Income Tax--Tax Management

Tax Deferral as a Tax Planning Tool

Srivatsan Ranganathan

Deferring taxes is this done consciously or in a reflex manner? The author has reviewed some recent decisions by saying that by deferring taxes one can leverage valuable working capital funding.

1. First take

Deferring tax is postponing tax payment. No doubt tax deferral attracts interest either ways for the department and for the assessee. For the assessee it is a three pronged 'Trishul' as in Section 234A/B and C (sometimes also 234D) and for the revenue it is only one Section 244A. Bereft this, tax deferral at times is also a tax planning tool both for the revenue and for the assessee. One can understand how it is a tax planning tool if it is in the hands of the assessee but how does it form a tax planning tool even in the hands of the revenue? Deferral of tax may arise due to various reasons one of it is also managing of working capital. With stiff market interest rates at times it might make sense to defer this tax especially if the tax amount can bring in a higher rate of return than the interest elsewhere by way of arbitrage. We have also seen in the past that interest rates which have gone up have also come down substantially lower. The same may also be resorted by the revenue wherein whatever tax needs to be refunded the same might get postponed wherein it forms a part of the handsome kitty of the government's working capital at least until the assessee 'earns it or demands it'.

2. Issue

In recent times we have seen a plethora of additions/disallowances made upon assessees on international taxation despite there being decisions which have been won by the assessee or gone in their favour at the ITAT level on facts (for earlier or for subsequent years as well). It is well understood that the revenue has every right to fight the case so as to let the 'assessee earn his order'.