Problems on Computation of Total Income and Tax Liability of Firms (Use of available software package for Computation of Tax Liability, Related Forms and Challan)

The Computation of Total income and tax liability for firms in India involves a thorough understanding of the Income Tax Act, 1961, and the rules thereunder. While manual calculations can be complex and time-consuming, the use of available software packages significantly streamlines this process. These software solutions are designed to automate calculations, ensuring accuracy and compliance with the latest tax provisions. Below, we explore the general approach to computing total income and tax liability for firms, and how software can facilitate this process, including considerations for related forms and challan.

Step 1: Income Computation

The total income of a firm is computed by aggregating the income from various sources under five heads:

1. Income from Business or Profession: This includes profits and gains from business operations after deducting allowable expenses.
2. Income from House Property: Rental income, after deducting municipal taxes and a standard deduction of 30% for repairs, maintenance, etc.
3. Capital Gains: Income from the sale of capital assets, segregated into short-term and long-term capital gains, each taxed differently.
4. Income from Other Sources: Interest, dividend, etc., not attributable to any other head.
5. Income from Salaries: Although typically not applicable directly to firms, salaries paid to partners (where allowed as a deduction) can affect the firm’s income computation indirectly through adjustments in partners’ capital accounts.

Step 2: Deductions and Allowances

Various deductions available under sections 80C to 80U and other relevant provisions can be claimed to reduce the taxable income. This includes deductions for specified investments, certain business expenses, and allowances.

Step 3: Calculation of Taxable Income

The taxable income of the firm is computed by subtracting the allowable deductions from the total income. Current tax rates applicable to firms are then applied to this income to compute the tax liability.

Use of Software for Computation

Modern tax computation software packages simplify these steps through user-friendly interfaces where the user inputs the relevant data, and the software handles the calculations. These tools are regularly updated to reflect the latest tax rates, deduction limits, and other relevant changes in the law.

Features of Tax Software:

• Automated Calculations:

Automatically calculates total income, allowable deductions, and applies the correct tax rates.

• Error Checking:

Identifies common errors or inconsistencies in the data entered.

• Tax Planning Suggestions:

Offers insights on optimizing tax liabilities through various legal avenues.

• Form Generation:

Automatically generates the necessary tax forms and challans based on the computed data.

• E-filing:

Enables direct filing of tax returns to the Income Tax Department, streamlining the submission process.

Related Forms and Challan

For firms, the primary form for filing income tax returns is ITR-5, unless specifically exempted or required to file under another form category. The software typically guides the user in filling out this form based on the financial data entered.

For payment of tax, Challan 280 is used, whether for advance tax, self-assessment tax, or regular assessment tax. Tax software can generate this challan with pre-filled details, making it easier to complete the payment process either online or at a bank.