|For better tax optimization, Taxpayers need to adopt the pre-mortem approach to tax rather than postmortem approach. Due planning and consideration can surely help in not only reducing the tax impact but also in timely compliance. March is a very important and crucial month for every taxpayer. It’s the end of the financial year, time to close the books of accounts & the deadline for most of the tax related activities. Planning for 31st March well in advance is always beneficial in deciding the tax liability. It’s time to revisit the regular article for making March Meaningful in view of the latest changes since last March-20. Let us make an annual review of some of the areas which one must review before March ends:
1.Optional Tax Regime & Investment in tax saving Investments:
Finance Act- 2020 has introduced a dual tax regime by providing a choice to the taxpayer to either opt for a new regime of concessional tax rate without any deduction & exemptions or continue with the old tax regime of higher tax rate albeit with deductions & exemptions. It has given freedom & flexibility to the taxpayers to make a suitable choice. If opting for the old tax regime, every taxpayer must ensure enough investment in tax saving instruments before 31st March. There are various investments which are eligible for deduction under the Income Tax Act. For example, Individuals & HUFs are eligible for deduction u/s 80C up to Rs. 1.50 Lakh for LIC/PPF/NSC etc, an additional deduction of Rs. 50,000/- u/s 80 CCD(1B) for investments in National Pension Scheme (NPS), U/s 80D towards Medi-claim policy payment up to a maximum of Rs. 50,000/-. Further, donation is also eligible for deduction u/s 35AC or u/s 80G.
2.Planning for Expenses & Income:
There are various incomes or expenditures which can be preponed or postponed legally. Review of the financial statements before 31st March 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.
3.Plan for payment of advance Tax including surcharge:
Cost of interest charged by the income tax department is relatively very high as compared to the normal cost of borrowing now. Taxpayers have to pay the tax in advance in four installments i.e., on or before 15th June (15%), 15th Sept (45%), 15th Dec (75%) &15th March (100%). Though minor variation is allowed, still taxpayers have to ensure the payment of tax by 15th March itself. 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 31st March so as to avoid the levy of interest u/s 234B & 234C. Taxpayers may estimate the tax liability and may compensate 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 is 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.
4.Take a Physical count of the Stock & Inventory:
It is always advisable for the businessmen to take the physical measurement of the inventory as on 31st March. It’s not only relevant from an income tax point of view but also from the prudent businessmen perspective. It can help the taxpayer in ascertaining the real loss or shortage in the inventory and can also be relevant for future inspection & record purposes. Even though the taxpayer may be maintaining the quantitative details in the books, it is still worth it to take an actual count on 31st March. It is preferable to add two columns in the inventory sheet i.e., (a) purchase cost & (b) realizable value.
5.Decision to Purchase or defer the purchase of Fixed Assets:
Very often, taxpayer purchases car, laptop, computer, etc enables in the month of March so as to claim depreciation without realizing the fact that profitability/financial statements don’t need any further expenses/depreciation. This would be all the more relevant in the current financial year 2020-21 wherein the business was not fully operational throughout the year due to Covid. It is not always profitable to purchase the assets before March 31st. If there is no enough profit or for any other reason whatsoever, the taxpayer can plan to defer the decision to purchase the new assets to 1st April.
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).
6.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 112. 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.
Likewise, there may be taxpayers who have earned the LTCG from sale of properties and have invested it in the Shares/Mutual Funds. The LTCG arising from sale of property can be very well adjusted against the loss arising from shares/mutual funds. Taxpayers can plan accordingly.
Similarly, the taxpayer has a tendency not to book the loss arising from the sale of outdated inventory, non-recoverable money from debtors i.e., bad debts, etc. The taxpayer must review the books of accounts before 31st March and if find that the amount is not recoverable then the amount can be reduced from taxable profit by writing it off as bad debts.
7. Account For Unabsorbed Capital Losses:
There is a limitation on the number of years a loss can be carried forward for set off against current year income. If taxpayers have brought forward loss then the taxpayer can plan for accrual of income in such a way that no part of the brought forward loss is wasted without adjustments against current year income.
8.Cleanup Your Loan Accounts:
It is always advisable to keep the year end balances of loans, creditors, debtors etc. at a lower level as various compliance emerges due to its pendency. If the amount is not payable or receivable, then it is advisable to write it off 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 now a day as there are instances where income may be liable for a tax rate of 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. Every penny count & sincere review of the ledger account does often result in detection & recovery of the old amount as well. It is always advisable to obtain confirmation of account in respect of completed transactions. Every taxpayer himself must review the accounts as the slight mistake or unintentional error of the accountant or staff could cost the taxpayers.
