Payment of Tax, Meaning, Importance, Types and Method

The payment of tax is a fundamental aspect of financial compliance, making it crucial for aspiring Chartered Accountants (CAs) to master this process. Understanding payment of tax not only ensures timely compliance but also helps businesses avoid penalties, legal issues, and financial discrepancies.

What is Payment of Tax?

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Why Is Timely Payment of Tax Important?

Also Read: Business Laws: ⁠Indian Regulatory Framework

Types of Taxes and Their Payment Mechanisms

Income Tax

• Advance Tax : Paid in installments by taxpayers who expect their total tax liability to exceed ₹10,000 in a financial year. It must be paid in four installments—15% by June 15th, 45% by September 15th, 75% by December 15th, and 100% by March 15th—during the year.
• Self-Assessment Tax : Calculated after filing the income tax return (ITR) if there’s any balance tax payable after adjusting advance tax and TDS.
• Tax Deducted at Source (TDS) : Certain payments require tax deduction at source, where the tax is deducted directly by the payer before the payment is made to the payee.

Goods and Services Tax (GST)

• Regular Payment : GST registered businesses file their tax returns (e.g., GSTR-3B) monthly or quarterly, based on turnover, remitting tax after adjusting input tax credit (ITC).
• Reverse Charge Mechanism (RCM) : Certain services and supplies mandate the recipient to pay GST instead of the supplier, which is paid at the time of filing returns.

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)

• TDS Payment : Employers and other entities deduct TDS before payments and remit it monthly to the government by the 7th of each month.
• TCS Payment : Businesses collecting TCS on applicable goods and services are also required to remit it to the government, generally by the 7th of the following month.

Corporate Tax

• Advance Corporate Tax : Similar to advance tax for individuals, companies are required to pay corporate tax in advance installments throughout the financial year.
• Final Settlement : The final tax liability is calculated at the end of the fiscal year, adjusting for advance payments, TDS, and other credits.

Methods of Payment of Tax in India

Online Payment via Tax Portals

• Income Tax Payment : Log in to the e-filing portal, select “e-Pay Tax,” and follow the prompts. Payments are usually made through net banking, credit cards, or UPI.
• GST Payment : Access the GST portal, select “Create Challan” under “Payment” options, and pay via internet banking or NEFT/RTGS.

Payment through Banks

Payment via NEFT/RTGS

Steps in Calculating Tax Liability and Filing Payment

Steps to Calculate Income Tax Liability

1. Determine Gross Income : Aggregate income from all sources, including salary, business income, capital gains, and other sources.
2. Apply Exemptions and Deductions : Deduct exemptions like HRA, and deductions under Section 80C, 80D, etc.
3. Compute Taxable Income : Arrive at taxable income by subtracting deductions from gross income.
4. Apply Tax Slabs : Calculate tax based on applicable slab rates for the individual or entity.
5. Calculate Advance Tax : If required, divide the liability based on advance tax due dates.

Calculating GST Liability

1. Calculate Total Sales : Determine total sales for the period and the applicable GST rate.
2. Determine Input Tax Credit (ITC) : Deduct eligible input tax credit on purchases and expenses.
3. Compute Net GST : The balance after adjusting ITC is the net GST payable.
4. Pay via Challan : Generate a challan on the GST portal and remit the tax online.

Filing the Payment and Generating Challans

• Generate Challan : Taxpayers need to create a challan for the specific tax type on the relevant portal.
• Make Payment : Follow payment prompts for net banking, UPI, or credit card. Ensure accurate entry of details, as mismatches can cause issues in tax reconciliation.
• Save Acknowledgment : After payment, save the payment receipt and acknowledgment for reference in future assessments.

Challenges in Payment of Tax