ITR Form for AY 2020-21: new disclosures that taxpayers need to make in new ITR forms

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The changes in this year’s ITR forms are significant because it is seeking more disclosures.
  • More disclosures are aimed at improving income tax compliances & e-assessments.
  • In AY 2018-19, 58.7 million returns were filed, out of which about 23.7 million people filed returns with no tax liability

While it may be commonplace in Uncle Sam’s country, India is slowly getting used to the idea of disclosing more information to the taxman. In the last five years, income tax return (ITR) forms have started asking for more details to ensure that your spending patterns match your tax return profile.

However, the department seeking details of a valid passport or foreign travel with spends of over ₹2 lakh has left many with a feeling of discomfort as it further complicates the filing process. Many experts also worry about the privacy and security issues. “Data protection law for individuals in our country is not like that in developed countries such as the US. Also, given that the Personal Data Protection Bill 2019 is under consideration, many people are worried and skeptical when it comes to divulging so much information,” said Divya Baweja, partner, Deloitte Haskins and Sells LLP, an accounting firm.

Whether asking for more information will bear fruit and result in better tax compliance continues to be a question mark. The fact remains that you need to provide additional details, for which you have to be on top of many things, including your spending patterns. Now, if you have spent more than ₹2 lakh on foreign travel or ₹1 lakh on electric bills in the current financial year (FY), you will need to furnish these details. The new ITR forms notified by Central Board of Direct Taxes (CBDT), for the upcoming assessment year (AY) 2020-21, require you to disclose such information. If your spending patterns don’t line up with your tax declarations, it may land you in hot water.

The objective is to gather more and more information and make the process of selecting cases for scrutiny easier.

New ITR Forms: ITR-1 &  ITR4

ITR-1 which is also known as “Sahaj” can be used by an individual whose incomes primarily include salary income and whose total income does not exceed Rs.50 lakh during the FY. On the other hand ITR-4 can be used to file returns by resident individuals, Hindu Undivided Family (HUFs) and firms (other than LLP) having a total income of up to Rs.50 lakh from business and profession and filing return under presumptive taxation scheme.

There are two major changes in the ITR Forms – first, an individual taxpayer cannot file return either in ITR-1 or ITR4 if he is a joint-owner in house property, second, ITR-1 form is not valid for those individuals who have deposited more than Rs.1 crore in bank account or has incurred Rs2 lakh or Rs1 lakh on foreign travel or electricity respectively.

Additional info

So far, the government has notified ITR-1 and ITR-4 forms for tax filing for FY 2019-20 or AY 2020-21. However, you will have to wait to file returns as online utilities are not yet updated. The new ITR forms ask you to provide a valid passport number, if you have one; and details of your employer like name, nature of business, address and TAN.

The objective is to gather more and more information about an individual, which will help the tax department carry out specific enquries and make the process of selecting cases for scrutiny easier. “These alterations may be happening because the government is slowly moving towards e-assessments and is thus seeking greater clarification from taxpayers in the return itself to save time and costs,” said Shailesh Kumar, director, Nangia Andersen Consulting Pvt. Ltd, a business tax advisory firm.

Other experts echo the thought. “The changes reflects the continuing journey of the government towards simplification and automation. It has already started providing pre-filled return forms. These disclosures will help capture the complete details of taxpayers and the validation of their financial information, wherever such information is available from more than one source,” said Kuldip Kumar, partner and leader, personal tax, PwC, an accountancy firm.

Data is the new oil

In a computerised environment, tax returns are now filed online and data is something that the government wants to be best friends with to tackle the problem of tax evasion. At the front-end, it is seen as asking for more information from you, the tax payer. However, this isn’t the first time the ITR forms have been amended. Every year, CBDT notifies the forms carrying amendments in accordance with the Finance Act. The aim is to increase the tax base as only a tiny percentage of the population files returns. Also, among the people who file returns, about 40% show that they have no tax liability.

