As a CA firm, when we start auditing in any business entity, we observe the treatment of many expenses that are disallowed as per the income tax act,1961. These expenses become disallowed not because of malafide intention of such an entity but only because of wrong treatment done by them. In this article, we will discuss all those points in which business entities make common mistakes and their correct treatment. Also, we will provide some tips for saving tax. Following are the point which we will discuss in details:
TDS on the provision of Expenses
Prior period Expenses
Personal Expenses
Taking of ITC on blocked credit
Limit of deduction under Ch-VIA
Timely filing of returns
Selling old equipment
Transferring your income to your spouse and children
Home Office Expenditure-Share trading
Invest in good software- TDS returns, GST return
Prior period Expenses
Business entities incurred many expenses which are related to that month but its amount is finalized next month. It’s common for all businesses but the problem arises in march month because in India we follow the Financial year which is from 1st April to 31st March.
Now, If we have incurred the expense in march month then we have to enter the estimated amount of expense in books as a provision.
If companies forgot to make the provision of the expenses related to march and record these expenses in the next year, when the number of such expenses becomes finalized, then such expenses shall be disallowed in that year as prior period expenses.
Summarise: Always make the provision for those expenses whose amount shall be fixed in the next year.
TDS on Provision of Expenses
In the above point, if the business entity has correctly made the provision of expenses then there is one more thing that is connected with the provision of expenses i.e., TDS on the provision of expenses.
As normally, TDS has to be deducted on an accrual basis. Now, during the audit, we have noticed that most of the business entities do not make the TDS liabilities on those expenses, and due to which 30% of those expenses are not allowed as per the income tax act.
Since, as per Section 40a(i)(a) of the Income-tax Act, if TDS has not been deducted on any expenses up to the end of the financial year, then 30% of such expenses are not allowed and they will be allowed in the year in which TDS deducted and paid to the government.
Summarise: Always journalize the TDS liability on the expense which has been created as a provision.
Personal Expenses
It is very common and almost every business owner knows that personal expenses are not allowed in the income tax act, but still, we noticed that almost every entity records some personal expenses to some extent to save tax.
It is very important to note that to not record the personal expenditure in business books
Taking ITC on blocked credit
Although these are not exactly related to saving tax, it is still the most common error that we notice in the audit.
As per section 16 of CGST Act, 2017, there are some conditions that are required to be fulfilled to avail the ITC on GST, and under section 17 of CGST Act, 2017, there are some transactions defined in which credit of GST is blocked.
It is necessary for the business entities to have a proper understanding of these sections.
If you want to understand it in detail, then you can message us by WhatsApp or Email.
Taking of deductions under Ch-VI A
For taking the deduction, many business entities invest in many schemes but they forgot that there are some limits defined under the income tax act, within which they will get the deduction.
For Example, An individual invests Rs.5 Lakhs under Section 80C, however, as per income tax, the maximum amount of deduction under section 80C is Rs.1.5 Lakhs only.
Summary: Before making the investment in any tax saving scheme, it is always advisable to discuss it with any practicing Chartered Accountant for better tax planning.
Timely filing of Return
There are many laws that have to be followed by different business entities. However, we noticed that many business entities fail to pay their statutory liabilities on time and due to which they have to bear interest, late fees, and penalties. Hence, it is advisable that every business entity should maintain a register in which it should provide the details of statutory liabilities and their due dates of payment. The most common liabilities are
ROC Payment (Which includes AOC-4, MGT-7, MGT-14, DIR-12, etc)
GST Payment (Which includes GSTR-1, GSTR-3b, GSTR-9, etc)
TDS return (which includes 26Q and 24Q)
PF and ESI returns
Selling old equipment
When any plant & machinery or any other office equipment is not working then most business owners try to sell them as scrap. It might look like a good idea because it helps them get something in return from such equipment, but it might not be from a tax standpoint. Before selling any of your property, it is necessary to check whether it is better to sell it or abandon it. The latter is considered an ordinary loss and, unlike a capital loss, might be fully deductible.
Transferring your income to your spouse and children
Many business owners use different methods to save their taxes and one of the methods is to transfer their income to their spouse or minor child. If any business owner transfers its income to its spouse or minor child or spouse is receiving any income as salary or commission in which the business owner has a substantial interest then such income shall be clubbed with the total income of such business owner. Also, such salary or commission payment shall not be allowed as an expense under section 40A(2)(b) of the income tax Act, 1961 as excessive payment to related parties.
Home Office Expenditure
Due to the COVID19 Situation, many business owners have started their business at work from home. For them, all their expenses are incurring from home. So, they have to consider their expenses very carefully. Let me explain this point with an example:
As per the income tax act, Business of share trading is a normal business and all business expenses are allowed as normal expenses. A person who is doing the business of share trading from home can claim the expenses incurred like electricity payment or Internet payment to some extent.
Investment in good software
In the market, there is much software that is available for business transactions but business entities have to carefully choose their software because every business has its own requirements. Business owners should use that software that will cover all requirements. Good software should provide the following benefits:
Giving the option to prepare TDS returns or GST returns etc.
Provide the debtor and creditors aging report
Different ratios for better business analysis etc.
We hope that these points will help you to save your tax and do the business in a better way. If you have any doubt then you can send us your queries. We will be happy to give you some assistance.