Financial Daily from THE HINDU group of publications
Thursday, Jun 08, 2006
Industry & Economy - Income Tax
On the presumption of dishonesty
With most perquisites now taxed in the hands of assessee or employers, justification for a detailed form seems to be based on the belief that taxpayers, per se, are dishonest.
The Income-Tax Department, vide Notification No. SO 848(E) of June 1, 2006, has substituted the NayaSaral, the single-page income-tax form now used, with a four-page not-so-saral Form No. 2F. Of course, this form will be saral for the Department as far as knowing the expenditure of assessees. What is intended is to seek more information about expenses, investments and cash-flows (including bank balance, gifts, donations and other receipts).
There are as many as nine schedules to the main return, which will contain particulars about house property income, income from other sources, deductions from gross income, incomes not included in total income other than exempted ones, cash flow statement and details of advance tax, self assessment tax and tax deducted at source.
There is a set of 22 instructions on how to fill the form. One can thus well imagine the simplicity of the form itself.
Form 2F, applicable with immediate effect, is nothing but a detailed cash-flow statement which will record the expenditure and income details of the assessee. It will contain information (in Schedule 5) about opening and closing cash and bank balances, other receipts about exempt income, loans, gifts, and so on.
Living expenses are also required to be disclosed as a lump-sum. In many cases, this will turn out to be a balancing figure and assessees will be under compulsion to show withdrawals at a level reasonable with their standard of living.
Mandatory next year
The new form will replace Form 2E (Saral), and has been made optional for assessment year (AY) 2006-07 for which returns are to be filed now. It will be mandatory from next year (AY 2007-08) Form 2E will be withdrawn w.e.f. August 1, 2006. Surprisingly, the new form has been made applicable even to salaried assessees and Hindu undivided families (HUFs). Generally, the sources of income of these assesses are known and they do not have other significant sources of incomes. Also, almost all income-tax on such salary income is deducted by the employer. This being the case, was there a need to include the salaried class?
The Government should be tracking the expense details of assessees in business and fall back on intelligence derived from information under the Banking Cash Transaction Tax (BCTT). Form 2F will have to be used by resident individuals and HUFs who do not have income from profits and gains of business, profession, capital gains, house property (more than one) or agricultural and as also by those who do not claim relief under Section 89 of the Income-Tax Act.
Those having long-term gains from securities can also use the new form. This apart, the karta of a HUF, though not an employee in any sense, is also required to file return in the new form. Normally, personal expenses are not booked in HUF accounts.
Surprisingly, this also extends to senior citizens and pensioners. This is illogical and seems to be a move towards a system where incomes are ascertained as `the sum of what is spent and what is saved'. Such a system is already in place in the UK, the US, Singapore, Malaysia, and so on..
Claimed to be simple, objective and easier to fill in, the new Form does not require any supporting paper to be attached, not even Form 16, as TDS certificate or proof of payment of advance tax. It is felt that such information will be subject to verification by the revenue officers, but it will not stop scrutiny assessments.
Though e-filing of returns in the new format is expected to enable centralised processing without any interface between the Department and taxpayer, it will still be a cause of harassment to taxpayers. The e-filing has to be followed by a physical return.
The logic of a detailed form is also not understood, since the Department has now access to all such information through the annual information returns (AIR), and BCTT for cash withdrawals.
While the Government has introduced the concept of tax return preparers (TRPs) to assist assessees in filling of Saral forms in smaller towns and other rural areas, it has now made returns complicated, making professional help necessary.
The new form is also not warranted because most of the high-value transactions require PANto be mentioned. PAN is mandatory for all vehicle purchases, investments of over Rs 50,000 in securities and even for possessing a credit card. Expense information can be easily got from checking credit card details.
Moreover, there is also the system of select scrutiny of income-tax returns. Under the new dispensation, such scrutiny could become meaningless.
With most of the perquisites now being taxed either in the hands of the assessee or the employer (FBT), the justification for a detailed, new form and that too for employees seems to be based on the belief that taxpayers, per se, are dishonest.
If the Government is serious about keeping a track of spending patterns, it should first make public the expenditure details of all politicians, ministers, Members of Parliament, revenue officers and other bureaucrats by, say, hosting them on a Web site. Such accountability and transparency would result in better tax compliance.
(The author is a Jaipur-based chartered accountant.)
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