In what would indicate an important change in the taxation system, the Finance Ministry has suggested a common income tax return (ITR) form for all taxpayers. Of late, the Central Board of Direct Taxes (CBDT), under the Finance Ministry, publicised a draft common ITR form, requesting feedback from interested parties and the public by December 15, following which the Income-Tax Department will finalise the common form and notify it. Normally, new forms are notified just before April 1. According to the proposal, all taxpayers, excluding trusts and non-profit organizations, can use the common ITR form, which also contains a distinct head for the revelation of income from virtual digital assets, usually referred to as crypto-currencies.
According to the CBDT, the suggested draft ITR reconsiders the return filing procedure together with global best methods. The CBDT intends to introduce a common ITR by combining all the prevailing returns of income tax except ITR-7. However, the present ITR-1 and ITR-4 will continue. This will give a choice to such taxpayers to file the return either in the existing form (ITR-1 or ITR-4) or the proposed common ITR, at their suitability. Taxpayers submitting ITR-2, ITR-3, ITR-5 and ITR-6 would not have the choice to file the old forms, once the new common form and related utility are notified.
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Presently, taxpayers are obliged to furnish their ITRs in ITR-1 to ITR-7 depending on the category of person and nature of sources of income. ITR-1 is for resident individuals having total income up to Rs.50 lakhs, having income from salaries, one house property, other sources such as interest, dividends, etc, and agricultural income up to Rs 5,000. ITR-2 should be picked by people who have income in the form capital gains, from more than one house property, earn a foreign income, or own a foreign asset. This form is also relevant for the people who hold a directorship in a company or possess unlisted equity shares. ITR-3 should be selected by businessmen and professionals who do not earn salaried income. All the income heads suitable for ITR-2 are valid for ITR-3 as well. ITR-4 is for Individuals, Hindu Undivided Families, and firms (other than LLPs) being a resident having a total income up to Rs.50 lakh and having income from business and profession. Likewise, ITR-5 and 6 are used by Limited Liability Partnerships (LLPs) and businesses, respectively, to furnish their ITRs. ITR-7 for political parties, trusts, institution or university or other educational institutions, any hospital or other medical institution and similar entities specified in the Income Tax Act. The present ITRs are in the shape of assigned forms wherein the taxpayer is compulsorily required to run through or consider all the schedules, notwithstanding whether that specific schedule is applicable for him or not, which surges the time consumed to submit the ITRs.
New wine in the new bottle
The proposals of the new scheme cover basic information (comprising parts A to E), a schedule for the computation of total income (Schedule TI), a schedule for the computation of tax (schedule TTI), details of bank accounts, and a schedule for the tax payments (schedule TXP) applicable for all taxpayers. The ITR is tailored for taxpayers with relevant schedules based on specific questions answered by the taxpayers. The questions have been framed in such a manner that if the answer to any question is ‘no’, the other questions associated with this question will not be shown to the taxpayer. Guidelines have been added to help in the filing of the return containing the instructions regarding the relevant schedules. The utility for the ITR will be rolled out in such a way that only relevant fields of the schedule will be visible and wherever necessary, the set of fields will appear more than once.
For non-resident Indians, the draft ITR requests comprehensive particulars varying from the nature of the business, permanent establishment (PE), business connection, whether the entity has a significant economic presence (SEP) in India, along with the number of users in India. The ITR protocol for NRIs could widen the scope of the SEP principle that was introduced in the Finance Bill 2018-19, and the explicitly defined ‘business connection’ to include the provision of download of data or software, if aggregate payments from such transactions exceed a prescribed amount, or if a multinational’s interaction is with a prescribed number of users. The SEP provision was deferred till 2022-23 because a multilateral solution under Organisation for Economic Co-operation and Development (OECD) is being deliberated, under which all tax treaties will get amended automatically. However, India has, in the meantime, expanded the scope of the equalization levy over the last few years, to tax non-resident digital entities. The new proposed ITR is being developed keeping in mind contemporary reporting requirements such as pass-through income or loss under various heads among others.
Messy Play
A thorough examination of the new proposal discloses that the common income tax return form may end up mystifying taxpayers with very few using the route to migrate to the new system under which the government is planning to club multiple forms into a single one. The draft needs further study. There is a possibility that it could become cumbersome or burdensome. By introducing the new common ITR the government was supposed to make the filing process a simple, painless experience. But it has done just the opposite. The guidelines run into 169 pages, which is voluminous. Senior citizens may find it difficult because they may have to fill in more information.
In the new ITR there are as many as 40 questions that a taxpayer needs to answer. This pre-assumes that the taxpayer is aware of the complicated income tax provisions. According to the data as on October 30, 2022 the number of individual registered users on Income-tax e-filing portal are around 11 crores. However, the majority of these individuals do not possess even basic knowledge to answer more than 40 ‘yes or no’ questions proposed by the CBDT. So, there is an anticipation of an additional increase in dependency on the assisted filing of returns. This may endanger the government’s judgment for the modification to enhance the ease of filing tax forms and lessen the time consumed for filing returns. The tax return filers should be more cautious while answering ‘yes/no’ questions and be completely aware of the consequences. In addition, right now in the transition period, there are too many decisions that a taxpayer has to make such as “Should I use the old tax regime or new tax regime?” “Should I use common ITR or continue with ITR-1 or ITR-4?” Therefore, further simplification of questions will help them to submit the ITRs successfully.
This is not the first time ITR forms are getting altered. The income tax department is marching towards automation for ITR filing with each passing year. Earlier the pre-fill option was introduced for taxpayers and in the recent past Annual Information Statement (AIS) containing detailed information related to every taxpayer’s income and financial activity has been introduced. Constant amendments in the filing system make filing difficult for taxpayers, who have to re-learn the process of filing tax returns. It also means the flow introduced the previous year by the tax department will have to suffer more change. Thus, frequent changes in ITRs are harmful and not beneficial at all. The tax department should be aware that regular changes in the tax filing procedure generate worry for taxpayers, especially those who do not take the help of service providers or consultants and need to learn the new process afresh. Furthermore, the new portal which was launched last year has several technical glitches. If these obstacles are not erased the new initiative will not deliver the desired outcome.
(The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa)