9.Review the financial statements from the bank perspective:
The rate of interest depends upon the financial ratios of the borrower. Businessmen must review & plan for the financial ratio like current ratio, Debt Equity ratio, etc before closing of the financial year as it can enable them to bargain better interest rates. Checking of the instances of diversion of funds, DP limit calculations can help the borrower in arriving at an appropriate decision.
10.Income Tax Return filing:
Though the due date of filing income tax return is already over, those taxpayers who have not filed the return for the FY 2019-20 can still file the return by 31st March, although with late fee. This is the last opportunity to file the return for the FY 2019-20. After 31st March 2021, return for the FY 2019-20 cannot be filed voluntarily. It may be noted that the partnership firm, companies are required to file the return of income even if there is no business carried out by them. Similarly, there are occasions where returns filed by the taxpayers are invalidated. In such cases also, the taxpayer must file the return before 31st March as it is the last opportunity of filing.
11. Check Form No. 26AS
Every Taxpayer should download & check Form No. 26AS to verify if all TDS done by the deductor is duly reflected therein. If the amount is not there in 26AS, taxpayers must do the follow up with the deductor. Similarly, if any entry is found in the 26AS which does not belong to the assessee then also efforts need to be taken for its removal from 26AS.
12. Complying with the TDS provisions:
It is advisable to review all the expenses and check whether TDS is being done and paid to the Government Treasury. It may be noted that non deduction or non-payment results in disallowance of 30% of the expenses. It may be noted that the payment of interest on bank loans is not liable for TDS but interest payments to NBFC like loans from Religare, Cholamandalam, Reliance Capital, etc are liable for TDS. Ensure its compliance as late deduction is even better than non-deduction.
13.Reconciliation of e GST Returns:
It is advisable to review the GST returns with the books of accounts again before 31st March. One must examine if all the Input Tax Credit is duly availed, all the debits, debit notes, credit notes, rate difference, discount, etc are recorded & reconciled. More particularly, taxpayers should reconcile their Input Tax Credit (ITC) as appearing in GSTR 2-A with books of accounts vis a vis GSTR 3B filed. Further, if ITC claims are not getting reflected in GSTR -2A then taxpayers need to get it done by taking up the issue with the supplier. Earlier follow-up ensures timely compliances. Adjustment in the same year is advisable as it ensures better transparency and control.
Small taxpayers with turnover not exceeding Rs. 1.50 Lakh may do the calculations to check if it is advisable to Composition scheme (Limit is Rs. 1.50 Cr.) from FY 2021-22.
15.Sale of Capital Assets:
Taxpayers planning to sell the assets in the month of March may plan to defer the sale deed to any day after 1st April. It enables taxpayers to have higher indexation benefit but also offers taxpayers enough liberty for its investment subsequently for claiming exemption & saving tax.
16.Dividend Distribution from closely held companies:
As of now, the company is liable for Dividend Distribution Tax (DDT) on dividend distribution by it but the recipient is not liable to pay tax if the dividend amount doesn’t exceed Rs. 10 Lakh. Pursuant to amendment by Finance Act-2020, DDT is abolished and now the recipient will be liable for taxation of dividend income without any threshold. Depending upon case to case basis, the closely held companies may plan for dividend distribution before 31at March itself.
17.Reconcile Bank Accounts with books of accounts:
Reconciliation of bank accounts with the books of accounts should be a regular feature. However, it must be reviewed more deeply in the month of March. Further, the interest charged by the bank, charges levied, insurance premium payment, may also hint at some revenue leakages.
18. Last date to Revise the Income Tax Return of FY 2019-20:
If a taxpayer notices any mistakes or errors in the return filed for the FY 2019-20 then it may be noted that 31st March 2021 is the last date to revise such return. Taxpayers may again have a look at the 26AS of FY 2019-20 to check if any new TDS credit is getting reflected. Often, it is seen that the deductor revises their TDS return after filing of income tax return by the deductee. By filing revised returns, taxpayers may claim such excess TDS amount.
19. Prepare Personal Balance-sheet::
It is advisable to prepare the personal balance sheet in addition to the balance sheet of the business. Last minute preparation makes it impossible to compile. With planning before 31st March, taxpayers can very well think of preparing the personal balance sheet as well.
20.Linking PAN with Aadhar:
The deadline to link Aadhar with PAN is notified as 31st March 2020. The linking is mandated under section 139AA of the Income Tax Act – 1961. Non linking will not only make PAN inactive but will also be liable for penalty of Rs. 10,000/-.
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 Government is not very flexible in extending the due date of filing income tax return.
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.
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