A charter of honesty
by Babar Zaidi
June 26, 2009
Taxing times, file today, easy ways to file, 10 tips, 20 steps…. It’s that time of the year when magazines, pink papers and papers of all other hues join in the chorus, telling you that paying taxes and filing your income tax return is not to be feared. In the same breath, they also inform you about tax notices and penalties for making errors while filing. On the whole, the media seems to be conspiring with the tax authorities to give you, the honest taxpayer, a severe case of performance anxiety.
Actually, there’s no need for this. All it takes is a little planning, a lot of paperwork, and a couple of undisturbed hours. And you’ll get by—with a little help from friends like us. Because, while we are going to inform you about e-filing, carrying forward losses and little-known deductions, we shall also tell you that if you stop after reading the following eight commandments, you shall still do well. We are calling them commandments because we feel that these ought to be etched in stone. You can call them canons or guiding principles, if you like. The result is the same: this set of rules will help make tax time go by like any other day of the week, and will certainly keep those dreaded notices at bay.
I. Thou shall file the return if your income exceeds the exemption limit.
It’s quite simple: if your income crosses the basic exemption limit (MT Basics, page 33), you have to file your tax return. Yes, you have to file even if you’ve invested so cleverly as to bring your taxable amount to nil. And yes, you need to file even if tax has been deducted at source.
Thus far, it’s easy. If you have not filed a return for the past few years because you assumed that tax deducted at source or nil tax liability meant a free pass, we’ve got bad news for you. The mills of the Income Tax Department grind slow, but they grind on inexorably. You might have realised now that you need to start filing from this year, but a year down the line, you could get a notice for the return you did not file last year. Or the year before that.
The good news is that the IT Department is not a heartless robot. According to its Website: “It is never too late to start honouring your constitutional obligations for payment of tax.” You can file a return before the expiry of two years from the end of the financial year in which the income was earned. So, for the financial year 2007-8, the belated return can be filed before 31 March 2010.
Implications: Not filing return can result in a notice. If all taxes are paid, you can file up to the end of the assessment year (31 March 2010) without any penal action. After that, a penalty of up to Rs 5,000 can be imposed.
II. Thou shall use the correct tax form for filing your return.
So you know you have to file, and have decided to go it alone. After all, year after year, the finance minister stands up and says the filing process has been simplified. Then you find out that there are eight forms to choose from—and no easy way of figuring out which one you need to fill and submit.
Actually, the confusion doesn’t have so much to do with the forms; it has to do with us not knowing what constitutes income. There’s a separate form for income from salary, pension and interest. And a different one if your income is from dividends, capital gains, rents and royalty. Another point to keep in mind is that the forms are issued every year, with the assessment year printed on them.
So, if you’re filing for this year, don’t make the mistake of using a form downloaded last year. This might be a good time to clear up another point: the assessment year (2009-10) is the year in which you file return for the income earned in the previous financial year (2008-9).
Implications: The returns filed using an incorrect form could lead to a tax notice. You may then be required to file a revised return.
III. Thou shall not quote a wrong PAN in your form.
When there’s a lot of money at stake, many of us tend to freeze up. Filling tax forms does involve a lot of money—on paper at least. But the Income Tax Department is not going to be sympathetic if you say you were too nervous to write your PAN correctly. Here’s the kicker: if you managed to get the PAN right on the form, but carelessly gave your office a wrong number, the tax deducted at source (TDS) from your salary will be credited to that account, not yours. Under the knowyour-customer (KYC) norms for banks, mutual funds, credit card companies, telecom service providers and other entities, you have to quote your PAN.
For those who can remember the 10 alpha-numeric characters, a little tip: the fifth character is the first letter of your surname. For the rest of us, the only way out is to keep a photocopy of the PAN card and refer to it. Some people keep a scanned copy of the PAN card on their computers. Good idea, but remember to passwordprotect the folder. And don’t, under any circumstance, save the number on your mobile phone.
Implications: Quoting an incorrect PAN in the tax return form can invite a fine of up to Rs 10,000.
IV. Thou shall include bank and FD interest in your income.
You have calculated all your dividends, rent, salary income and have come up with the grand total. But before you start inking in those numbers, ask yourself if you included the interest earned on the balance in your bank account? “Given that in India a lot of household wealth stays in banks, this is a common mistake,” says Kartik Varma, co-founder of iTrust Financial Advisors.
