What is Financial Identity? How Income Tax Return helps in creating it for you?

Introduction: –

Income tax return or Income Tax in general is a word that instantly strikes fear in the mind of the person. And definitely, this fear has a lot to do with the visual media and movies we see where Income Tax Authorities are shown as wealth sucking leach which waits for the opportunity to unleash upon it preys.

But the reality is a bit different. And it is definitely not this harsh. In fact, through this article, I shall focus upon the less talked aspect which shall give you a better perspective of this whole Return thing. And you will get to know how in-fact income tax return is a great thing that exists in this world.

What exactly is an Income Tax return (ITR)?

An Income tax return (Commonly known as ITR or Return) is nothing but a statement you file to the government (through an intermediary known as Income Tax Authorities), reflecting all your incomes (Along with their source) that you earned during the year along with an annual declaration of assets and liabilities you possess at the end of the year.

But Why is the filing of this statement so important? What value does it create for me?

Filing of ITR is mandatory for a taxpayer under the law. But at the same time, regular filing of Income Tax Return gives you the key in the form of Financial Identity. Which unlocks within you the potential to leverage your financial situation to a greater height.

So, what is this Financial Identity?

A financial identity is nothing but the recognition of the person on the basis of his financial condition, which gives an assurance to the person dealing with him, w.r.t to his financial capabilities.

I shall share with you an example to help you understand my point.

Example: Alok Industries vs Reliance Industries Limited

There was a big textile company named Alok Industries. It was burdened under a great loss and hence it defaulted on the repayment of dues to its creditors and financers. It approached big corporate banks and investors for help, but no one was willing to take the risk on it. Why So? Obviously, because it didn’t have any financial capability to repay it. And eventually, it destroyed the wealth of investors and stakeholders. And was forced to get into the process of bankruptcy.

But then came a big corporate house Reliance Industries Limited (RIL). RIL decided to invest in Alok Industries. And suddenly the company which was a lost entity became a hotshot in the market. And all the banks and investors got excited about this entity. And it started enjoying preferential treatment in the market.

Now, what brought this sudden change in the behavior of banks and investors? Did something change within the Alok Industries? Or did it become an exceptionally great company overnight?

NO, all this preferential treatment was the result of the favorable financial identity of RIL (the acquirer Company run under the leadership of Mr. Mukesh Ambani). Banks and investors are aware of the financial capability that Mr. Ambani has and hence they became rest assured about the company’s financial viability.

How can one create such a favorable financial identity?

Charlie Munger (one of the greatest Value Investors) when asked about “How one can judge a person’s integrity”?. He Replied “A person can be judged about his integrity from his past. If he has been involved in deceitful practices in the Past, then there are chances that he will repeat the same if he encounters a similar situation”.

The same definition could be cloned to understand how we can recognize a person with a favorable financial identity. A favorable financial identity is nothing but a financial reputation a person enjoys, which he has created in the past with the series of events repeatedly done over the years.

Hence to create a financial identity you must repeatedly indulge in a series of event which proves your financial stability over the period of time. And this event is what we are here to discuss about i.e.., filing of income tax return over the period of time.

How does Income Tax Return give you such Financial Identity?

Income Tax return when filed over the period of time creates a favorable track record for the taxpayer. And this documented track record of wealth along with the audited financials creates a great financial identity for the person filing the return.

And eventually, this small habit of filing return year by year gets you into the position of great advantage which could help you tap the resources which are usually not available to a general person.

What all resources can I tap with a great financial identity? 

Though the resources that could be tapped has no potential. But I will still just elaborate a couple of points to give you an insight.

Leverage your financial position on the borrowed money

Banks love people with a great financial identity. In fact, to some extent, they don’t mind even sacrificing a portion of their interest income for lending the cash where they feel that it is safe with the borrower. Now with a great financial identity, you automatically get qualified to get into the position to get a cheaper loan for your financial needs. And this cheaper loan could be wisely used to elevate your financial situation.

Helps in the processing of documents for foreign Ventures.

When you plan for a business or employment opportunities in a foreign country you got to have your documents right for the VISA and other secondary requirements. Even here your financial viability is verified by your favorable financial entity. And this great habit of the yearly declaration of your Income-tax return helps you to prove great track record and eventually takes you to a great deal.

Helps to get into new business opportunities

Many Government and Private businesses before getting into the business relationship with any person usually expect a favorable financial identity of a person. And in fact in some cases even requires the person to submit their latest return along with their audited financials before applying for the tendor. So next time if you wish to apply for a new business opportunity, ensure that you are updated with the latest set of returns and financial statements.

Okay, now we understand how important it is to file our returns. But what is the frequency of Filing the Return in a year? 

For most of us, our wealth grows on a real-time basis but the same cannot be declared to the government at the same speed. Hence the government has created a protocol where every income earning person needs to declare their income on a yearly basis.

And for the FY 2019-20, deadlines for filing the return shall begin from 30th November 2020.

And the last question: Can this return be filed on our own or does it require any assistance?

Of course, anyone can file this statement on their own. And also, at the same time the government has also arranged help for us in the form of professionals, known as Tax Return Preparers (Commonly Known as TRPs). Along with this, you may even opt for assistance from legal consultants (such as practicing chartered accountants) to file your return.

Whatever option you may opt, just ensure that you put the right information on the domain, and you pay the correct tax on it.

Please Note: The last date for filing of Belated and Revised return of FY 2018-19 is 31st July 2020 (Utilize this opportunity to create a great FINANCIAL IDENTITY for yourselves).

About the Author

The author is Robin Babu, working as a manager in Adlakha Kukreja & Company (Chartered Accountants), a chartered accountancy firm helping foreign companies establish their business set up in India while also helping them comply with various tax laws existing in India. Along with that, it helps companies outsource their accounting, legal, and taxation matters.