Income Tax Return – A Child’s Play?

Shubhangi Agarwal 

“Death and taxes in life are certain, knowing how to pay only your fair share is third.”

– Yvette D.

Income Tax Return (‘ITR’), an annual record of income, enables a taxpayer to declare his income, expenses, tax liability, deductions, savings, investments, etc. during the applicable Fiscal Year (i.e. Financial Year (‘FY’) – a period from April 1 to March 31). This annual record is to be mandatorily submitted to the Indian revenue authorities in a prescribed format, known as the ITR form. In India, tax on income for individuals, is levied at slab rates i.e. lower income is taxed at a lower rate and higher income at a higher rate. This is also known as Vertical Equity, i.e. people with higher income are placed higher up the ladder and therefore are required to shell out more taxes compared to those with lower income who are placed at lower end of the ladder. The Income Tax Act, 1961 (‘Act’) and the related rules cast a legal obligation on every individual to file ITR, wherein the total income for the year exceeds the basic exemption limit of INR 2.5 lakhs, which is not chargeable to income tax as per the applicable provisions. However, in case of companies, there is no such basic exemption limit and it becomes mandatory to file the ITR annually.

Assessee, in simpler terms, means a person by whom any tax or any other sum of money is payable under the Act. The total income of an assessee for the FY / Previous Year (‘PY’) is taxable in the relevant Assessment Year (‘AY’). For example, the total income for the PY 2019-20 (i.e. from  April 1, 2019 to March 31, 2020) is taxable in the AY 2020-21.

Why taxes are levied? Can Government collect the taxes arbitrarily?

One of the primary reasons for levy of taxes in India, is that it constitutes the basic source of revenue for the Government, which is further utilised to meet the expenses for development purposes like
health-care, infrastructure, provision of education, defence, etc. and public welfare.

• Article 265 of the Constitution of India, lays down that “No tax shall be levied or collected except by authority of law”;
• The Parliament and State Legislatures are empowered to makes laws on the matters enumerated in the 7^th Schedule by virtue of Article 246 of the Constitution of India;
• The 7^th Schedule to Article 246 contains 3 lists which enumerate the matters under which the Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes;
• One of the 3 lists is the ‘Union List’, on the matters of which, only the Parliament has the exclusive power to make laws;
• Entry 82 of the ‘Union List’ has given the power to the Parliament to make laws on taxes on income other than agricultural income.

Article 265 → Article 246 → 7th Schedule → Union List → Entry 82 → Income Tax

Therefore, the government derives its powers to frame laws on taxes directly from the Constitution of India.

IMPORTANCE OF ITR FILING

The ITR serves as an income proof and is very critical for the following reasons:

1. Claiming refunds or deductions: Deductions are one of the ways to reduce the overall tax liability and save the unnecessary tax leakage. By filing ITRs, a person can get refund of Tax Deducted at Source (‘TDS’) subject to certain conditions.

2. Carry forward of losses: In situations wherein losses have been incurred for a particular year, even then the ITR should be filed so that the assessee can carry forward the losses to set off against the gains of the subsequent years, subject to certain conditions. This is one of the efficient ways to reduce the burden of tax in the forthcoming years.

3. Visa Processing: Foreign consulates often ask for ITRs of past few years, at the time of visa process. Thus, it becomes an important document while traveling overseas.

 4. Government Tender: Individuals that plan to start their own business and are required to fill government tenders, have to furnish ITR of preceding years. It serves as a proof of financial status and act as a check on timely payment obligations.

5. Fee / Prosecution for non-filing or late-filing of ITR: Under the Act, non-filing or late filing of ITR can attract a fee of INR 1,000 if the total income does not exceed INR 5 lakhs. In other circumstances, penalty of INR 5,000 or INR 10,000 is levied (as the case maybe), leading to legal implications for the taxpayers who are mandatorily required to file as per the provisions. Further, a wilful failure to furnish ITR in due time may lead to rigorous imprisonment of 3 months to 7 years and fine.

MODES OF TAX COLLECTION

Some of the important modes of collecting taxes from taxpayers are in the form of TDS, Advance Tax and Self-Assessment Tax. The taxes are deductible from the total tax due from the assesse. Additionally, every person whose estimated tax liability for the year is INR 10,000 or more shall pay tax in advance, i.e. advance tax subject to few exceptions. Advance tax also known as ‘pay-as-you-earn’ refers to paying a part of taxes before the end of the FY rather than paying the complete amount at the end of the FY. This helps the government to get a constant flow of income throughout the year and is beneficial for the assessee to avoid any interest on taxes for late payment.

The assessee, while filing ITR, needs to pay Self-Assessment Tax under section 140A of the Act, if tax is due on the total income as per his ITR after adjusting, inter alia, TDS, relief of tax, tax credit, advance tax, etc. However, it is to be noted that a senior citizen of age 60 years or above who does not have any income chargeable under the head “Profits and Gains of Business or Profession” is not liable to pay advance tax and can discharge their tax liability (other than TDS) by payment of Self-Assessment Tax.

