Difficulties in Filing Income Tax Returns and Tax Audit
Filing returns and tax audits are two important aspects of compliance with India’s Income Tax Act of 1961. Filing returns declares one’s income and tax liability to the Income-tax Department. A tax audit is a process of verifying one’s accounts and financial statements by a chartered accountant. Both filing returns and tax audits are mandatory for certain categories of taxpayers who meet criteria based on income, turnover, profession, etc.
The purpose of filing returns and tax audits is to ensure that taxpayers pay their due taxes correctly and timely and to prevent tax evasion and fraud. Filing returns and tax audits also help maintain transparency and accountability in the tax system. Filing returns and tax audits are governed by various provisions of the Income Tax Act, such as Section 139 for filing income tax returns, Section 44AB for tax audits, Section 271B for penalties for not furnishing tax audit reports, etc.
This essay’s main argument or thesis is to identify and analyze the common difficulties taxpayers face while filing returns and tax audits in India. The essay will examine the challenges and problems taxpayers encounter while choosing the correct forms, filling in the relevant details, reconciling the data, disclosing the information, complying with the technical requirements, etc. The blog will also provide recommendations or suggestions for overcoming or avoiding these difficulties.
Choosing the right options
One of the common difficulties that taxpayers face while filing returns and tax audits in India is choosing the correct ITR form and tax audit report form based on the nature and source of income, the turnover or gross receipts, and the applicability of presumptive taxation or other special provisions. The Income Tax Department has prescribed different ITR forms for different categories of taxpayers, such as individuals, Hindu Undivided Families (HUFs), firms, companies, trusts, etc. The ITR forms also vary depending on the type and source of income, such as salary, house property, business or profession, capital gains, other sources, etc. Similarly, the CBDT has prescribed different tax audit report forms for different types of audits, such as Form 3CA/3CB for general audit under section 44AB, Form 3CD for statement of particulars under section 44AB, Form 3CEB for report under section 92E for international transactions or specified domestic transactions, etc.
Choosing the correct ITR and tax audit report forms is crucial for ensuring compliance with the Income Tax Act and avoiding errors or discrepancies in reporting income and tax liability. However, many taxpayers find it difficult to choose the correct forms due to various reasons, such as:
- Lack of clarity or awareness about the eligibility criteria and conditions for different forms
- Complexity or ambiguity in determining the nature and source of income
- Confusion or uncertainty about the applicability of presumptive taxation or other special provisions
- Changes or modifications in the forms or rules by the Income-tax Department or CBDT from time to time
Choose right information
Another common difficulty taxpayers face while filing returns and tax audits in India is filling in the relevant details and information in the ITR form and tax audit report form accurately and completely, without any errors or omissions. The ITR and tax audit report forms require taxpayers to provide various details and information related to their income, expenses, deductions, allowances, exemptions, disallowances, taxes, etc. These details and information are essential for computing taxpayers’ taxable income and tax liability and verifying their accounts and financial statements.
Filling the relevant details and information in the ITR form and tax audit report form is challenging for many taxpayers due to various reasons, such as:
- Lack of knowledge or understanding of the provisions of the Income Tax Act and the relevant accounting standards and auditing standards
- Difficulty or complexity in calculating or reporting income, expenses, deductions, allowances, exemptions, disallowances, taxes, etc.
- Inconsistency or discrepancy in reporting income under different heads or sources
- Non-availability or incompleteness of supporting documents or evidence
- Human error or negligence in entering data or figures
Reconciliation of Data
A third common difficulty taxpayers face while filing returns and tax audits in India is reconciling the data and figures reported in the ITR form and tax audit report form with the books of accounts, financial statements, GST returns, TDS returns, bank statements, etc. Reconciling the data and figures reported in the ITR and tax audit report forms is important for ensuring the accuracy and consistency of the information provided to the Income-tax Department and avoiding any mismatch or discrepancy. Reconciling the data and figures reported in the ITR and tax audit report form is also required by the Income Tax Act and the relevant accounting and auditing standards.
Reconciling the data and figures reported in the ITR form and tax audit report form is difficult for many taxpayers due to various reasons, such as:
- Differences or variations in the accounting policies or methods adopted by the taxpayers and the Income Tax Act
- Differences or variations in the accounting periods or financial years followed by the taxpayers and the Income tax Act
- Difference or variation in the valuation or measurement of assets, liabilities, income, expenses, etc., by the taxpayers and the Income tax Act
- Difference or variation in the treatment or recognition of transactions, events, items, etc., by the taxpayers and the Income Tax Act
- Difficulty or complexity in adjusting or reconciling the data and figures reported in different sources, such as books of accounts, financial statements, GST returns, TDS returns, bank statements, etc.
Disclosing Information
A fourth common difficulty taxpayers face while filing returns and tax audits in India is disclosing the information related to GAAR, ICDS, cash transactions, foreign assets, etc., as required by the ITR and tax audit report forms. The ITR and tax audit report forms require taxpayers to disclose various information related to these aspects, which are relevant for determining their tax liability and compliance status. These aspects are:
- GAAR: General Anti-Avoidance Rules, which are provisions of the Income Tax Act that empower the tax authorities to disregard or re-characterize any arrangement or transaction that is entered into with the main purpose of obtaining a tax benefit and that lacks commercial substance or creates abuse or misuse of the provisions of the Income tax Act.