At the back-end, the government is taking steps to strengthen the compliance ecosystem. For instance, in 2004, as a measure to widen the tax base, the concept of Annual Information Return (AIR) filing was introduced. AIR is a statutory requirement where mutual funds, institutions issuing bonds and registrars or sub-registrars, and so on are required to record and report high-value financial transactions of individuals to the tax department.

In 2006, a project for enabling e-filing of ITR was launched. Further, in 2007, the government launched integrated taxpayer data management system (ITDMS). Under this system, data from multiple sources is collected in a complex process for drawing a complete profile of the taxpayer. A non-filers monitoring system (NMS), focusing mainly on non-filers with potential tax liabilities, was also initiated by the department. The system assimilates and analyses in-house information as well as transactional data received from various sources like ITR and AIR filed by third parties and other departments to identify people who had undertaken high value financial transactions but did not file their returns.

Taking it further, in the year 2017, the tax department initiated “project insight” to strengthen the non-intrusive information-driven approach for improving tax compliance and effectively utilizing information in tax administration. Under this project, an integrated data warehousing and business intelligence platform, which includes Income Tax Transaction Analysis Centre (INTRAC) and Compliance Management Centralized Processing Centre (CMCPC), has been set up. According to the department’s website, INTRAC leverages data analytics in tax administration and performs tasks related to data integration, compliance management, enterprise reporting and research support. CMCPC uses campaign management approach (consisting of emails, SMS, reminders, outbound calls and letters) to support voluntary compliance.

Will disclosures help?

The government wants you to divulge more information for better scrutiny. However, some experts feel that this will only increase the burden on the tax payers, who are already struggling with a very complicated system of tax filing. “This is overreach and intrusion, and it’s a wasteful exercise. For instance, many people from India go to gulf countries for labour work; if such people get notices, they won’t know how to respond. There is a lot of duplication. The department has already acquired most of this information through AIR filed by different entities,” said Himanshu Sinha, partner, Trilegal, a law firm.

While giving out more information makes things more difficult, such information will be able to trace non-filers and is intended to bring more compliances.

Historic GST launched at midnight, from today India is finally one nation, one tax

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India embraced the goods and services tax (GST) on the intervening night of Friday-Saturday, in a move that marked the culmination of the country’s long and chequered journey toward a uniform, all-encompassing, pan-India indirect tax system.

India embraced the goods and services tax (GST) on the intervening night of Friday-Saturday, in a move that marked the culmination of the country’s long and chequered journey toward a uniform, all-encompassing, pan-India indirect tax system. The GST would militate against and cut out the cascade of multiple taxes which jack up product prices. The official launch of the tax preceded a grand ceremony in the central hall of Parliament attended by the president and prime minister, along with members of both Houses and the GST Council. Some Opposition parties including the Congress, Trinamool Congress and Left did not attend the ceremony, citing protests against GST by small and medium-scale entrepreneurs, traders, weavers and informal-sector workers.

Although the design of the new destination-based tax on consumption with its multiple rates, sub-optimal coverage and complicated rules is unmistakably inferior to an “ideal GST”, even independent tax experts welcomed the launch, calling it a transformational move. However, trenchant critics would say the imperfect GST has merely enabled cross-utilisation of credit between the central and state VAT chains and is, therefore, akin to the 2004 Cenvat rules that allowed such cross-credit facility between central excise and service tax.

But these critics might have taken too dim a view; GST is a momentous event for thee reasons: One, it puts in place a federal, rules-bound indirect tax system that would curtail the scope of rate differentials for the same products among states (one-product-one-tax) ; two, it could potentially slash India’s high logistics costs by speeding up movement of goods across state borders and even within states and thereby make the country’s goods and services more competitive; and three, thanks to the availability of seamless input tax credits, GST would discourage tax evasion and expand the revenue base for the government without hurting the businesses or the consumers. The GST will subsume excise duty and state VAT (along with the corresponding taxes on imports), service tax, octroi, entry tax, purchase tax, central sales tax, and entertainment tax, but not the basic Customs duty which is the tariff on imports.

