Budget 2022 expectations: The government can provide relief to taxpayers by rationalising tax provisions and improving the efficiency of tax return processing methods. Here's what measures it can take
With Budget 2022 around the corner, individual taxpayers have built up their wishlists. The longstanding expectations include reductions in tax rates and an increase in limits of various deductions.
On the other hand, the government is hard-pressed to balance the fiscal deficit in view of the expenditure incurred during the COVID-19 pandemic. This gives the Centre limited options to provide relief to taxpayers such as tax cuts/ rebates. In view of these limitations, the government can instead provide relief to taxpayers by rationalising tax provisions and improving the efficiency of tax return processing methods, a few of which are discussed below.
Taxability upon withdrawal of contributions from Provident Fund National Pension Scheme (NPS) and Superannuation Fund (SAF)
Effective 1 April 2020, employer contributions into PF, NPS and SAF in excess of Rs 7.5 Lakhs in a tax year were made taxable as “perquisite” in the hands of employees as income for the year contributions were made.
As per rules, the withdrawal of NPS balance (partially), employer SAF contributions (in certain circumstances) and employer PF contributions (when withdrawn before 5 years of continuous contributions) are taxable. A fundamental principle of taxation is that if an income has suffered tax once, the same income should not be subjected to tax again. The government should outline principles and methodology to obviate double taxation of contributions that have already suffered tax in the year of contribution. This would bring clarity and pre-empt unnecessary litigation that may arise on this aspect in the future.
Tax Credit at Source (TCS) on remittance outside India under the Liberalised remittance scheme (LRS) when remittance exceeds Rs. 7.5 lakhs in a tax year
With the stated intention of widening and deepening the tax net, effective 1 October 2020, the government introduced a requirement for authorised dealers (e.g. banks) to deduct TCS @ 5 percent on overseas remittance. The intent of a TCS provision is generally to collect tax in advance of the tax year and bring the taxpayers who are making the specified payment under the radar of revenue authorities.
In today’s globalised world, many Indians send their children for overseas graduate and post-graduate studies for which they need to remit significant amounts of fees/other costs to overseas bank accounts.
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Based on the current requirements, for remittance to be made outside India, duly verified forms and declarations are collected by the authorised dealer. There is sufficient documentation available with the dealer, which can be used by the government for tracking such cases.
Therefore, the government should revisit the levy of TCS on remittance of money outside India under LRS. The above-mentioned objective of the government to widen the tax base can also be achieved by implementing a robust process of capturing relevant details of such transactions via the Annual Information Report system and then requiring those individuals to file the tax returns. This may be a better route than a blanket levy of 5 percent TCS on such transactions, which causes unnecessary hardship of having to claim a tax refund for many individuals who do not have taxable income.
Timeline for revision of the tax return can be restored to one year from the end of assessment year
With the aid of automation and digitisation of tax processes and faceless assessment, the government is committed to completing assessments faster than earlier. On account of reduction in such time, it had reduced the timeline for filing a revised tax return.
Under the tax law, the intent of allowing a revision of tax return is to allow correction or omission or error voluntarily by a taxpayer when he/she spots the error or omission. With the reduced time frame between the original tax return filing due date and revised return filing due date, the chances of such identification practically may be lower. The reduced timeline for revision of tax return filing also has a big impact on those taxpayers who claim a foreign tax credit (FTC).
This is because, in many other countries, the tax year is not aligned with the Indian tax year. The tax return of an overseas country may not be available with the taxpayer before the revised return timeline in India. Due to this, the India tax returns are practically filed on best estimate basis, which may result in under-reporting/over-reporting of taxable income. The due date for revised tax return filing should be restored to one year from the end of the assessment year, which will allow taxpayers sufficient time to revise their tax returns.
Processing of tax returns by Central Processing Centre (CPC)
The government has come a long way by establishing automated processing of tax returns with the use of technology. The flip side of such an automated process is that due to lack of human interface, certain tax credits are not granted at the time of processing the tax return which leads to demands (e.g., foreign tax credit claims- ‘FTC’).
At the time of filing the tax return, taxpayers have to mandatorily submit Form 67 and proof of tax paid outside India in support of the FTC claim. At the time of auto-processing of tax returns, FTC claims are not allowed (without assigning any reason) and this leads to unnecessary tax demands.
Unless the case is transferred to the Assessing Officer (AO) by the CPC, no relief is provided by the AO. The only remedy available to the taxpayer is to file for a rectification. To ensure that the FTC claim is not lost if the said credit is not granted as a result of the rectification process, many taxpayers also take recourse to simultaneously filing an appeal (against the above denial of FTC) within a very limited time frame.
To address the same, the government can consider measures to reduce the burden of such taxpayers by allowing automatic foreign tax credit claims where the necessary proof of tax paid in support of FTC is already submitted by the taxpayer. Detailed verification of such claims can be carried out by way of scrutiny assessments, depending upon the criteria adopted by revenue authorities.
These changes will give relief to taxpayers from undue litigation and also reduce the administrative burden on tax authorities in disposing of the appeal cases.
The author Alok Agrawal is Partner, Deloitte India and Sangeeta Mehta is Manager with Deloitte Haskins and Sells LLP.
(Edited by : Kanishka Sarkar)
First Published: IST