Individuals will have to start reporting their income from all sources in due course, including tax-free income.The government is vetting a proposal to shift from an exemption to a deduction-based regime for reporting income, a government official said. This means while computing the tax outgo, an individual has to include income from all sources and then claim a deduction on tax-free income. The objective of the proposal, set to feature in the new income-tax code, is to establish an audit trail.This, in turn, will help widen the assessee base as more people will file tax returns. There are 3.5 crore tax assesses in the country. The proposal is also in sync with the goal of linking all transactions of an individual to his permanent account number (PAN).

The new income-tax code will replace the existing Income-Tax Act, 1961. A concept paper on the new code is on the cards. “The focus will be on policy changes that need to be carried out in the long run,” an official said.

The government, for instance, can elicit a feedback on the phase-out of various corporate tax exemptions or even propose new policy initiatives on non-resident taxation. The code may incorporate a basic formula for tax calculations to make it more user-friendly.

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Provisions will be regrouped for easier interpretation. Currently, individuals or non-corporate assessees do not have to include income from certain sources while calculating tax outgo. These include agricultural income, insurance receipts, long-term capital gains and dividends, among others. They are spared of paying tax on such income.

However, the proposal could have political ramifications if the norm is applied to farm income. Right now, individuals who earn only agriculture income do not have to file tax returns and are out of the tax net. Those who have other sources of income besides farm income have to report income from agriculture in tax returns.

This is required to compute the rate of tax, which is then applied only on non-farm income. One option being looked at is to maintain status quo on the existing tax treatment for individuals who earn only from agriculture. So, the deduction-based regime will apply to other non-corporate tax assesses.

“The proposal to usher in a deduction-based regime will mark a significant change for non-corporate assessees. They will have to report income from all sources, irrespective of whether they pay tax on a particular source of income. This means non-corporate assessees could be subject to greater scrutiny. From the tax authorities perspective, it will strengthen the audit trail,” Ernst & Young tax partner Jayesh Sanghvi said

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