Earlier, the GST Council, which met for an hour, decided to reduce the tax rate on fertilisers from 12% proposed earlier to 5%, a move that would nullify the chances of prices of these key farm inputs rising under GST. The gap between the current tax incidence on fertilisers and the 12% rate had created a practical difficulty in recovering the differential from fertiliser stocks lying with manufacturers and dealers as MRPs are printed on them. Also, the ministry of finance tweeted, the rate for “exclusive parts of tractors” have been reduced to 18% from 28%.

NITI Aayog member Bibek Debroy on Friday rebutted the claim that GST would produce 1.5% increase in GDP. “For an imperfect GST, I have no idea what is the figure. This particular figure (1.5%) was for ideal GST,” he said. Chief economic adviser Arvind Subramanian had told FE earlier that even though “we have not got as much base expansion and as much reduction in complexities as we would have liked”, there was still a huge reduction in complexities. “I expect a 10% expansion in the (tax) base due to just invoice-matching,” he had said.

While the government has iterated that the GST would not stoke inflation — GST will be zero on 50% of consumer price index basket and 5% on another 10% — former finance minister P Chidambaram said that the new tax could be inflationary in the short run. However, Subramanian said that with with actual tax incidence to be substantially lower under GST due to input tax credit, a downward bias on prices was to be expected. Firms disposing of stocks could also have a dampening effect on prices in the short run, he added.

Even as the industry is keeping its fingers crossed, the government has assured them that the anti-profiteering provision built into the relevant GST laws to prevent companies from not passing on the tax benefit under GST to consumers would be sparingly used. “I sincerely hope that we don’t have to really use the anti-profiteering mechanism,” Jaitley had said on Thursday. Chidambaram, however, sharply criticised the mechanism, saying it was wrong to assume that “the element of taxes decide at what price I sell my goods”. Since tax is only one of the things that make up costs, he said, if tax falls, it does not mean there should be a corresponding reduction in prices.

Even though 68 lakh businesses have already been issued provisional IDs by GSTN, the IT backbone for the new system, and the deadline for first filing of returns have been postponed to August 20 — invoice-wise returns can be filed as late as the first week of September — concern over the transition pains remained. Arun Kumar, chairman and CEO at KPMG in India, said: “The focus should now be on making the transition seamless and effective. Making compliance cost-effective, particularly for smaller businesses, is extremely important. The potential benefits of this landmark-reform will become real when the benefits of rationalised taxation accrue to consumers and business benefits from cost-efficiencies in logistics and streamlined processes.”

According to Shyamal Mukherjee, chairman, PwC India, “We are confident (that GST) will boost investors’ confidence in India, incentivise manufacturing and fuel the growth of the economy.” When asked about the quantum of extra growth due to GST by a TV channel earlier in the day, the chief economic adviser, however, merely said GST’s effect on the economy would be “positive”. “The medium-term impact of GST on macroeconomic indicators is expected to be extremely positive. Inflation will be reduced as cascading of taxes will be eliminated,” CII director general Chandrajit Banerjee said, adding that exports would emerge as more competitive in global markets, while FDI was likely to be encouraged.

Source: http://www.financialexpress.com/economy/historic-gst-launched-at-midnight-from-today-india-is-finally-one-nation-one-tax/744112/

Fresh transfer pricing trouble for MNCs

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A new provision for secondary adjustment in transfer pricing, announced in the Union Budget for 2017-18, is likely to affect the cash flow of multinational corporations (MNCs) and the dividend distribution tax paid by their Indian subsidiaries. The provision has also sparked worry on Minimum Alternate Tax (MAT) and service tax payable by the subsidiaries, as well as retrospective implementation from 2013-14.   Experts claim the provision is in line with the norms of the Organisation for Economic Co-operation and Development (OECD) —but its wording is giving rise to apprehension.

