Income tax: New rules floated on compounding of tax offences. Details here 

Income Tax rules: The Income Tax Department has introduced new guidelines with the objective of streamlining the process of compounding tax offenses as per the Income Tax Act, 1961. These revised regulations will be applicable to both existing and future applications.

These guidelines are in accordance with the 2024 Budget announcement by the Finance Minister, which emphasizes simplifying procedures and reducing compounding fees. This will benefit both individual taxpayers and businesses by making the process more efficient and cost-effective.

Here are the top points:

Application process

The process for submitting compounding applications has been streamlined under the revised rules by the Income Tax Department. The previous categorisation of offences, which added complexity to the process, has been eliminated.

Moreover, taxpayers are no longer restricted on the number of times they can submit an application. Previously, multiple compounding requests were not allowed, but the new rule permits taxpayers to submit fresh applications after rectifying any defects in their earlier filings.

Examples of defects that could be corrected include using incorrect forms, resolving outstanding tax payments, or providing any missing documents.

Reduction in compounding fees

The guidelines have been updated to streamline compounding charges by removing interest on delayed payments and reducing rates for various offenses. Previously, TDS defaults were subject to multiple rates of 2%, 3%, and 5%, but now there is a single rate of 1.5% per month. The calculation method for non-filing of returns has also been simplified. Additionally, there is no longer a separate compounding fee for co-accused.

As an illustration, under the previous rules, a taxpayer who failed to deduct ₹2 lakh in TDS would have incurred compounding charges of ₹42,000, calculated at 3% per month.

"The revised guidelines for compounding income tax offences, issued on October 17, 2024, reflect the government’s commitment to easing compliance and simplifying processes. These changes are highly beneficial for businesses and individuals, as they eliminate the complexity of filing compounding applications and introduce more streamlined procedures. 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. Moreover, the rationalization of compounding charges, particularly the reduction of interest rates and penalties for delayed payments, represents a positive move towards decriminalizing tax offences and fostering a more compliant tax culture," said Harsh Bhuta, Partner, Bhuta Shah and Co LLP.

Bhuta added: "These reforms are a step in the right direction, offering clearer guidelines and fewer procedural hurdles for taxpayers, which will encourage greater voluntary compliance and reduce the burden of prolonged legal proceedings. The shift towards rationalized and predictable charges provides much-needed relief to businesses dealing with tax disputes."

Payment of taxes and other dues

Prior to submitting a compounding application, it is essential for the taxpayer to confirm that all outstanding taxes, interest, and penalties associated with the violation have been settled.

If any additional amounts are discovered to be owed after a departmental verification, they must be paid within a period of 30 days. Failure to comply with this requirement will result in the compounding application being deemed invalid.

Withdrawal of appeals

In addition, one of the important prerequisites for compounding is that taxpayers must withdraw any appeals that have been lodged regarding the offenses being considered for compounding.

In cases where the appeal includes grounds that are unrelated to the offense, an explicit commitment must be made to withdraw only those specific grounds that are connected to the offense.