The Income Tax Department has rolled out new guidelines aimed at simplifying the compounding of tax offences under the Income Tax Act, 1961. These updated rules will apply to both pending and new applications.

The guidelines align with the Finance Minister’s 2024 Budget announcement, focusing on reducing procedural hurdles and lowering compounding charges, benefiting both individual taxpayers and businesses.

Let’s break down the changes and how they are set to ease the compliance process.

What is compounding of offences?

Compounding of offences is a process where a taxpayer, who has violated certain provisions of the Income Tax Act, can avoid prosecution by admitting the offence and paying a specified fee.

It is an alternative to legal action and helps the taxpayer avoid prolonged court proceedings.

This procedure is available for offences such as failure to deduct tax at source (TDS) or delay in depositing TDS amounts.

Key changes in the revised guidelines

Simplified application process

Under the revised guidelines, the process for submitting compounding applications has been simplified.

The Income Tax Department has eliminated the categorisation of offences, which earlier made the process more complex.

Additionally, there is no longer a limit on how many times a taxpayer can submit an application.

Previously, applicants were restricted from filing multiple compounding requests, but the new rule allows them to submit fresh applications after curing defects in earlier filings.

Defects could include minor issues like incorrect forms, outstanding tax payments, or missing documents.

Reduction in compounding fees

One of the most significant benefits of the revised guidelines is the reduction in compounding fees.

For instance, under the previous rules, a taxpayer who failed to deduct ₹2 lakh in TDS would have had to pay ₹42,000 in compounding charges, calculated at 3% per month.

“Under the new rules, the fee has been halved to ₹21,000 (1.5% per month). The rationalisation of compounding charges is a positive move towards decriminalising tax offences. It offers much-needed relief to businesses and individuals facing tax disputes,” said Harsh Bhuta, Partner at Bhuta Shah and Co LLP.

Retrospective application of rules

The new guidelines will also be applicable to cases already in process, provided that final payments of compounding fees have not yet been completed.

If the revised fees are lower than those calculated under the previous guidelines, taxpayers will be allowed to pay the lower amount.

However, no refunds or adjustments will be made if the higher compounding fees are already paid.

Fresh applications for defectively rejected cases

Taxpayers whose compounding applications were previously rejected due to curable defects, such as an incorrect financial year or non-payment of outstanding tax, now have the option to refile.

This was not allowed under the earlier rules, leaving many taxpayers stuck with unresolved cases.

Further, any payments made under the old rules will be credited towards the new compounding charges.

How to apply for compounding

Under the revised process, taxpayers can submit a consolidated compounding application if offences pertain to multiple financial years or quarters.

This means that instead of filing multiple applications for different periods, taxpayers can consolidate all their offences in a single submission.

A non-refundable compounding application fee of ₹25,000 will be charged for single applications, while consolidated applications will incur a fee of ₹50,000.

The application must be submitted in the prescribed format, which includes filing an affidavit on a ₹100 stamp paper. It can be submitted suo moto, even before the offence comes to the notice of the Income Tax Department, and can also be filed after prosecution proceedings have been initiated.

Payment of taxes and other dues

Before filing a compounding application, the taxpayer must ensure that all outstanding tax, interest, and penalties related to the offence have been paid.

If any additional amounts are found due after verification by the department, they must be settled within 30 days.

Failure to do so will invalidate the compounding application.

Withdrawal of appeals

Another key condition for compounding is that taxpayers must withdraw any appeals filed in relation to the offences sought for compounding.

If the appeal contains grounds unrelated to the offence, an undertaking must be provided to withdraw only those specific grounds linked to the offence.

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