Towards the end of a financial year, you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits and carrying forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes.
You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade. By booking the loss, the tax liability for the financial year would reduce.
BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.
Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading?
There are both schools of thought, one which considers it to be speculative because no delivery was taken. However, I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.
Paying advance tax is important when you have a business income. Like we discussed in the previous chapter, the advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. I guess the question that will arise is % of what?
The % of the annual tax that you are likely to pay, yes! When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.
But everything said and done, you are required to pay that advance tax, otherwise, the penalty is 12% annualized for the time period it was not paid for. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year-end, you can make all balance payments as you would have a fair idea on how you will close the year. You can claim a tax refund if you end up paying more tax than what was required to pay for the financial year. Tax refunds are processed in a quick time by the IT department.
You can make your advance tax payments online by clicking on Challan No./ITNS 280 on https://incometaxindiaefiling.gov.in/
Also, here is an interesting link that helps you calculate your advance tax – http://www.incometaxindia.gov.in/Pages/tools/advance-tax-calculator.aspx. You can also check this link to see how exactly interest or penalty is calculated for non-payment of advance tax.
When you have declared trading as a business income, you are required to like any other business to create a balance sheet and P&L or income statement for the financial year. Both these financial statements might need an audit based on your turnover and profitability. We will discuss more on this in the next chapter.
When is an Audit Required?
An audit is required if you have a business income and if your business turnover is more than Rs 5 crore for a financial year (from FY 20-21). In the case of digital transactions (equity transactions are 100% digital), this turnover limit is Rs 5 crores. For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs.5 Crores but profits are lesser than 6% of the turnover and total income is above the minimum exemption limit.
We will discuss this in detail in the next chapter.
However, let us understand what audit really means.
The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. Likewise, the Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law if he meets the above-mentioned turnover criteria.
An audit can also be defined as having an accountant verify if you have prepared all your accounts right. In this case, it is getting an accountant to check if you have created a correct balance sheet and P&L statement for the year. Ideally, this audit should be done by the IT department itself, but considering the number of balance sheets out there, it is surely impossible for the IT department to audit each one of them. Hence we need a Chartered accountant (CA), who is a qualified professional and authorized by the Income-tax department to perform audits on the balance sheet and P&L statements. You the taxpayer can use any CA of your choice.
What role should a CA play?
Ideally, a CA is required to only audit and sign on the balance sheets and P&L statements. But a CA also typically ends up creating your balance sheets and P&L statements and will audit them only if required. We will in the next chapter briefly explain how a CA typically creates these two statements.
The importance of the audit process by a CA cannot be understated, apart from all the reporting requirements an audit also helps traders/investors know their financial health, ensure it faithfully reflects the income, and claims for deduction are correctly made. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.
Which ITR form to use? – ITR3 (ITR 4 until 2016), we will discuss more on this in the last chapter. I have come across incidents where people have declared both speculative and non-speculative as capital gains to avoid having to declare business income, and not having to use ITR3. Taking a shortcut like this could mean a lot of trouble if called for an IT scrutiny.
Business expenses when trading – Advantage of showing trading as a business is that you can show all expenses incurred as a cost which can then be used to reduce your tax outgo and if a net loss for the year after all these costs, it can be carried forward as explained above.
Following are some of the expenses that can be shown as a cost when trading