Budget 2016 has significantly increased the income tax compliance burden on individual tax payers by making advance tax payable from June 15 instead of September 15 earlier. Now, individuals (except for exempted categories) will have to estimate their income for the full financial year as early as June 15, compute the income tax payable on that income and pay 15 per cent of that or else get ready to shell out interest on late payment at a stiff rate of 1 per cent simple interest per month.
The current advance tax payment schedule for a company is 15 per cent, 45 per cent, 75 per cent and 100 per cent (cumulative) of income tax payable on the full financial year's income to be paid by 15th June, 15th September, 15th December and 15th March, respectively. Till now, individuals liable to pay advance tax, had to pay 30 per cent, 60 per cent and 100 per cent (cumulatively) of tax payable on the full fiscal's income by 15 September, 15 December and 15 March, respectively. An individual with a tax liability of Rs 10,000 or more in a financial year has to pay advance tax in that year as per current income tax law. The budget proposes to do away with the separate advance tax payment schedule for individuals and instead, impose the same schedule as that for companies on the individuals as well.
Making advance tax payable by June 15 instead of Sept 15 earlier will hike compliance burden on individuals. Agree?
— ET Wealth (@ET_Wealth) March 10, 2016
"Aligning advance tax schedule for individual tax payers is an accelerated revenue collection measure and will be an administrative burden for tax payers. There will be another compliance date to remember and missing it will mean having to pay interest. So instead of 3 there will be 4 advance tax instalments with the first date being June 15 followed by September 15, December 15 and March 15 as dates by which advance tax should be paid", says Sonu Iyer, Partner & National Leader - People Advisory Services, EY.
Impact of proposed change
For taxpayers who calculate and pay advance tax based on estimated income, the adverse impact of this proposal would increase with increase in variation (quantum as well as degree) of actual income from estimated and vice versa. For tax payers, who are unable to take out time from their busy schedules (a substantial number fall in this category) to calculate and pay advance tax, the adverse impact would be in the form of a significant increase in interest payable on the deferment of advance tax payment.
In practice, even now a majority find it very tedious to calculate and pay advance tax and therefore a large number skip the first or the first two advance tax payment dates and pay only by the third. Therefore, advancing the payment schedule by one quarter will increase compliance burden for them.
"The general feeling is that it (the budget proposal) has increased the tax compliance burden for the smaller tax payers'', says Mr Sanjay Sood, a Delhi-based practising chartered accountant.
"The change in advance tax payment schedule for individuals as proposed in Budget 2016 will increase the compliance burden for them. Practically most people do not pay the first few instalments because they find it difficult to estimate their income for the full year which means that the interest payment on deferment of advance tax will increase for them. Individuals may also have to bear the unnecessary burden of additional professional fee if he has engaged a professional (chartered accountant) and he increases the fee due to extra compliance, " adds practising chartered accountant R K Malhotra of Rajinder Kumar Malhotra & Co.
There is a small concession though: As per the proposed amendment, even if an individual pays 12 per cent and 36 per cent of the total tax payable for the full fiscal by June 15 and Sept 15, instead of the full 15 per cent and 45 per cent, then he would not be liable to pay interest of 1 per cent on the shortfall in advance tax. However, the real problem in case of advance tax is the fact that a substantial number of people are simply unable to find the time to properly estimate their income for the full financial year multiple times.
Advance tax calculation
The advance tax required to be paid by a particular date is a percentage of the total tax that is expected to be payable for the full financial year. Therefore, in order to pay advance tax by a given date, an individual tax payer will have to: (1) Accurately estimate his expected income for the full year; (2) Calculate the tax that would be payable on this estimated income; (3) Then pay advance tax so that the specified percentage of the total tax payable is paid by the dates stipulated.
If the stipulated amount, say 15 per cent, is not paid by June 15, then the tax payer will have to pay a simple interest @ 1 per cent of shortfall in actual advance tax payable per month for every month that the advance tax has been delayed under Section 234C of the Income Tax Act.
Refer illustration below for how the change in advance tax payment schedule may impact a tax-payer.
