ByAdvance tax, as the name suggests, is a payment made before the completion of a financial year. It ensures that taxpayers contribute to the national revenue on an ongoing basis rather than waiting until the annual tax filing deadline. This approach helps the Federal Board of Revenue (FBR) maintain a steady cash flow to meet quarterly revenue targets.
For instance:
- If the annual tax liability is estimated to be Rs. 20,000, this amount is divided into quarterly installments throughout the year.
- The taxpayer pays Rs. 5,000 per quarter, reducing the burden of paying a lump sum at year-end.
Who Does Not Need to Pay Advance Tax?
The obligation to pay advance tax generally applies to businesses and others with taxable income. However, certain exemptions exist:
- Small taxpayers with minimal income or non-taxable thresholds.
- Entities with no taxable income due to losses or exemptions in a given year.
- Individuals whose tax liability is entirely deducted at the source (e.g., salaried employees under withholding tax).
How is Advance Tax Calculated?
The FBR uses a formula specified in Section 147, which is:
(A × B) ÷ C – D
Here’s what each term means:
- A = Turnover for the quarter (sales/revenue during the specific period).
- B = Total tax paid in the previous year.
- C = Total turnover (sales) in the previous year.
- D = Advance tax already paid or withheld during the quarter.
For example:
- Quarterly Turnover (A): If a business had annual turnover of Rs. 1,200,000, the quarterly turnover would be Rs. 300,000.
- Previous Year Tax (B): If Rs. 15,000 was paid in the previous year.
- Annual Turnover (C): Rs. 1,200,000 for the previous year.
- Advance Paid (D): Rs. 2,000 paid in the current quarter.
The quarterly tax liability would be calculated as:
(300,000 × 15,000) ÷ 1,200,000 – 2,000 = Rs. 1,750.
Also Read: Exceptions to Advance Tax under Section 147 of Income Tax Ordinance
Deadlines for Advance Tax Payment
Deadlines vary depending on the taxpayer’s classification:
- For Other Taxpayers:
- 1st Quarter: 15th September
- 2nd Quarter: 15th December
- 3rd Quarter: 15th March
- 4th Quarter: 15th June
- For companies:
- 1st Quarter: 25th September
- 2nd Quarter: 25th December
- 3rd Quarter: 25th March
- 4th Quarter: 15th June
What If There’s a Discrepancy?
If the tax calculation provided by FBR appears higher than the taxpayer’s own estimate, the taxpayer can:
- Respond to the Notice: Provide an updated estimate or clarification to the FBR.
- Submit Evidence: Demonstrate lower turnover or exempt income to adjust the tax liability.
- File an Objection: If advance tax has been wrongly calculated, filing a rectification request is an option.
Penalties for Non-Compliance
Failing to pay advance tax within the deadline may result in:
- Surcharges or penalties for late payment.
- Legal notices from the FBR demanding compliance.
Why Does FBR Enforce Advance Tax?
The government collects taxes quarterly to ensure sufficient revenue for public expenditures, reducing reliance on loans or emergency measures. Additionally, advance tax serves as a tool to prevent tax evasion by ensuring timely contributions from businesses and individuals.
Understanding advance tax is essential for every taxpayer, particularly businesses and professionals. Ensuring accurate calculations, timely payments, and clear communication with the FBR can save taxpayers from unnecessary penalties and complications. If you’re uncertain about your liability, consulting a tax advisor or reviewing your notices in detail is advisable.