Transfer pricing is the value at which companies trade products, services or assets between units across borders, a regular part of doing business for a multinational.

A primary adjustment is made, by tax administration, to company´s taxable profits on transactions with an associated enterprise in a secondary jurisdiction.

At present, there is only primary adjustment on transfer pricing of an MNC´s subsidiary.

This means if the subsidiary concerned agrees to the tax adjustment provided by an assessment officer, or on its own makes such an adjustment, it will pay taxes on that amount.

For instance, a company claims it has earned Rs.400 crore, and the transfer pricing officer claims it has earned Rs.600 crore, using the arm´s length principle.

If the company agrees to the assessment and pays tax on this, it is called primary adjustment.

Under the existing law, the additional Rs.200 crore would not need to be shown in the books of the company.

A secondary adjustment arises when simultaneous changes are made in the books of accounts of the company as well. This is what new provision aims at —the additional Rs.200 crore would also have to be shown in the books of the Indian subsidiary of MNC concerned.

“The parent company might not want to part with this Rs.200 crore, as the subsidiary in India might not be significant for its strategy,” said Eric Mehta, partner, transfer pricing, PwC India.

“An MNC might have a global presence, with India only a small part of its affairs.” Sending the money to India would also face hurdles because of lack of a contractual arrangement, said Amit Maheshwari, partner, Ashok Maheshwary and Associates.

He added it would have an adverse effect on the cash flow and business operations of MNCs.

If the Indian subsidiary concerned does not get the required amount, say Rs.200 crore, within a stipulated period, it would be considered a loan to the parent or associate, attracting interest.

(The time period has not been specified in the Budget documents.) “In case, the total amount is brought to the books of the Indian company, it will give rise to higher dividend, which in turn, will give rise to higher dividend distribution tax,” said Mehta.

Also, if the payment is towards services rendered by Indian subsidiaries, the higher receipt in books will give rise to higher service tax liability, added Mehta.

Maheshwari said higher receipt and hence profit in the books would also give rise to MAT as profit on the additional income, in this case  Rs.200 crore, was not shown earlier in the books earlier.

It should be noted that MAT is applicable to book profits.

All this will, however, only apply if the primary adjustment of the Indian entity exceeds Rs.1 crore the previous year —along with other conditions.

The provision has also given rise to fear of retrospective application, as the condition of primary adjustment exceeding Rs.1 crore is effective from April 1, 2016 or previous years.

Currently, the assessment of 2013-14 is underway for transfer pricing purposes, said Mehta, pointing to the possibility of secondary adjustments made from that year.

He agreed the purpose of the provision might not be to have retrospective effect, but the wording does not prevent it.

CBDT tightens screws on shell companies

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The Central Board of Direct Taxes (CBDT) on Tuesday issued the much-awaited “guiding principles” for determination of a Place of Effective Management (PoEM) of a company, scotching speculation that the Budget may see its removal from the statute book.

Put simply, PoEM means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

The CBDT guidelines come barely two months before the end of fiscal year 2016-17, in which PoEM had become legislatively effective, giving little time for Indian multinationals to prepare for the new regime.

The main objective of introducing PoEM was to ensure that companies incorporated outside India but controlled from India do not escape taxation here. It also brings in the concept of residency of corporates with internationally accepted principles, say tax experts.

Girish Vanvari, National Head of Tax, KPMG in India, said that the guidelines stress on substance over form. “They attempt to differentiate between shareholder control, management control and routine decisions. Whilst the guidelines are comprehensive, they are subjective on substance and can be challenged for interpretation in many places,” he said.

Narrower application

Rohinton Sidhwa, Partner, Deloitte, Haskins & Sells LLP, said that what has been released has a narrower application than what was originally proposed. They are also supplemented with examples on isolated facts that will not lead to a PoEM as also illustrative interpretations. The legislative amendment was effective from April 1, 2016, whereas the guidelines are being released only today, Sidhwa pointed out.

