Tax Filing Essentials: Implications and Penalties of Delayed Income Tax Returns

If you are not aware yet, you need to pay appropriate taxes to the government if you earn over a certain income amount in a year. There are various tax slabs based on income levels that you must follow while paying your returns to the government. Unfortunately, many companies and individuals get overwhelmed with the tax filing process and often fail to file their returns before the deadline. Tax returns, known as ITRs, are essential to tax compliance for companies and individuals.

Why are tax filings necessary?

You might be wrong if you think tax returns are just about informing your income to the government. Here are some of the top benefits of filing your return on time and under the right taxable bracket.:

• Ensures all the compliances are fulfilled
• Better chances of getting loans from banks and financial institutions
• Claim tax refunds
• Am effective income proof.
• Faster visa processing and approval
• Carry forward losses.
• Avoid penalties and interest on the tax liability.

For people who don't know what an income tax return is, it is a declaration that informs the government about your income. Based on your income levels, you fall under a certain taxable bracket that determines how much tax you need to pay. If you fail to file your ITR to the government, you will face various penalties as well as it can be considered tax evasion. That is why it is essential for individuals and firms to file ITRs on time and appropriately. If you are unaware of how not paying your ITR can affect you, here are five consequences of Late Filing returns and the possible penalties and fines associated with it.

1. Penalties

One of the major and direct consequences of not filing your ITR is its penalties. It is a 3-tier fee payment system which is used to regularize the failure of income tax payments within the due date. If the firm or individual files the returns beyond the due date, they must pay the penalty of ₹5,000. If the taxpayer's income is below five lacs, the penalty fee is limited to ₹1,000. Therefore, filing your ITR before the due date is advised to avoid penalties.

2. ​Interest implications on the tax amount

Companies often face a lot of damage when they fail to file their taxes in time. If a company fails to file returns, they must pay 1% interest on their monthly tax amount until they file their ITRs. The company must pay the interest after reducing the tax deductions at the source, advance tax, tax collected at the source, and any other tax credits available under the tax law. The 1% interest may not sound like a big surplus, but company tax amounts are massive and paying 1% interest on that amount every year can incur substantial financial losses for a company.

3. No Carryforward of losses.

Profits and losses are part of business, but there has to be adequate accounting of losses so that the business can reduce the impact of losses. There are provisions in ITR filing to reduce losses, which carries forward losses. A tax loss carryforward allows the taxpayer to shift tax losses to the next year to offset the profits. A business or individual can claim a tax loss carryforward to reduce further tax payments.

If the taxpaying business or individual fails to file the ITR within the due date, they cannot carry forward the tax losses under the capital gainer, the profits and gains of the business or profession head. So, it's best to file the ITR on time, so you can carry forward the tax losses and offset its impact.

4. Delay in tax refunds

Individuals and companies often receive tax refunds on their tax payments. The tax refund is an amount reimbursed to the taxpayers, which is an excess amount they pay to the government. Though the amount received in tax refunds may feel like free money or a bonus from the government, it is the extra money you pay to the government that it returns to you. You can also call it an interest-free loan to the government given by you.

Once you sign and file the returns, the Income Tax Department's central processing center processes and verifies them. Only when that verification is done the taxpayer comes to know about their tax liability or refund. Failure to file the ITR on time will further delay your tax refunds and other processes. It will delay your tax refund receipt. To avoid that, it's best to avoid any delay in the return filing and ensure you file your return as per the taxable bracket on time.

5. Deemed as Tax Evasion

According to The State of Tax Justice 2020, India suffers losses of $10.3 billion annually due to tax evasion from MNCs and private taxpayers. The individuals and firms who indulge in tax evasion face severe consequences from the government. If a company or individual fails to file their ITR, it can be considered tax evasion. The tax authorities can levy penalties under 270A for under-reporting income. Based on the amount of tax evasion, they can also prosecute under section 276CC, which can include rigorous imprisonment for a minimum of 3 months to 2 years with a fine. Companies and individuals must file their ITRs on time to avoid the penalties that come with tax evasion.

The tax paid by the taxpayers serves as financing for public development work, public health, education and infrastructure development. Therefore, companies that file their return late or don't file at all often face rigorous punishments from the government in terms of penalties, cancellation of benefits and imprisonment. Hence every company and individual must file their returns regularly.

ITR returns and tax compliances can be complicated to understand and process for companies with limited resources. Mistakes or inconsistencies in doing so can cause a lot of financial and reputation damage to a company. You can avoid that by taking the right advice from professionals. Talk with Teamnest's Compliance and Filing Expert @ +91 913-786-6322 or email at sales@teamnest.com.