Direct and Indirect Tax Compliance Checklist in India

Direct and indirect taxes have different implications for businesses, and every company needs to comply with rules and regulations specific to each tax system. GST, an indirect tax, is levied on sales, while corporate income tax is charged on net taxable income. 

How much does direct and indirect tax compliance differ? Stay with us to learn more on this topic. 

Importance of Tax Compliance for Indian Businesses

Tax compliance is an inseparable part of doing business in any country. Companies operating in multiple geographies are required to adhere to tax laws in each of those regions. The same applies to Indian businesses. 

The key reasons behind the necessity of tax compliance for companies in India are: 

• Avoiding legal ramifications - Failure to comply with tax laws and regulations can cause serious legal ramification for businesses in India. It can be as minimum as levying of penalties to as severe as seizure of company assets and imprisonment of business promoters and managers. 
• Continuity of business operations - It is the responsibility of a company to learn about the applicability of taxes on its business. The legislation gives power to the tax authority to seize goods, consignments and block bank accounts, even when a business unknowingly fails to comply with tax laws. Furthermore, vendors and customers may refuse to deal with non-compliant businesses. Hence, tax compliance is essential for conducting business operations smoothly.    
• Managing brand reputation - Public perceptions about a company can change drastically following any news of legal proceedings against the entity because of tax avoidance. It damages brand reputation among investors, employees and suppliers.    
• Better financial forecasting - Accurate forecasting of tax liabilities is critical for financial projection in any new project or venture. Practice of tax compliance helps companies adopt tools and techniques necessary for reliable tax forecasting.  
• Corporate social responsibility - Governments collect taxes to meet public expenditures and finance their developmental programmes. Businesses that voluntarily comply with tax laws of the land ultimately help the government and the people of the land. 

Differences Between Direct and Indirect Taxes in India

In any modern economy, individuals and businesses need to pay different taxes. We can broadly segregate them in two types—direct tax and indirect tax.  

Direct taxes are those taxes that taxpayers pay to the government directly. All other taxes are indirect taxes. Let us understand the differences between these two types.

What is Direct Tax Compliance?

Direct tax compliance is a part of a company’s overall tax compliance procedures that deal with all the direct taxes applicable to its business across jurisdictions. 

For a business in India, direct taxes payable could include:

• Corporate income tax.
• Security transaction taxes. 
• Dividend distribution tax.

Direct Tax Compliance Checklist

Unlike personal income taxes, adhering to direct taxes for businesses requires following many rules and regulations across multiple stages of business operations. This may be easier for large companies with dedicated accounting departments. However, for small businesses, it can become a tremendous workload. 

The following is a direct tax compliance checklist that businesses in India can follow to avoid unintentional mistakes and negligence:

• Determine the type of the company for direct taxation: There are 2 types of tax rates for corporate taxation, depending on whether it is a domestic company and foreign company. 
• Estimate the total income for the company in the financial year: Businesses in India with a tax liability exceeding Rs 10000/- need to pay advance tax. It requires estimation of income for the period from 1st April to 31st May of the ongoing year, known as a financial year. 
• TDS compliance - Review payments made to vendors and collect TDS for compliance. 
• Statement of financial transaction or Form 61A - Collect information regarding financial transactions and investments in banking, share markets and other financial assets.  
• Calculate the taxable income and the applicable tax rates: It requires adding up all the taxable incomes and deducting the tax-deductible expenses. 
• Add cess and surcharges applicable to corporate tax: The final payable tax can be arrived at only after computing and adding the applicable surcharges and cess. 
• Pay the estimated advance tax: In India, advance tax is to be paid in 4 instalments through the financial year, bound by the applicable advance tax deadlines.   
• Conduct internal and statutory tax audits. – The Income Tax Act in India requires eligible companies to conduct tax audits and file the audit report along with tax return before 30th September every year. 
• File the tax return before the last date of submission. – The due date for filing tax returns in India is 31st July of the relevant assessment year. However, the due date for domestic businesses (those requiring audits) in India is 31st October, and for businesses requiring transfer pricing reports (Businesses requiring transfer pricing reports in case of international/specified domestic transactions) is 30th November of the relevant assessment year.

What is Indirect Tax Compliance?

Businesses are required to collect indirect taxes from their customers and pay the collected tax to the government. A company in India might need to pay multiple indirect taxes, including CGST/SGST or IGST. Procedures of calculation, reporting and payments of each of those indirect taxes are different.  

Voluntarily adhering to all the applicable indirect tax laws can be termed as indirect tax compliance. 

Indirect Tax Compliance Checklist

The major indirect tax that every Indian business needs to pay is the Goods and Services Tax or GST. 

The indirect tax compliance checklist for GST includes: 

• Update the GST registration certificate with the latest details of the places of operation.  
• Ensure that the unique serial numbers and other GST-relevant details are mentioned in all invoices issued.
• Self-generate invoices for supplies received from unregistered persons 
• Document all the payment vouchers. 
• Reconcile sales numbers and credit notes to calculate the final turnover.    
• Compute and set off Input Tax Credit (ITC) claims accurately. 
• Confirm with suppliers regarding their GST filing statuses. 
• Check the generated e-way bills, where applicable, and reconcile them with the sales data as per the books. . 
• Companies registered under e-invoicing will need to reconcile their sales as per books and GST liabilities with the list of e-invoices generated.
• Reconcile GSTR-1, GSTR-2B and GSTR-3B with the company’s books of accounts to avoid underreporting of GST liabilities or overreporting of ITC.
• File monthly and quarterly GST returns such as GSTR-1, GSTR-3B, GSTR-9, and CMP-08 returns periodically, depending on business types and sales turnover limits. Pay tax in Form PMT-08, where the quarterly filing of GST returns has been opted for. File GSTR-9 where applicable. 

Benefits of Direct Tax Compliance

The major benefits of direct tax compliance are: 

• It enables taxpayers to manage their tax liabilities effectively by using deductions and incentives available within the law.
• Voluntarily complying with direct tax laws helps avoid unwanted penalties and the cost of legal proceedings. 
• It improves the reputation of the company in front of investors, tax officials and other stakeholders. 
• Company tax accountants become skilled in forecasting tax liability as part of future business growth projections.    

Benefits of Indirect Tax Compliance

Compliance with indirect taxes like GST offers unique benefits to companies, such as: 

• It helps businesses to report their tax liabilities on time as well as set off input tax credit on their purchases.  
• Indirect tax compliance reduces the risk of operational disruptions, which may arise due to suspension/cancellation of the GST registration following non-compliance, such as failure to file returns, non-payment or short payments of taxes, etc.
• Litigations with tax authorities can increase legal costs and also waste managerial hours for the company. 
• Non-compliance can also affect the reputation of the company in front of suppliers and customers.