Income-tax return forms: Not so Saral!
The monsoon this year has been no different for the taxpayer with new Income Tax
Return forms ('ITR Forms') once again
raining on the various categories of
taxpayers. These forms are applicable with respect to Assessment Year 2007-08
alone.
In relation to the salaried taxpayer, it is claimed that the
unique selling proposition of the new ITR forms is that they are
paperless
and less complex. A perusal of the forms, however, indicates that they may
actually be more complex than the
earlier forms and, in most cases, would
require the assistance of a tax consultant.
However, given the government's aim of a paperless and annexure-less return
filing system coupled with the aim to curb tax
evasion, the introduction of
these forms represents a significant step forward.
Through this article,
we attempt to demystify for the salaried class the two main ITR forms applicable
in their case, i.e.
Forms ITR-1 and ITR-2.
Form ITR-1:
Overview
ITR-1 is the return form for individuals having income from one
or more of the following sources:
Income under the head salaries;
Interest income whether such income is
taxable or tax exempt;
Family pension.
Additionally, ITR-1 covers within
its ambit, only those individuals whose exempt income is limited to agricultural
income and
interest income.
Thus, individuals having exempt income
under any other head are not covered. For example, if an individual earns income
under
the head salaries and earns long-term capital gains from the sale of
listed shares, he would not be eligible to file a return
using the Form
ITR-1.
Difference between the Form ITR- 1 and the Saral Form
Although the need
for filing annexure's has been dispensed with under the Form ITR-1, the
information requirement within the
form is naturally more tedious as
compared to the erstwhile Saral Form. In comparison to the Saral Form, the new
Form ITR-1
requires the following additional details to be
furnished:
1. Category of the employer i.e. whether the employer is the
government, a public sector unit or any other;
2. Details of the return
filed i.e. whether the same is a voluntary return or in response to a notice
under the Income Tax
Act, 1961 ("Act");
3. Tax exempt interest
income;
4. Details of tax deducted at source (as per Form 16 and
16A);
5. Details of Tax Return Preparer ('TRP") (if
utilised).
TRP
A TRP is a tax return preparer trained by the government through select centres
to prepare income-tax returns. The minimum
qualification for undergoing
training as TRP is a graduate degree in Commerce / Law / Economics / Mathematics
/ Statistics /
Management. The Income Tax Department with the help of a
training partner trains TRPs for 9 days with 8 hours sessions each.
TRPs
help in reducing the cost of compliance especially for small and marginal
taxpayers so as to encourage them to comply
with tax laws. The facilities of
TRPs are available in across 80 cities for a nominal fee of Rs 250 per tax
return.
Currently, there are 5000 TRPs in the country to accomplish this
task.
6. Transactions reported through Annual Information Return
(AIR)
Annual Information Return (AIR)
The Act requires filing of
an AIR in respect of specified financial transactions undertaken during the
financial year.
The specific financial transactions include:
Cash deposits aggregating to
Rs 10 lakh (Rs 1 million) or more in a year in any savings account;
Credit
card payments against bills aggregating to Rs 2 lakh (Rs 200,000) or more in a
year;
Payments of Rs 2 lakh or more for purchase of units of mutual
funds;
Payment of Rs 5 lakh (Rs 500,000) or more for acquiring bonds or
debentures issued by a company or institution or investment
bonds issued by
the RBI;
Purchase or sale of any immovable property valued at Rs 30 lakh (Rs
3 million) or more;
Form ITR-2: Overview
ITR-2 is the return form for
individuals and Hindu Undivided Families ('HUF") having income from any one of
the sources of
income specified for ITR-1, and/or one or more of the
following sources:
Income / loss from house property;
Capital gain /
loss on sale of investments / property, etc;
Dividend income (taxable /
exempt);
Any other income (taxable / exempt), except from business or
profession or share of profit from partnership firm;
Income of other person
to be included (i.e. clubbing of income);
Brought forward loss of earlier
years from house property and/or capital gains.
Unlike the Form ITR-1, the
said form covers in its ambit, individuals whose income is clubbed with another
individual. Thus,
in the case of an individual taxpayer who clubs his income
with that of any other family member such as wife, minors etc, the
Form
ITR-2 would be applicable.
A specific exception exists in ITR-2 with respect to individuals who are
partners in a firm. Such individuals cannot file
their return using the Form
ITR-2.
