What is Tax Compliance? Definition, Importance, Objectives, Types, Procedures

As the name suggests, Tax Compliance meaning complying to relevant tax laws and regulations as imposed by Government bodies. If businesses want to ensure smooth running of operations, barring any legal problems, complying with tax laws is mandatory. In this blog we’ll be stating everything you must know to stay on the right side of tax laws.

What is Tax Compliance?

Tax Compliance refers to how well businesses adhere to the applicable tax regulations as well as pay due taxes and file tax returns in a given period. In this context, it’s about businesses following and adhering to the tax rules and regulations relevant to their industry, imposed by the government.

What is the Importance of Tax Compliance?

Tax Compliance is important for businesses for many reasons. Some of the key reasons are-

1. Legal Obligation

All businesses must comply with tax laws that are relevant to them and falls within their jurisdiction in order to run their operations smoothly. Failure to abide by these laws may lead to legal issues like penalties, fines and in some cases imprisonment.

2. Maintain the Company Reputation

If a company isn’t abiding by the tax rules and regulations then there is a chance that they could face legal proceedings, tarnishing business reputation. And once there is a dent in your business reputation, your vendors, investors and customers start losing trust in your business.

3. Continuity of Business Operations

Not abiding by the tax laws and regulations that are relevant to the business causes noncompliance, leading to legal issues. Legal issues could be tax authorities seizing business assets, block company accounts etc, disrupting business operations. And everyone is aware how costly fighting tax obligations can get, so it’s best to avoid it altogether and run operations smoothly.

4. Corporate Social Responsibility

Contributing to societal betterment is the responsibility of all companies alike. Complying with tax regulations voluntarily showcases a company’s commitment to its corporate social responsibilities as these revenues are used to fund developmental programmes.

5. Expansion of Business

An established practice of voluntary tax compliance may help a company build a reliable tax forecasting mechanism and minimise being overly concerned about tax implications. Ultimately, it facilitates business growth and smooth expansion into new territories.

What are the Objectives of Tax Compliance?

Some of the main objectives of tax compliance are-

• Keep an eye on tax laws and figure out the effects of changes in rules and regulations relevant to your business
• Implementation of company-wide practice of following tax compliance procedures
• Document and keep records of all transactions made in your business for tax estimation purposes
• File tax returns and pay taxes within the given time period to avoid legal problems
• Conduct internal audits and improvise on tax compliance practices

What are the Types of Tax Compliances in India?

The first and foremost thing that you need to understand is why are there different types of tax compliance. India, being one of the most populated countries in the world, naturally has a lot of avenues that require money for their development. By mobilizing the significant amounts of taxes that come in from businesses, the government can finance these developmental programmes. So, the central and state government impose a certain amount of tax on businesses, which are then used for various economic developments. All companies must abide by these tax laws not just as a CSR contributor but also to avoid legal problems and keep up their brand reputation.

The major tax laws under the jurisdiction of the central government of India are-

• Income Tax Act
• Customs Act
• Central Goods and Services Tax Act
• Integrated Goods and Services Tax Act

The major taxes imposed by the state governments are as follows-

• Professional Tax Act
• Stamp Duty and Registration Fees Act
• Road Tax and Motor Vehicles Act
• Excise Duty on Alcohol

What is Direct and Indirect Tax Compliance?

Tax compliance is categorised into two types based on who they must be paid to, how and when they must be paid- Direct and Indirect Tax Compliance.

What is direct tax compliance?

Direct taxes are those taxes that must be paid directly to the respective governments. A different entity cannot take the liability of paying these taxes. Direct taxes are also progressive in nature, meaning that as you receive more taxable income, the amount of tax you must pay also goes up. Some of the common examples of direct taxes in India are- Income taxes, Wealth tax, gift tax, security transaction tax and more.

Direct tax compliance essentially means following of direct tax laws that are applicable to their business, show transparency about taxable income, paying the right amount of tax and filing of tax returns on time, audits and documentation.

What is indirect tax compliance?

