Individuals will have to start reporting their income from all sources in due course, including tax-free income.
The
government is vetting a proposal to shift from an exemption to a
deduction-based regime for reporting income, a government official
said. This means while computing the tax outgo, an individual has to
include income from all sources and then claim a deduction on tax-free
income. The objective of the proposal, set to feature in the new
income-tax code, is to establish an audit trail.
This, in
turn, will help widen the assessee base as more people will file tax
returns. There are 3.5 crore tax assesses in the country. The proposal
is also in sync with the goal of linking all transactions of an
individual to his permanent account number (PAN).
The new
income-tax code will replace the existing Income-Tax Act, 1961. A
concept paper on the new code is on the cards. “The focus will be on
policy changes that need to be carried out in the long run,” an
official said.
The government, for instance, can elicit a
feedback on the phase-out of various corporate tax exemptions or even
propose new policy initiatives on non-resident taxation. The code may
incorporate a basic formula for tax calculations to make it more
user-friendly.
Provisions will be regrouped for easier
interpretation. Currently, individuals or non-corporate assessees do
not have to include income from certain sources while calculating tax
outgo. These include agricultural income, insurance receipts, long-term
capital gains and dividends, among others. They are spared of paying
tax on such income.
However, the proposal could have political
ramifications if the norm is applied to farm income. Right now,
individuals who earn only agriculture income do not have to file tax
returns and are out of the tax net. Those who have other sources of
income besides farm income have to report income from agriculture in
tax returns.
This is required to compute the rate of tax,
which is then applied only on non-farm income. One option being looked
at is to maintain status quo on the existing tax treatment for
individuals who earn only from agriculture. So, the deduction-based
regime will apply to other non-corporate tax assesses.
“The
proposal to usher in a deduction-based regime will mark a significant
change for non-corporate assessees. They will have to report income
from all sources, irrespective of whether they pay tax on a particular
source of income. This means non-corporate assessees could be subject
to greater scrutiny. From the tax authorities perspective, it will
strengthen the audit trail,” Ernst & Young tax partner Jayesh
Sanghvi said.
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