Firms defer advance tax payments

Cash-starved Indian companies have begun to defer their advance tax liabilities in order to tide over the liquidity crisis in the financial markets.

While they are required to make advance tax payments in four instalments based on their profit estimate for the year, a growing number of companies are now choosing to pay only at the end of the year.

Companies need to pay 12 per cent annual interest on these deferred payments, which they don't mind because the prime lending rate of most banks is between 13 per cent and 16 per cent. Thus, they end up saving at least 1-4 per cent in annual interest costs.

Self-assessment tax, which shows the deferred advance tax liabilities, paid by companies stood at Rs 13,527 crore (Rs 135.27 billion) during April-October 2008-09, up 86 per cent from Rs 7,253 crore (Rs 72.53 billion) in the same 7-month period of the previous financial year.

Personal self-assessment tax paid by individuals during the same period went up 45 per cent to Rs 8,947 crore (Rs 89.47 billion).

A chartered accountant told Business Standard that mid-cap companies were more prone to this kind of a practice.

Such deferments have come to the notice of the Central Board of Direct Taxes (CBDT), which plans to clamp down on firms which have sharply increased their self-assessment tax.

"We are looking at provisions made for advance taxes and the taxes ultimately paid. Wherever provisions are much lower, we are asking the company to pay more," said CBDT Member (revenue) Saroj Bala. The CBDT may take legal action wherever necessary to ensure that companies do not carry forward advance tax payments.

Zonal income tax offices have been instructed to monitor advance tax payments of top 100 cases in each region as well as their quarterly results to look for such deferments.

According to Income Tax rules, companies pay advance tax in four instalments depending on their profit projection. Accordingly, they pay 15 per cent by June 15, 45 per cent by September 15, 75 per cent by December 15 and 100 per cent by March 15.

Individuals pay 30 per cent by September 15 and the remaining amount in two instalments on December 15 and March 15. If they do not pay taxes in proportion to their annual tax liability, they have to pay it with interest.