Indirect taxes refer to those taxes that government levies, for example on consumption of goods and services. These taxes are not linked to personal taxable income or business profits. Unlike direct taxes, these are regressive in nature as it doesn’t depend on whether a business making more profits is paying or the one making lesser profits is paying. These taxes are the same for all. Some of the common indirect taxes in India are Goods and Services Taxes (GST), Services Tax, Excise Tax, Entertainment Tax.

Indirect tax compliance means when businesses must pay a certain tax that follows the tax legislation, declare their taxable activities, make tax payments and proceed with audits and documentation.

What are the Tax Compliance Procedures?

Tax laws are constantly evolving with changes in regulations. Steps in tax compliance vary depending on the business and industry. However, here are a few common steps involved in tax compliance procedures-

1. Monitor and stay updated

Tax laws and regulations are constantly changing. It’s important to stay updated on these changing laws and this requires the intervention of an expert.

2. Maintain proper financial records

Each and every business transaction must be recorded and documented as each transaction can have tax implications.

3. Calculate payable taxes

Calculation of the right taxes that is payable to the government, relevant to your business or industry is mandatory. This must be followed by filing tax returns within the stipulated time.

4. Conduction of tax audits

Your tax accounting and returns must be examined carefully. This can help you find out if there are discrepancies and correct them. It is also important to implement the suggestions made.

5. Respond to tax notices

In case you receive any tax notices from governing bodies, make sure to reply to them and maintain communication. Not replying to these may lead to legal implications.

What are the Examples of Tax Compliance?

Some of the examples of tax compliance for businesses includes filing quarterly payroll taxes and paying VAT or sales tax on earnings. Keeping accurate records of income and expenses also facilitates efficient, precise tax returns and allows businesses to deduct any permissible expenses.

Multinational organizations face additional complexity as they must comply with varying tax regulations in each country where they operate.

What are the Challenges in Indian Tax Compliance?

Some of the common challenges in Indian Tax Compliance are-

1. Complex tax Structure

The Indian tax system has multiple layers of taxation including Goods and Services Tax, Income Tax, Corporate Tax and various other local and state taxes

2. Regulatory changes

Our tax system and tax regulations are never the same and are constantly evolving with frequent updates and changes.

3. GST Compliance

GST compliance or filing of GST is a complex procedure that involves multiple monthly, quarterly, and annual filings, which can be cumbersome and prone to errors.

4. Tax Audits

Facing tax audits and scrutiny can be daunting, especially for businesses with complex financial transactions.

5. Tax Evasion and Fraud risks

Evasion of tax or other fraudulent activities lead to heavy fines, penalties, sometimes imprisonment. It leads to noncompliance.

Are you Looking for a Tax Compliance Partner?

Tax compliance is extremely crucial for businesses, failing which there could be serious implications. However, following the standard practices of tax compliance is a full-time responsibility. So, it is important to take help from expert professionals to establish and implement company-wide tax compliance procedures. Alp Consulting is a well-established compliance service provider with a proven track record. If you are looking for a tax compliance partner to help address and navigate through your compliance issues, then get in touch with us today and we’ll help you find the right solution.

Frequently Asked Questions

1. What is the meaning of tax compliance?

Tax compliance refers to how willingly a taxpayer adheres to tax rules and regulations in their country. This includes declaring their income, filing tax returns and paying taxes on time.

2. How do you manage tax compliance?

A business owner manages and ensures tax compliance by keeping accurate records of all transactions, reporting income and deductions accurately on their tax returns, and paying any owed taxes by the due dates.

3. What are the consequences of non-compliance with tax laws?

Some of the common consequences of not complying with tax laws are- Charge of interest, imposition of penalty, and filing of legal cases against non-taxpayers.

4. How does GST compliance work for businesses?

GST allows businesses to obtain GSTIN and file a single return, CMP 08, enjoying the benefit of a lower tax rate. For businesses with a turnover exceeding Rs. 1.5 Cr, registration as a regular taxpayer is required. Monthly GST Returns need to be filed to report sales data and fulfil tax liabilities.

5. What are the types of tax compliance?

There are two major types of tax compliances- Direct Tax Compliance: Ensuring that individuals and businesses accurately report their income and pay the appropriate amount of income tax. Indirect Tax Compliance: Adhering to tax laws related to corporate entities, including accurate reporting of profits and payment of corporate taxes.

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