EXEMPTIONS VIS-À-VIS DEDUCTIONS: A CONUNDRUM

One of the common conundrum that exists among taxpayers is the difference between deductions and exemptions. Not all that one earns is taxed in India. Yes! The government provides exemptions which are applicable on certain types of income, such as agriculture income is exempt from income tax in India. The various items of income that are mentioned in Section 10 of the Act are excluded from the total income of an assessee and hence are known as exempted incomes.

Now what if the income earned by the individual is not exempted? Is there still a ray of hope? Yes, of course. There are certain other incomes which are included in the Gross Total Income but are wholly or partly allowed as deductions while computing the total income.

Rent paid – claim exemption or deduction

One of the most common exemption/deduction claimed by an assessee is for the rent paid while filing ITR. This can be availed using House Rent Allowance (‘HRA’) under Section 10 (13A) of the Act or Deduction of Rent Paid under Section 80GG of the Act. HRA is an allowance granted by an employer to its employee towards payment of rent for residence of the employee. Tax exemption on HRA can be claimed on satisfaction of certain conditions. Whereas, Section 80GG of the Act provides relief to those individuals who do not receive HRA.

ITR FORMS AND THEIR APPLICABILITY

Certain sections of the society consider the ITR process to be cumbersome. However, it is of significant importance to consider that people with different income levels / sources are required to file different ITR forms. Every individual is not required to provide detailed information and calculations. For example, a salaried employee who earns a modest salary and has no other source of income except salary, the government has provided a plain-vanilla ITR form which actually becomes a child’s play. The assesse has to judiciously ascertain the ITR form applicable as follows:

TABLE: ITR FORMS[1]

ITR can be filed either online or offline. The introduction of online or electronic filing (‘E-filing’) portal has made the ITR filing comparatively swifter and easier compared to earlier days making it a child’s play.

FORM 26AS: A CONSOLIDATED FORM

Form 26AS is a consolidated annual tax statement that reflects details of TDS, Tax Collected at Source, Advance Tax, Self-Assessment Tax, against the taxpayer’s Permanent Account Number (PAN). Basically, it is the record of all the transactions (certain to some conditions) made or done against one’s individual PAN.

The Budget for 2020-21 further revised the Form 26AS with an aim to provide a more comprehensive profile of the taxpayer which would include all high value transactions like the details provided by banks and financial institutions too.[3]

This is to enhance the flow of information between the taxpayers and the tax authorities. As a result, all the information is available and collected in a consolidated form that is Form 26AS. This in turn facilitates correct ITR filing as the assesse can cross-check the details of income and taxes, thereby making Form 26AS a very important document while filing ITR. For instance, if the employer quotes an incorrect PAN of any employee, TDS deducted will not be reflected in the employee’s Form 26AS. Further, certain high value transactions are also reported in Form 26AS now. Thus, bringing everything under the government scanner now.

CONCLUSION

Filing ITR is a legal, moral and social duty of every citizen of the country. It provides a platform to the assessee to claim refund of taxes already paid, apart from other reliefs and act as a basis for the government to determine the revenue generated in the country and accordingly form public welfare policies. The number of registered users on the Income Tax India E-filing Portal as of August 31, 2020 was 9.47 crores[4] out of approximately 138 crores of population. Now, any individual can easily file ITR by visiting www.incometaxindiaefiling.gov.in and creating own income-tax account simply using their PAN. Considering the Covid-19 pandemic and with a view to providing immediate relief to the business entities and individuals, in a press release dated July 17, 2020, the Ministry of Finance stated that the Income Tax Department refunded INR 71,229 crore to more than 21.24 lakh taxpayers. The last date to file ITR for AY 2019-20 is September 30, 2020 and for AY 2020-21 is November 30, 2020. It is observed that citizens consider the whole procedure of ITR filing, to be tedious, however, it is undeniable that India is moving towards creating an easier, simpler and efficient tax system with the introduction of e-filing and newly introduced tax reforms.

Notes:-

[1] incometaxindia.gov.in

[2] HUF stands for Hindu Undivided Family

[3] Union Budget 2020-21, Ministry of Finance, Government of India

[4] https://www.incometaxindiaefiling.gov.in/moreStatistics

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(The author Shubhangi Agarwal is an Economics graduate and also holds a master’s degree in Economics. Currently, Shubhangi is in her final year of LL.B. (Symbiosis Law School, Pune) wherein she secured merit scholarship for holding first rank in her batch. Shubhangi has undergone numerous internships with certain renowned law firms like Khaitan & Co. and L&L Partners, New Delhi. The views expressed in this article are solely of the author and does not relate to the views of any other person or firm.)