- ICDS: Income Computation and Disclosure Standards are standards issued by the CBDT for computing income under different heads or sources under the provisions of the Income Tax Act.
- Cash transactions: Transactions involving cash payments or receipts exceeding certain limits specified by the Income Tax Act or other laws, such as Rs. 2 lakh for a single transaction or Rs. 10 lakh for an aggregate transaction in a financial year.
- Foreign assets: Assets located outside India that are owned or controlled by taxpayers, such as bank accounts, immovable properties, shares, securities, loans, trusts, etc.
Disclosing the information related to these aspects is challenging for many taxpayers due to various reasons, such as:
- Lack of clarity or awareness about the applicability or scope of these aspects
- Complexity or ambiguity in determining or reporting these aspects
- Non-availability or incompleteness of supporting documents or evidence
- Risk or consequence of non-disclosure or mis-disclosure of these aspects
Complying with the Technical Requirements
A fifth common difficulty that taxpayers face while filing returns and tax audits in India is complying with the technical requirements of filing the ITR form and tax audit report form online through the e-filing portal of the Income Tax Department. The e-filing portal is a website that enables taxpayers to file their returns and tax audit reports electronically without any physical submission of documents. The e-filing portal also provides various facilities and services to taxpayers, such as verification, rectification, refund, grievance redressal, etc.
Complying with the technical requirements of filing the ITR and tax audit report forms online through the e-filing portal is essential for ensuring a smooth and hassle-free filing process. However, many taxpayers find it difficult to comply with these requirements due to various reasons, such as:
- Lack of access or familiarity with the internet or computer technology
- Difficulty or complexity in converting or uploading data or files in XML format
- Difficulty or complexity in obtaining or using digital signature for authentication and verification
- Difficulty or complexity in generating or entering verification code for confirmation and submission
- Technical glitches or errors in the e-filing portal
Reconciliation Of The Financial Statements With The GST Returns And The Books Of Accounts
The reconciliation of the financial statements with the GST returns and the books of accounts, and the reporting of any discrepancies or adjustments in the ITR and the tax audit report: This is a difficulty faced by taxpayers who are registered under the Goods and Services Tax (GST) regime, which is a comprehensive indirect tax levied on the supply of goods and services in India. The GST returns are filed online on a monthly, quarterly, or annual basis, depending on the turnover and type of the taxpayer. The GST returns contain details of the outward and inward supplies of goods and services, the input tax credit claimed, the tax paid, and the refund claimed by the taxpayer.
Any mismatch or discrepancy may result in notices or queries from the income tax department or the GST authorities or penalties or interest for under-reporting or misreporting income or taxes. The reconciliation process may involve identifying and rectifying any errors or omissions in the GST returns, the financial statements, or the books of accounts, adjusting for differences in accounting policies or methods, or disclosing any reasons for variations in the ITR and the tax audit report.
Cryptocurrency Transactions
Cryptocurrencies, such as Bitcoin, Ethereum, Ripple, etc., are not recognized as legal tender or currency by the Reserve Bank of India (RBI) or any other central authority in India. However, they are not banned or prohibited either. Therefore, there is no clear or consistent guidance or regulation on reporting or taxing such transactions in India.
The income tax department has issued notices to some taxpayers who have traded or invested in cryptocurrencies, asking them to disclose their sources of income and pay taxes accordingly. The taxation of such transactions may depend on whether they are treated as capital gains or business income, depending on the nature and frequency of the transactions. Capital gains arise when a taxpayer sells a capital asset at a profit. Business income arises when a taxpayer carries on a business or profession and earns income from it.
The distinction between capital gains and business income may depend on various factors, such as the intention of the taxpayer, the holding period of the cryptocurrency, the volume and frequency of transactions, etc. The tax rates and deductions may also vary depending on whether the transactions are treated as capital gains or business income.
Digital Transactions
Digital platforms include e-commerce platforms (such as Amazon, Flipkart, etc.), social media platforms (such as Facebook, Instagram, YouTube, etc.), online gaming platforms (such as Dream11, MPL, etc.), etc. The taxation of such transactions may depend on whether they are treated as income from business or profession or income from other sources, depending on the nature and frequency of the transactions. Income from a business or profession arises when a taxpayer carries on a business or profession and earns income from it.
Income from other sources arises when a taxpayer earns income from any source other than salary, house property, capital gains, or business or profession. The distinction between income from business or profession and income from other sources may depend on various factors, such as the taxpayer’s intention, the regularity and continuity of transactions, the involvement of skill or expertise, etc. The tax rates and deductions may also vary depending on whether the transactions are treated as income from a business profession or other sources.
Conclusion
Filing returns and tax audits in India can be challenging for many taxpayers, especially if they are not well-versed with the rules and regulations, the forms and formats, and the technical and reporting aspects. Some of the common difficulties that taxpayers face while filing returns and tax audits in India are choosing the correct ITR form and tax audit report form, filling in the relevant details and information in the ITR form and tax audit report form, reconciling the data and figures reported in the ITR form and tax audit report form, disclosing the information related to GAAR, ICDS, cash transactions, foreign assets, etc., and complying with the technical requirements of filing the ITR form and tax audit report form online through the e-filing portal of the Income Tax Department.