Problems faced
Individuals, normally, do not have the kind of account keeping and computation resources that companies do. Therefore, this kind of calculation four times in a year is quite a bit of work. Whether an individual does this computation himself or takes the help of a chartered accountant/financial expert, the compliance cost in terms of time and money increases with the number of times it has to be done. In fact, most people prefer to pay the interest on late payment and pay the total amount in March in one go rather than pay advance tax instalments as prescribed.
The problem does not end here. If advance tax payer's estimate of income for the full year goes drastically wrong (i.e. actual income is much less than estimated), then he may end up having paid more tax than necessary and will have to claim a refund. He would have also suffered the notional loss of interest he would have earned on the excess advance tax paid. If he does not pay advance tax or pays less than the requisite amount, then he has to pay heavy interest for paying late. Either way, it is a tightrope walk which has been made even more difficult by Budget 2016.
Actual income may vary sharply from estimated income due to several reasons: (a) A person may lose his job after the third instalment is paid which would entail loss of salary for three months; (b) A person may not get any of the bonus normally paid along with salary at the end of the financial year which he may have included in estimated income; (c) Interest income may vary as interest rates would change whenever fixed deposits are renewed/ investment allocation is reworked; (d) Rental income may stop mid-way through the year if the tenant suddenly vacates and the property given on rent remains vacant due to some problem or the other e.g. renovation/ pipe leakage etc.
Alternatively, a person may find a much higher paying job mid-way through the year and also get a hefty bonus at the year-end thereby pushing the actual salary way above the original estimate. Although capital gains are not subject to advance tax, the other income of an individual can still vary a lot. Therefore, the task of accurate advance tax calculation becomes tedious and difficult for the common tax payer.
While salaried individuals can inform their employers about their 'other income' and get the advance tax paid via TDS, they will still have to compute the estimated income prior to the four advance tax instalment dates.
Advance tax is payable as per the new schedule by all individuals except certain exempted categories. These exempted categories are: Senior citizens who do not have income from business or profession; If an individual is eligible for and opts for presumptive taxation scheme, then he would be liable to pay tax as per that scheme and the four proposed advance tax payment dates would not apply to him/her.
The table below illustrates how the amendment proposed in Budget 2016 will impact the interest burden of an individual tax-payer.
We have assumed a tax-payer's estimated income on the first three advance tax payment dates and the actual income on the last advance tax payment date in FY 2016-17. We have calculated advance tax payable on each of the first three due dates (as per the new proposed schedule) using these estimated income levels and after that, have included the impact on the tax-payer's interest burden due to the proposed amendment of u/s 211 and Section 234C of the Income Tax Act, 1961 made under the Finance Bill, 2016. * This being the actual income of the F.Y.
Advance tax and interest payable in Rs: (where actual income turns out to be higher than estimated income)
As per existing tax laws
| Due Dates | Estimated Income level for whole year | Advance tax paid on estimated income | Advance tax payable on actual income | Shortfall in advance tax payment | Interest u/s 234C |
| By 15th June | 1200000 | 0 | 0 | 0 | 0 |
| By 15th Sept | 1500000 | 84975 | 131325 | 46350 | 1400 |
| By 15th Dec | 1700000 | 207030 | 262650 | 55620 | 1700 |
| By 15th Mar | *2000000 | 437750 | 437750 | 0 | 0 |
| TOTAL | 3100 |
As per newly proposed amendment
| Due Dates | Estimated Income level for whole year | Advance tax paid on estimated income | Advance tax payable on actual income | Shortfall in advance tax payment | Interest u/s 234C |
| By 15th June | 1200000 | 28580 | 65660 | 37080 | 1100 |
| By 15th Sept | 1500000 | 127460 | 196990 | 69530 | 2100 |
| By 15th Dec | 1700000 | 258790 | 328310 | 69520 | 2100 |
| By 15th Mar | 2000000 | 437750 | 437750 | 0 | 0 |
| TOTAL | 5300 |
The newly proposed amendment has increased the interest payable from Rs 3,100 to Rs 5,300 which means an increase of around 71 per cent in the interest burden for the tax-payer assuming his estimated income varies from actual as per illustration. The actual impact on interest payable by any individual will depend on how much his actual income varies from his estimates.
Thus, whether an individual tax payer complies with the proposed new schedule of advance tax payment or does not, either way the cost in terms of time or money is set to increase.