Things to Know About Tax Compliance

‘Tax compliance’ is a straightforward term in English, but in legal parlance, it can have far-reaching implications for businesses. This article discusses everything you need to know to stay on the right side of the tax laws.

What is Tax Compliance?

Many people confuse tax compliance with tax payment, mistakenly believing that paying taxes is the same as complying with tax laws. However, this is not necessarily the case. Governments legislate a set of laws regarding the applicability and levying of taxes on businesses to mobilize tax revenues.

Tax compliance means the willingness of a taxpayer to abide by applicable tax laws, file tax returns, and pay due taxes within the stipulated time period. It’s important to follow both the spirit and text of tax laws.

Importance of Tax Compliance

Tax compliance is crucial for businesses for several reasons:

1. Legal Necessity: Compliance with tax laws is legally obligatory for any business operating in its jurisdiction. Failure to comply—intentional or unintentional—can lead to legal ramifications such as penalties, fines, and even imprisonment.
2. Managing Company Reputation: Legal issues regarding tax avoidance can severely tarnish a company’s reputation, leading to a loss of trust among investors, vendors, and customers. This can dry up the flow of fresh capital into the company.
3. Avoiding Disruptions to Business Operations: Legal consequences for non-compliance can increase operational costs. The tax authority may seize assets and freeze bank accounts, disrupting regular business activities and leading to significant cost burdens.
4. Corporate Social Responsibility: Every company should contribute to the societal goals of the region it serves. Voluntary tax compliance reflects a company’s commitment to corporate social responsibility, as tax revenues fund developmental programs.
5. Business Growth and Expansion: Established practices of voluntary tax compliance help build reliable tax forecasting mechanisms, facilitating business growth and smooth expansion into new territories.

Objectives of Tax Compliance

The major objectives of tax compliance for a company include:

• Monitoring taxation laws and interpreting the effects of changes on the business.
• Implementing company-wide practices for tax compliance.
• Documenting and maintaining records of business transactions for tax estimation.
• Filing tax returns and paying taxes within stipulated timelines to avoid legal repercussions.
• Assessing and improving tax compliance practices through regular internal audits.

Types of Tax Compliance in India

India, being a fast-developing country with a population of over a billion, requires mobilizing significant amounts of tax revenue to finance developmental programs. Therefore, both central and state governments impose taxes on various economic activities. Companies must comply with each of these tax laws.

The major tax laws under the jurisdiction of the central government of India include:

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

The major taxes, fees, and duties imposed by the state governments include:

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