Some taxpayers even believe that the income from tax-saving options such as NSCs and five-year fixed deposits is exempt from tax. Many don’t know that they need to club the income of their minor children, including the interest earned on bank accounts, with their own. Others harbour the misconception that the income will be taxed when they receive it on maturity of a bond or security. Tax laws say that income is to be taxed on an accrual basis. The income earned every year by a five-year FD will be taxed in the relevant year and not at one go on maturity.
Implications: Not reporting a taxable income amounts to tax evasion. The fine for this can be 100-300% of the unpaid amount.
V. Thou shall not ignore income from previous job.
Till recently, changing jobs had been commonplace. No doubt, it’s a good thing, but while it might improve your career and bank balance, it’s bad news when it comes to filing your income tax return. This is because most of us who change jobs during the year report income only from the current job and don’t take into account the income received from the previous employer. This amounts to taking a double tax exemption and could result in underpayment of tax.
This is because the new employer will deduct taxes on the assumption that this is your only income in the year. If you changed jobs during the previous financial year, include income from both employers while calculating your tax liability. The deadline for paying taxes for any financial year is 31 March. If any tax is due for the previous year, you have to pay it along with a 1% penal interest for every month of delay after March 2009. The good news is that you can avoid this by informing the new employers about your income from the previous job and getting them to factor it in (and the tax deducted at source) with your income tax liability for the year.
Implications: Not reporting the income is tax evasion and can lead to stiff penalties. Remember, ignorance of the law cannot be an excuse.
VI. Thou shall pay advance tax as per schedule.
This is not a serious issue—but could end up costing you. Assume you’ve been investing and making decent profits. Are you paying taxes on it? An individual has to pay tax as and when he earns income.
If you made a short-term capital gain of Rs 20,000 from shares in the first quarter of the financial year, you need to pay an advance tax of Rs 3,000 (15% of the profit) by 15 September of that year. Yet, many taxpayers miss the first two advance tax dates (15 September and 15 December) and pay the entire tax in the last instalment, which is due on 15 March.
Consequently, they don’t pay the interest due on the delayed payments.“Late payment of advance tax lays the taxpayer’s return open to scrutiny. Once you get a notice, you may be asked tens of other questions,” cautions Surya Bhatia, chartered accountant and partner, Asset Managers.
Implications: Like we said, this is not a huge issue. But it’s best to stick to the advance tax schedule to avoid an inquiry and subsequent scrutiny by the Income Tax Department.
VII. Thou shall mention high-value transactions in the AIR.
The annual information return or the AIR is generally considered an optional entry if the rest of the form is filled in correctly. After all, it’s just details of investments and expenses—much of which might have been covered in the form. But here’s what actually happens. The banks, credit card companies and the like file their AIRs with details of all the transactions. The tax department compares your AIR with that of the financial entity. If you have left out transactions, it’s a flag for the department to scrutinise your return.
But there are over 3 crore returns filed every year. Your paper is literally a drop in the ocean. Allow us to puncture that happy bubble. The tax department uses a computer-aided scrutiny selection (CASS) procedure that picks up cases which show a likelihood of tax evasion. “AIR information is one of the inputs in the CASS and, therefore, non-disclosure of an AIR transaction in the income-tax return would definitely put a taxpayer at the risk of his case being selected for scrutiny,” says Shishir Jha, commissioner of income tax and CBDT spokesperson. This could be the thin edge of the wedge for a taxpayer. It’s best to play safe and fill the AIR correctly.
Implications: The taxman gets AIR details from other sources. A notice is sent if there’s a mismatch.
VIII. Thou shall pay tax with interest for previous unfiled years.
This is for the Rip Van Winkles among us who have not filed returns for several years. There is precious little you can do for returns more than two years old because you cannot file them now. The tax laws allow you to file delayed returns which are up to two years old.
What you should do is pay the tax dues of the previous years along with a penal interest of 1% for every month of delay. And then hope for the best. That’s because even though you might have filed your return, you can still be penalised for late filing if the assessing officer is not convinced about the reasons for the delay. The silver lining is that he is likely to show leniency if you have voluntarily filed your return, albeit several months after it was due.
“If you have paid your taxes then you are better placed vis-a-vis not filing returns and not paying tax. If you get a notice for non-filing, you can at least show that there is no tax due,” says Bhatia.
Implications: You can be fined Rs 5,000 for not filing your return by the due date. If there are unpaid taxes, the penalty is 100-300% of the tax due.
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