Difference between ITR- 2 and the Saral Form
Similar to
the Form ITR-1, the need for filing annexures has been dispensed with under the
Form ITR-2. However, unlike the
Saral Form, the following additional
information is required to be furnished alongwith the Form ITR-2:
1. All
additional details that are required in the case of ITR-1;
2. Details of
salary income:
Name, address and PAN of the latest employer. However, in
case of dual (or multiple) employment, name, address and PAN of
the employer
from whom the individual has earned higher salary are to be provided
The
break-up of the salary into basic, allowances, perquisites etc is to provided.
It should be noted that salary details of
all the employers are to be
provided.
3. Details of house property income including a detailed
computation of income from each property, details of receipt of
previously
unrealised rent, etc;
4. Comprehensive details of short term and long
term capital gains/loss for residents capturing inter alia the following:
Full value of consideration paid to acquire a capital asset
Cost of
acquisition
Cost of improvement
Expenditure on transfer
Capital Loss
disallowed under certain provisions of the Act
Capital gains exempt under
certain provisions of the Act
Break up of capital gains according to the
time of accrual
5. Details of "income from other sources" broken into
various heads along with deductions claimed
6. Miscellaneous schedules
requiring details of:
Set-off of current year losses;
Set-off of
brought forward losses;
Losses to be carried forward to future
years;
Deductions claimed under Chapter VI-A of the Act;
Income of other
persons to be included in the income of the assessee;
Income chargeable at
special rates;
Exempt income.
Although, the Forms ITR-1 and ITR-2 are
quite comprehensive and require furnishing of extensive financial information by
the
taxpayer, there are nonetheless certain shortcomings that are inherent
in the forms.
ITR Forms: Certain shortcomings
There are certain
missing links with respect to the recently published ITR forms. By way of
example, there is nothing
specified in the forms on how details are to be
furnished in the return in the event more than two Form 16s and three Form
16As are issued given the fact that the Revenue has done away with the
requirement of furnishing annexures.
At the other end of the spectrum,
despite the claim of the returns being paperless, in case an individual has more
than two
house properties, he is required to furnish details by way of an
annexure in physical form which is somewhat contradictory to
the instruction
of not filing annexures.
Another issue that could arise because of the new forms relates to the cost of
acquisition and improvement, and value of
consideration of various assets
for the purposes of computing capital gains.
The Form ITR-2 requires that
in the event, a assessee sells more than one capital asset in the year, a
consolidated cost of
acquisition, a consolidated cost of improvement be
disclosed. Given that different assets may have a different cost of
acquisition and/or cost of improvement, providing a consolidated cost of
acquisition or cost of improvement may lead to a
detailed scrutiny of
capital gains transactions.
The possibility of a detailed scrutiny are
higher since it would not be possible on a perusal of the return for the tax
authorities to conclude whether the proper valuation of capital assets has
been arrived at for the purposes of the tax
computation.
While the
attempt to link the AIR with the ITR is understandable, there still exist
numerous doubts that with respect to the
AIR itself. For example, the AIR
should capture payment of Rs 2 lakh or more for purchase of units of mutual
fund.
However, it is not clear whether this limit is for a single
purchase or for cumulative purchase of mutual funds on an annual
basis and
whether the limit is for a lump sum investment or investments made under
systematic investment plan.
Similarly, a payment made by an individual
against bills raised in respect of a credit card aggregating to Rs 2 lakh or
more
in a year must be reported in the AIR. It is however unclear whether
only payments by personal credit cards are to be
considered or whether
payments by corporate credit cards are also covered.
Further, in cases
where payments in excess of Rs 2 lakh are made on more than one card, it is not
clear whether the
cumulative amount of payment has to be mentioned in the
AIR or whether each payment has to be recorded separately.
Lastly, given
the complexity of new forms, most small and marginal taxpayers would place
reliance on TRP's to file their
returns.
However, there exists no
provision in the Act at present, which bars the tax authorities from levying
penalty on the taxpayer
in case erroneous details are filled in by TRP.
Thus, the taxpayer may end up being penalised for an error committed by the
TRP.
Conclusion
In summary, though the new tax forms are a
step in the right direction, there still exist certain creases that need ironing
out. A significant increase in tax compliance can be achieved only if the
same is made less onerous and simple while being
stringent enough to ensure
that tax there is no evasion of taxes.
Without a doubt with further
fine-tuning of the forms the two seemingly divergent goals could be met. Since
the new ITR Forms
are valid only for Assessment Year 2007-08, we hope the
forms introduced next year are bereft of any ambiguity and are
relatively
simpler.