Hitesh Sawhney, Partner — Direct Tax, PwC, said thatCBDT has clarified that the intent of PoEM provisions is to target shell companies/companies that are created to retain income outside India and not Indian MNCs engaged in business overseas.

Stress on substance

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the finalised guidance relies on substance over form and that routine operational decisions shall not be relevant for PoEM determination.

“Also a panel of three commissioners is to affirm the proposed decision of the assessing officer on the PoEM of a foreign company. Hopefully, this will not impinge upon the right to appeal by the foreign company before a judicial forum,” he added.

Now that the final guidelines are out, will the government go ahead with a Controlled Finance Corporation (CFC) structure or not? Says Daksha Baxi, Executive Director, Khaitan & Co: “My personal view is that CFC is a better anti-avoidance provision, less prone to subjectivity and therefore less litigative.” It seems that at least for the current year, where PoEM is applicable, the government wants to ensure that the provision can be properly implemented, she said.

Rahul K Mitra, Head of Transfer Pricing & BEPS, KPMG in India, said: “With guidelines for PoEM out, it looks like they may not be introducing CFC.”

Jiger Saiya, Partner – Direct Tax, BDO India, echoed his thoughts, saying the “government seems inclined towards implementing the PoEM framework rather than introducing an alternative measure.”

Source: http://www.thehindubusinessline.com/economy/cbdt-tightens-screws-on-shell-companies/article9499358.ece

New Year GIFT for MNC law and audit firms

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Foreign law and accountancy firms now have a chance to operate in India on their own. On January 3, the ministry of commerce and industry amended a rule allowing such foreign firms to set up offices and advise clients from SEZs. The move will initially benefit Gujarat International Finance Tec-City (GIFT).

Current regulations so far do not permit multinational law firms to operate in the country. Indian law and accountancy firms were also not allowed to operate from any of the SEZs. That rule has now been amended which would benefit financial centres.

The notification, dated January 6 but issued on January 3, by the department of commerce allows foreign law and accountancy firms to be established in SEZs. The earlier version of the rule, prior to the amendment, had excluded legal services and accounting.

“This will be the big enabler for the legal and accounting firms to expand their services in multi-services SEZ with IFSC (International Finance Service Centre) and thereby export their services to various global players,” said Nitin Potdar, partner, J Sagar, a law firm. As of now, only GIFT is a multi-services SEZ with an IFSC in India.

“Until now, no foreign law firm could operate in India and not even Indian firms were allowed to provide their services in any of the SEZs. The new amendment allows not only Indian law or accountancy firms to set up a base in GIFT, but even multinationals can directly advise upon international disputes or arbitration by setting up a base there,” Dipesh Shah, head, IFSC at GIFT, told ET.

While many foreign professional services firms such as Deloitte, PwC, KPMG and EY are present in India, they cannot directly operate as auditors and require an Indian affiliate. This amendment does away with that requirement at least in the case of GIFT.

Many Indian law firms have been opposing the entry of multinational law firms in India for some time. Going ahead, many multinationals could set up base in India but they will only be able to advise on cross-border transactions or disputes. Some are also looking to quickly take advantage of this and set up base in GIFT.

“Allowing law firms in GIFT for arbitration or other work would work as a catalyst for economic activities in the country. We ourselves are in discussions to set up an office in GIFT,” said Nishith Desai, founder of law firm Nishith Desai Associates.

But the amendment does not permit foreign law firms to advise Indian clients on local businesses and regulations. Their advice and help would be strictly restricted to arbitrations fought in GIFT, international mergers and acquisitions, international taxation or any other advice for operations outside India.

Industry experts say some foreign law firms may consider partnerships with Indian firms under the arrangement. There could also be stiff competition as both Indian and foreign firms would compete for the same clients in GIFT.

“Many law firms may set up their base in GIFT but that would take some time. And I am a firm believer that it would only lead to betterment of all law firms,” said Desai.

Source: http://economictimes.indiatimes.com/articleshow/56529046.cms