How To Avoid Penalties Under The Income Tax Act

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  • 06 Feb 2023

The taxes are crucial for the overall economic success and social welfare of the country.

Here are four reasons why income tax is so important for the government:

  • Redistribution: It plays a crucial role in the redistribution of wealth within the economy
  • Revenue: It provides funding for services required by citizens, such as healthcare, infrastructure, education, and housing
  • Accountability: It keeps the government accountable to its people. The government’s legitimacy can be determined by how it spends the taxes taken from the citizens
  • Repricing: It is used to either incentivize or discourage things/actions that are good or bad for the public. For example, high taxes on tobacco increases the prices of tobacco products and results in reduced consumption.

Defaulting in the payment of taxes is a punishable offence. If you make omissions or errors when reporting or paying taxes, you will face penalties. The assessing officer determines the amount to be levied as the penalty. However, this will not exceed the tax in arrears.

The income tax department can prosecute those suspected of tax evasion. A person can land in jail, or face hefty penalties, or even both.

Here is a list of penalties under the Income Tax Act in India.

Penalties For Late Filing Of Income Tax Return

  • The taxpayer has to file their tax return by 31 July of the assessment year. Section 139 (4) of the Income Tax Act states that a person can file their return within one year after the end of the assessment year. What happens if the taxpayer fails to pay taxes within the given period? They will have to cough up a penalty of Rs 5,000—if the return is filed after the due date of 31 July but before 31 December of the assessment year.
  • For all other cases, the taxpayer must pay a penalty of Rs 10,000.

Penalties For Under-reporting Of Income

  • There is a penalty of 50% of the tax payable when the income assessed exceeds the amount declared by the taxpayer. The same applies when the taxpayer does not file income tax returns even after it is above the tax exemption range.
  • Under-reporting of income due to wilful misreporting of income results in a penalty of 200% of the tax payable.

Related: Tax Planning Under MAT

Penalties For Undisclosed Income

  • It is imperative to disclose all forms of income as well as income sources. Failure to do so results in a penalty of 10% of the tax payable.
  • In some cases, the tax authorities conduct a search on the taxpayers’ premises and unearths undisclosed income. If the search began on or after 15 December 2016, the penalties are as follows:
    • If the taxpayer declares the previously undisclosed income during the search, pays the tax, and files a return, only a 30% penalty is chargeable
    • For all other cases, the taxpayer has to pay a penalty of 60%

Related: Filing Income Tax Returns - Common Mistakes

Penalties For Failure To Maintain Books Of Accounts And Other Documents

  • The usual penalty for failing to maintain books of accounts and other such documents is Rs 25,000.
  • If the taxpayer has entered into an international transaction, the penalty levied is 2% of the value of the transaction.

Related: What is Dividend Distribution Tax?

Penalties related to TDS/TCS

  • TDS stands for tax deducted at source. When the taxpayer fails to make a TDS deduction, they have to pay a penalty equal to the amount of tax that was not paid/deducted.
  • TCS stands for tax collected at source. When there is a failure to collect tax at source, the taxpayer has to pay a penalty equal to the amount of tax that was not collected.
  • If the taxpayer fails to provide TCS or TDS returns, they have to pay a penalty ranging from Rs.10,000 to Rs.1 lakh
  • There is a penalty of Rs.1 lakh if the taxpayer fails to provide information or provides erroneous information about TDS deduction related to non-residents.

Penalties Related To Audit And Audit Reports

  • The failure on the part of the taxpayer to get their accounts audited or to obtain an auditor’s report will result in a penalty. The penalty is either ½% of the total turnover/ sales/ gross receipts, or Rs 1.5 lakh, whichever is lesser.
  • If the taxpayer fails to provide an auditor’s report for a foreign transaction, they will have to pay a penalty of Rs 1 lakh.

Related: Tips for Start-up Taxation

Penalties For Using Modes Other Than Account Payee Cheque/ Draft/ ECS

  • One must take out a loan or deposit exceeding Rs 20,000 only via account payee draft/account payee cheque, or the Electronic Clearing Service (ECS). Failure to do so results in a penalty equal to the amount of the loan/deposit.
  • One should not receive an amount of Rs 2 lakh or more in aggregate from a person in a single day or transaction. It will result in a penalty equal to the received amount.
  • One should repay a loan or deposit exceeding Rs 20,000 only via account payee draft/account payee cheque or ECS. Otherwise, there will be a penalty equal to the amount of that loan/deposit.

Penalties For Failure To Furnish Statements/ Information

  • There is a penalty of Rs 50,000 if the taxpayer provides any inaccurate statement pertaining to a financial transaction
  • If the taxpayer fails to provide a statement of financial transaction or a reportable account, they have to pay a penalty of Rs 100 per day of failure. What happens if the taxpayer fails to provide the statement even after receiving a notice to report a specified transaction? In this case, the penalty is increased to Rs 500 per day of failure.
  • If an Indian concern fails to provide information or documentation related to an international transaction, there is a penalty of 2% of the transaction value or Rs 50000 in certain cases.
  • If an accountant, registered valuer, or merchant banker furnishes a report or certificate in which information is found to be incorrect, a penalty of Rs 10000 per report or information is chargeable.
  • Failure to provide information on the part of a person attending or carrying the business of another on whose premises the tax authorities are collecting information will attract a penalty of up to Rs 1,000.
  • Failure to provide a report on the part of a reporting entity obliged to provide country to country reports attracts the following penalties:
    • Less than or equal to 1 month – Rs 5,000 per day
    • Continuing default – Rs 50,000 per day from the beginning of service of the order
    • Submission of inaccurate information – Rs 5 lakh

Related: What is Luxury Tax in India?

The Bottom Line

Over the past few years, the government has come down hard on tax defaulters. So, it is of utmost importance to file your tax returns on time and with complete accuracy. Defaulting for any reason due to laziness or ignorance is not a viable excuse. In such cases, you will face the wrath of the tax authorities who may not look upon your case very kindly. It is better, therefore, to be cautious and punctual when it comes to filing your income tax returns.

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