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.
Divya Baweja is Partner, BMR & Associates, and Nitin Baijal is Director, BMR & Associates. They can be reached at Divya.baweja@bmradvisors.com or Nitin.baijal@bmradvisors.com. The views expressed are those of the authors and do not necessarily represent the firm's views.
