During the past few years, numerous changes have been made by the government in the ITR forms to bring undisclosed income into the tax net.
Income tax return (ITR) forms for the financial year 2018-19 were notified by the government on 1 April, 2019, and individuals who do not require an audit of their accounts will have to file their tax returns by 31 July, 2019. While the excel utilities for ITR-1 (Sahaj) and ITR-4 (Sugam) have been released, the utility for the rest of the forms and instructions are still awaited. While the instructions will provide guidance for completing the forms, the changes provide us an insight into the objectives of the government.
In the past few years, numerous changes have been made by the government to bring undisclosed income into the tax net – these include TDS on payment of rent and purchase of property, disclosure of PAN for transactions like purchase/sale of property, etc. In the same vein, several changes have also been made to the forms to help the government join the dots and unearth income that has escaped tax. In addition, the government is seeking to collect information at the time of filing of tax return and avoid asking for more information while processing. One can expect efficiency and speed in the processing of the income tax returns and reduction in face-to-face interactions with tax authorities at the time of scrutiny.
Applicability of ITR-1 Sahaj
ITR-1 is applicable for Resident and Ordinarily Resident (ROR) individuals having total income up to Rs 50 lakh from salaries, one house property, other sources (interest etc.), and agricultural income up to Rs 5,000.
Key Changes in ITR-1
# ITR-1 can no longer be used by an individual who is either a Director in a company or has invested in unlisted equity shares or has income on which tax has been deducted in the name of another person. Hence, a salaried individual who holds any unlisted equity shares, including shares of private companies, start-ups, shares issued under an employee stock option plan (ESOP), can no longer file the ITR-1 Form.
# While in the past, the emphasis in the salary schedule was on taxable allowances, a detailed breakdown is also required for exempt allowances now.
# An individual is now required to provide the nature of income from other sources (through a drop down selection) and corresponding income, for instance, savings / deposits / income tax refund etc. In the past, one consolidated number for income from other sources was the only requirement.
# It is now also mandatory to provide the Indian address, possibly for ease of communication.
Applicability of ITR-2
ITR-2 is applicable to individuals (not eligible to file ITR-1) and HUFs not having income from profits and gains of business or profession.
Key Changes in ITR-2
# A self-declaration of the residential status is no longer enough – the basis in determining ‘Resident’, ‘Resident but not ordinarily resident’ or ‘non-resident’ status is also required by confirming the number of days of stay in India in the year, the past 4/7 years and whether the individual has been a non-resident in the last 9 out of 10 years. In case of a non-resident being Indian citizen or person of India origin, stay details for FY 2018-19 as well as for the previous 4 years has also been sought.
# A non-resident is required to disclose additional details like country of residence, taxpayer identification number.
# A person who is a director in a company will need to disclose the details like name and Permanent Account Number (PAN) of the company along with Director Identification Number (DIN). The details of unlisted equity shares held by an individual need to be disclosed with further information on the opening balance, face value/issue price, closing balance etc. The intent likely is to differentiate between shell companies and start-ups. The government would be able to cross check details of investors provided by unlisted companies in their ITRs and the details disclosed by an individual and thus identify shell companies.
# If an individual reports income/loss from capital gains on transfer of immovable property, it is mandatory to provide details of the buyer like name of the buyer, PAN, percentage share in the property and amount of the property. This will help in reduction of benami property trades.
In light of the amendment in capital gains taxation, with effect from FY 2018-19, the Forms have been amended to incorporate the taxation of long term capital gains in excess of Rs 1 lakh, from transfer of equity shares, equity-oriented mutual funds or units of business Trust, where STT is paid.
# Agricultural income up to Rs 5,000 is exempt provided some conditions are satisfied with respect to nature of income, location of land. There is a premise that some individuals were claiming income to be exempt under the garb of agricultural income. In an attempt to plug the gap, if the net agricultural income of an assessee exceeds Rs 5 lakh, the form seeks further details such as measurement of agricultural land, name of district in which agricultural land is located, etc.
# The exempt income schedule calls for details of the amount and nature of income, country name, Article of DTAA, head of income and a confirmation on availability of Tax Residency Certificate (TRC) in case of exempt income under the DTAA.
# The foreign asset reporting schedule has been revamped and details of foreign depository account, foreign custodian accounts, equity and debt interest and particulars of overseas cash value insurance contract or annuity contract are being asked for, instead of foreign bank accounts, as per the old ITR forms.
# The government’s intent to focus on arresting tax evasion from overseas assets and income for RORs is evident from these additional disclosures that are required. It may be surmised that data available in tax returns would be mapped against information available to the government through exchange of information and AIR and gaps, if any, could be easily detected.
Applicability of ITR-4 Sugam
ITR 4 is applicable for individuals, HUFs and firms (other than LLP) being a resident having total income up to Rs 50 lakh and having income from business and profession which is computed under presumptive basis.
# Key Changes in ITR-4
# ITR-4 can no longer be used by an individual who is either a Director in a company or has invested in unlisted equity shares.
# The new form now requires disclosure pertaining to each GSTIN No. separately. Also, the form seeks annual value of outward supplies as per the GST returns filed vs. amount of turnover/gross receipt as per the GST return filed. This would enhance cross-verification of details furnished in GST tax return.
# The basis for computation of presumptive income for profession under Section 44ADA has been specified. This would avoid any confusion at the time of filing the ITR. Additional disclosures with respect to goods carriage like registration number, ownership, tonnage capacity etc., is also being asked for.
The detailed disclosure of income, both taxable and exempt, under all sources of income – salaries, house property, capital gain, income from other sources, will enable verifiability of the information and act as a measure to dissuade individuals in making any incorrect claims/disclosures. As such, there is a strong likelihood of tax authorities determining income escaping tax at the stage of filing of the tax return, rather than at the time of assessment, which otherwise would have been restricted to a select few. The requirement of detailed scrutiny will reduce as income tax authorities can now focus only on specific areas of enquiry as most of the information would be available to them at the time of filing itself.
What do taxpayers need to do?
Collation and reconciliation of data before preparation and filing of tax return is essential. While burdensome, these additional disclosures will reduce the likelihood of queries being raised by tax authorities at a later stage and should be looked at positively.
(By Tapati Ghose, Partner with Deloitte India, and Shalakha Kedia, Deputy Manager with Deloitte Haskins and Sells LLP)