Budget 2023: 5 ways to make tax compliance easier

However, on the other hand, the government has made tax filing a more elaborate and elaborate exercise. Filing a tax return is not just about reporting the correct income and paying the required tax. There is also a very detailed practice of reporting assets and liabilities, in particular, foreign assets. Perhaps the time has come to take some measures to ease tax compliance. This article is on five such aspects which require special attention.

1. Streamlining Tax Rates

Today, the tax rates under the old tax regime as well as the new personal tax regime (“NPTR”) are very onerous. There are four rates of surcharge and five rates under the old system. The surcharge is nil for income up to Rs.50. 10% between income level of Rs 50 lakh – Rs 1 crore, 15% for income between Rs 1-2 crore, 25% for income between Rs 2-5 crore and 37 for income above Rs 5 crore % Was applied .

The different rates of surcharge make the estimation of taxes very complicated as it is not always possible to predict which rate of surcharge will be applicable for the year. This may have a serious adverse effect on the interest payable on the shortfall in advance tax paid during the year. For example, an ad hoc source of income (say capital gains) at the end of the year can immediately push the effective tax rate to a higher rate and have a domino effect on all income, affecting earlier advance tax installments as well. This can put a heavy financial burden on the taxpayer at the end of the year.

On the other hand, in case of NPTR there are very high slabs and rates. With seven slabs for tax rates (see below) and four for surcharge (no change from the old regime), it is very difficult for a common man to calculate taxes without outside help.

taxable income rate

Up to Rs. 250,000 nil

Rupee. 250,000 – Rs. 500,000 5%

Rupee. 500,000 – Rs. 750,000 10%

Rupee. 750,000 – Rs. 1,000,000 15%

Rupee. 1,000,000 – Rs. 1,250,000 20%

Rupee. 1,250,000 – 1,500,000 25%

Above Rs. 1,500,000 30%

It would be better to reduce the number of slabs. Further, it is common knowledge that NPTR has not picked up as per expectations as most taxpayers have preferred to avail exemption/deduction arising out of HRA, investments/payments under Chapter VIA, housing loan interest, etc. It is important to note that even having no tax deduction available for these expenses can have a detrimental effect on these industries. Bringing some relaxation/reduction in the ambit of NPTR will encourage public to opt for it and avail concessional rates

Merging the two regimes, simplifying tax rates and allowing some deductions to encourage people to keep investing for the future can be a win-win for all.

2. Simplification of capital gains taxation

Capital gains taxation is one of the most annoying parts of the Income Tax Act. There are many permutations and combinations of factors to determine the applicable tax rate. To determine whether a capital asset is long term or short term the holding period depends on a number of factors – type of asset (financial asset vs real estate), location of the asset (Indian shares/mutual funds vs foreign financial assets) , Types of mutual funds (equity oriented or otherwise), holding period, different tax rates, deemed and grandfathering provisions etc. This can be very confusing for taxpayers. Aligning the holding period between different types of assets would be extremely helpful.

3. Foreign Assets Reporting

One of the most difficult schedules in the ITR form is the FA schedule. While filling the schedule is mandatory for an ordinary resident of India, the information sought in the schedule requires a lot of preparation by the taxpayer. The schedule is divided into sections such as bank accounts, depository and custodial accounts, equity and loan interest, cash value insurance contracts, financial interest, real estate, etc. Each section has a number of disclosure requirements, and it is difficult for the taxpayer to collect the details. Like peak balance, cost of investment etc. To add to the troubles, the forms or instructions do not clarify the period for which such assets need to be reported, for example reporting of foreign assets and whether there is income from any source outside India. To be reported for Indian Financial Year (31st March) or Accounting Year (Tax Year of Foreign Country) or Calendar Year (Y/E 31st December). Simplifying the form schedule or adding clear instructions will make the process easier for taxpayers and avoid the possibility of giving wrong information.

4. Income from house property

One strange aspect under the Indian tax laws is the concept of deemed rental income. Under the Act, if a person owns more than two house properties, which are self-occupied, the additional properties will be deemed to be let out and notional income will be required to be charged to tax. While this deeming fiction would have brought in provisions to bring excess real estate wealth into the taxable net, in today’s world when returns from real estate are not very lucrative, it may be time to consider this method of taxing wealth. Consider the hypothetical method again. Further, where a person is occupying his own house and letting the same on rent for part of the year, then under the present tax provisions, he pays tax for the entire year, i.e. actual rent received and notional rent Rent for the period for which the person occupied the house during the year. Whereas in a similar situation, where the person did not occupy the house and it was lying vacant for part of the year and let it out, then it is charged to tax only for the actual rent received during the year .

This is a difficulty especially in today’s scenario where there is increased mobility of individuals for employment outside India. Therefore, only that part of the year where the property was let out should be subject to tax. It will also help in simplifying the taxation of house property generally. Deduction for interest paid on housing loan, deduction of pre-construction interest, carry forward of loss from house property – in general, these provisions need to be simplified.

5. Claiming treaty benefits in India

Any treaty relief claimed by a person is subject to conditions laid down under the relevant tax treaty between the two countries. Furthermore, the time difference between the two countries’ tax years adds to the concerns. In practice, it is difficult for a taxpayer to furnish proof of taxes paid outside India with the filing of Form 67, as the overseas return is not available till the due date of filing the India tax return. Apart from this, non-availability of Tax Residency Certificate (“TRC”) from foreign tax authorities while filing India tax return, limited way to verify Form 67 etc. are other challenges that taxpayers face. Treaty relief is not allowed during the processing of returns even after tax filing and creates difficulties for taxpayers in contacting authorities and interpreting claims. In view of all these issues, the government may take steps to simplify the process of claiming such treaty relief or set up a separate wing. / Team to look after such cases where section 90/91 is applicable. A dedicated helpline for affected taxpayers can also be seen as a solution to such problems.

(With inputs from Ishita Sengupta, partner and leader, Violto Partners, India, Manvi Gupta, associate director)