 "Tax dept simplifies compounding offence process with lower penalties")
The Income Tax department on Thursday issued revised guidelines for a process that allows people to make amends for legal offences by paying a penalty and admitting their fault.
“In conformity with the Finance Minister’s Budget announcement on simplification and rationalisation of compounding procedure, CBDT (Central Board of Direct Taxes) has issued Revised Guidelines for Compounding of offences under the Income-tax Act, 1961(the 'Act') on 17.10.2024. The revised guidelines supersede all existing guidelines on the subject and would apply to pending as well as new applications, from the date of its issue,” said the department in a press statement.
“These changes are highly beneficial for businesses and individuals, as they eliminate the complexity of filing compounding applications and introduce more streamlined procedures,” said Harsh Bhuta, partner at Bhuta Shah & Co LLP law company.
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“Key improvements include the removal of the limit on the number of occasions for application submission and allowing for fresh submissions in cases of defects. The rationalisation of compounding charges, particularly the reduction of interest rates and penalties for delayed payments, represents a positive move towards decriminalising tax offences and fostering a more compliant tax culture,” he said.
What is compounding of offences
Compounding of offences is a process that allows taxpayers who have breached specific provisions of the Income Tax Act to avoid prosecution by acknowledging their offence and paying a designated fee.
It is an alternative to legal proceedings, helping taxpayers steer clear of court battles.
It is applicable to offences like failing to deduct tax at source or delaying the deposit of TDS amounts.
The updated guidelines feature several key simplifications:
The categorization of offences has been eliminated.
Restrictions on the number of applications that can be filed have been lifted.
Submitting fresh applications to correct defects is now allowed.
Offences under Sections 275A and 276B of the Act can now be compounded, and the prior 36-month time limit for filing an application following a complaint has been removed.
A notable change has been introduced for companies and Hindu Undivided Families (HUFs), allowing for a more streamlined process. The “main accused” in a tax dispute is no longer obligated to file the compounding application, according to the press statement. “…the offences of the main accused and any co-accused can be compounded once the necessary compounding charges are paid by either the main accused or any co-accused.”
Charges reduced
Charges have been rationalised by abolishing interest chargeable on delayed payment of compounding charges, reducing rates for various offences, such as for TDS defaults multiple rates of 2, 3 and 5 per cent have been reduced to a single rate of 1.5 per cent per month and basis for calculation of compounding charges for non-filing of return has been simplified.
“For instance: If a person fails to deduct TDS Rs 2,00,000 as on 31-03-2024, the compounding fees he was supposed to pay as per the old provision is Rs 42,000 (3 per cent per month), which will now be reduced to Rs 21,000 i.e., at 1.5 per cent per month,” said Harsh.
Special provision for NRIs
“Specific changes have been made to encourage NRI taxpayers for compounding of offences. NRI taxpayers are generally under the misconception that opting for compounding would constitute admission of offence and which could affect their reporting obligations at various statutory and international forums,” said Nikhil Kabra, partner at Ved Jain and Associates.
“The CBDT has now directed the competent authorities to insert a rider in the compounding order that the order is only intended to resolve the offence and shall not be construed as admission of offence by the applicant,” said Kabra.