Tax without the tears

Right from the Direct Taxes Code which was sought to be implemented by the UPA government, to every Budget in recent years, there have been attempts to make tax laws friendlier. The Justice RV Easwar Committee, set up for this purpose yet again, submitted its first report in mid-January 2016.

It is expected that many of the proposals in this report may find their way into the upcoming Budget. Here’s explaining some of the recommendations which, if included in the Budget proposals, could make life much easier, especially for individual tax payers.

Background : It is well known that TDS (Tax Deduction at Source) has proved to be quite tedious for tax payers. Compulsory triggering of TDS provisions on payment as low as ₹2,500 (interest on NSS deposits), ₹5,000 (receipt of commission, brokerage, interest on deposits other than bank deposits) or ₹10,000 (interest on bank deposits) meant that small investors whose income did not fall in the taxable limit had to remember to promptly give Form 15G or 15H to the institution deducting the taxes. Even if the income was taxable, high TDS rates of 10 per cent in many cases implied huge refunds, and the agony of having to wait for it for a long time. This is because while basic exemption limit and tax slabs steadily moved up over the years, the TDS rates remained constant.

As the committee points out, in financial year 2004-05, taxable income of ₹5 lakh in the case of an individual attracted income-tax of ₹1. 24 lakh at an average rate of 24.8 per cent. But for the current fiscal, ₹5 lakh attracts income-tax of only ₹25,000. It gets even lower if the rebate of ₹2,000 allowed for those who have taxable income of up to ₹5 lakh is considered. At ₹23,000 on an income of ₹5 lakh, the average tax rate today works out to just 4.6 per cent. The average tax rate of 10 per cent gets attracted only on taxable income beyond ₹7 lakh (10 per cent tax on income between ₹2.5 lakh and ₹5 lakh = ₹25,000 + 20 per cent tax on income between ₹5 lakh and ₹7 lakh = ₹40,000.

Hence, total tax of ₹65,000 on a taxable income of ₹7 lakh gives an average tax rate of 9.3 per cent. But TDS of 10 per cent is applicable to those who earn much lower than ₹7 lakh as well, implying that TDS would be deducted during the financial year, only to give a portion of it back as refund later on.

To avoid this situation, there is a provision to obtain a ‘certificate for lower deduction’ from the department if your taxable income does not warrant high TDS rates. But this provision has been used more popularly only by corporate assessees. Obtaining a certificate has so far been wrought with procedural hassles and delays, too, thus not giving much of a choice to individual assessees but to pay TDS at normal rates and wait for refund.

Recommendations : The Easwar committee has brought in major relief for small taxpayers on this front by proposing higher threshold limits and lower deduction rates for TDS provisions. This implies that for many small taxpayers, TDS may no longer need to be collected in the first place, thus freeing up money that might otherwise be locked-in until the refund is issued. The accompanying table details the changes proposed.

Background : Secondly, the committee has also looked into the difficulties faced by assessees relating to TDS deductions in situations where the deductor is at fault. Say, in case of rent on jointly held assets or interest on jointly held deposits, while the deductor may issue a TDS certificate in one party’s name, the other party in the joint holding may want to claim the TDS deductions. Even after having filed a declaration with the deductor requesting for the same, the request might not have been considered. Similarly, for reasons such as not furnishing PAN or giving an invalid PAN, tax is mandated to be deducted at a higher rate. But even after the assessee furnishes the correct PAN, some deductors may not correct their TDS statements.

Mistakes in TDS returns filed due to oversight of the deductor and his failure to rectify the mistakes after that also don’t help deductees.

Recommendations: For assessees caught in all such situations discussed above, the committee has recommended that assessees can report the correct information to the authorities through a prescribed form, before the due date of filing the return of income.

Once done, their rightful TDS payments can be credited to them automatically, even if the deductor has not yet woken up to it.

Further, to help assessees keep track and cross-check as and when the deduction happens, the report has also recommended that deductors should inform assessees about the deduction through SMS or email.

Background : If you are one of those assessees whose rightful refund due for one year was adjusted against an unjustified demand of the same year or of another year, you did not have much respite until now. While you could approach your auditor, he would then have to go back and forth with the assessing officer, convincing him of your case. You could file an objection in the department’s portal, but there was no way you could really pin anyone down to hear you out. This apart, low interest rates (6 per cent per annum) prescribed on late refunds also meant the department could delay the processing of your returns and make you wait long before returning what is due to you.

Recommendations : To avoid tax payers being harassed on such counts, the committee has suggested that refunds should not be set off without giving intimation to the concerned person and without dealing with objections filed in response to the intimation.

To speed up paying of refunds, the committee has also upped the interest rates and set time limits for both the processing of returns and the issue of refunds. Breach of these will require payment of interest on the refund. With cases of random scrutiny of assessments on the increase these days, the committee has also proposed that the processing of returns and payment of refund cannot be delayed even if your return has been taken up for further scrutiny.

Background : Are you a savvy stock market investor? If the taxman has not knocked on your door yet, disputing what you showed as capital gains from sale of shares in your IT return, you are lucky. Vinal Mittal was not so lucky. A salaried employee, Vinal reported long-term and short-term capital gains on sale of shares in his return filed for the assessment year 2007-08.

Matters went to the Delhi High Court when the revenue authorities accepted the long-term capital gains, but wanted to treat the short-term profits as business income based on the very short holding periods, frequency of transactions, scale of activities, etc.

After several years of wrangling, the Delhi High Court thankfully came to Vinal’s rescue in 2012, and said that the short-term profits were indeed capital gains. Among other things, it took into account the fact that he was a salaried employee, that according to documents submitted by him, he maintained two separate portfolios for trading and investing and that his transactions were few in number although the quantity of shares sold was high.

According to Sec 2(14) of the Income Tax Act, shares and other securities can be held either as capital asset or stock-in-trade or both. But the Act does not contain any specific laws as to the characterisation of any particular investment (as capital asset subject to capital gains tax or stock-in-trade that is taxed as business profits). Although circulars/instructions have been issued by the department and certain judicial precedents exist, how it should be taxed has been left to be decided on a case-to-case basis.

This has left matters to the whim and fancy of the assessing officers time and again, causing agony to assessees, especially small individual investors such as pensioners and homemakers.

Recommendations : The committee has recommended amendments to sec 2 (14), to help small investors. Accordingly, surplus arising on transfer of shares and securities held for a period exceeding twelve months will be chargeable as capital gains if they are not specifically held as stock in trade. Surplus arising on transfer of shares and securities held for a period less than twelve months, up to a sum of ₹5 lakh, will be chargeable as capital gains if they are not specifically held as stock-in-trade.

If these changes are proposed in the Budget, you can sleep peacefully if you are a big time, but long-term investor. When you declare the profits as capital gains, your intentions cannot be questioned.

But mind you, if you believe in trading and making quick profits and your short-term gains are higher than ₹5 lakh in a particular year the onus will still be on you prove your intentions in buying and selling the shares.

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