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Start-ups need not begin life with taxes
December, 19th 2006

Start-up projects, hassled by tax authorities, will now get some breathing space. The income-tax department has been insisting that such firms cough advance tax and pay it along with all other old and established companies. The start-ups, on the other hand, have been at pains explaining that they do not generate income in the first few quarters of operation and it makes little sense for them to pay the tax.

However, tax authorities have been adamant that advance tax should be paid based on the projection of the full-year earnings, just as any other company.

Now theres good news for start-ups. The Income-Tax Appellate Tribunal recently ruled that start-up projects are exempt from the mandatory provision of assessing the income of the accounting year and remitting the tax in advance.

Thus, the new entrepreneurs can remit the tax only after receiving the income and tax authorities cannot levy interest and penalty for not paying the earlier instalments of advance tax.

Advance tax is paid in four instalments: 15% in June, 30% in September, 30% in December and the balance 25% in March, after making a projection of the income for the given fiscal.

For example, if a corporate estimates a tax outgo of Rs 1 crore based on the earnings estimated for the full financial year, it is liable to pay an advance tax of Rs 15 lakh in June, Rs 30 lakh each in September and December, and Rs 25 lakh in March. The tax is paid by the 15th day of the concerned months.

According to ITAT, Law does not oblige the tax payer to do something which is impossible. The fundamental point the ruling deals with is whether a firm is liable to pay tax in advance (say, in June) even if its first income, after incorporation of the company, is received at a later stage during the fiscal, as late as December or March? However, the question crops up whether the start-up should be exempt from paying an advance tax in the first quarter even if the firm generates income as early as March.

The order has wide implications and will have a bearing on all new enterprises, senior chartered accountant Narayan Verma said.

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