitable and don’t sell the shares where taxpayers may incur loss. In such cases, taxpayers can also book a loss by selling some of the loss making shares. As a result, the taxpayer can reduce the amount of taxable profit and will be able to pay the tax on a real income basis and not just on realized gain basis. Shares sold at a loss can be purchased by such a taxpayer on the next day if they still want to hold it on a long term basis. The transactions can be planned in such a way that the LTCG amount doesn’t exceed Rs. 1 Lakh. LTCG from shares to the tune of Rs. 1 Lakh don’t have any tax impact. Same can be done in respect of business profit wherein outdated inventory, non-recoverable money from debtors i.e., bad debts, can be given due effect

8. Planning for Expenses & Income:
   There are various incomes or expenditures which can be preponed or postponed legally. Review of the financial statements before 31^stMarch can enable taxpayers to plan for its tax impact. Taxpayers can plan for it keeping in view the individual requirements. This is not only possible in the cash system of accounting but also possible in mercantile systems of accounting.

9. Few other activities for March:
   There are various other decision which the taxpayers must take before 31^st March like physical inventory position, re-checking the compliances with the TDS provision on expenses incurred during the year, ensuring that the benefit of carry forward of loss is not lost due to completion of the period of 4 years or 8 years by suitably booking the profit, reviewing the estimated financial position from bank perspective as the rating or interest rate would depend upon the financial ratio as on 31^st March, Reconciliation of the GST returns as adjustment in the same year is advisable as it ensures better transparency and control, Deciding whether to continue with the regular scheme or composition scheme in GST, selling or deferring the decision to sale the capital assets, Planning for the distribution of the dividend of the closely held companies,

Conclusion:
Though around 3 to 6 months’ time is available with the taxpayers after March for filing income tax return, it is advisable to start the process of return filing earlier, as too much information is sought in the ITR & compiling the same may be time consuming. Further, the past experience has proved that the Government is not very flexible in extending the due date of filing income tax returns. March is the best time to compile & keep the data ready for subsequent return filing.  Review on the points referred above would help taxpayers in earlier finalization & filing of income tax returns. The benefit of efficient tax planning at March end may help taxpayers not only in saving tax but also in filing Income Tax Returns timely much before the due date. Needless to say, last moment finalization and filing has its own cost & consequences. Taxpayers can prepare a checklist & activity chart for timely return filing.