Strategies for taxation of the self employed sector

1. Strategies for taxation of the self employed sector Key Considerations and Strategies in Registering self-employed taxpayers

2. Characteristics of the Group • Hard to tax • Geographically dispersed and unorganized • May be family owned and home based • Lack of continuity of business • Majority of transactions cash based

3. Characteristics of the Group • Not part of formal regulatory system • Perception that Income-tax Department cannot detect their activities • Not aided by professionals hence not well informed or educated about their rights or liabilities

4. Categories of self-employed • Proprietors • Small business owners • Professionals-Lawyers/Doctors/Accountants • Transport industry • Construction • Other contractors • Unorganized manufacturing

5. Key Strategies • Permanent Account Number (PAN) • Unique taxpayer identification number • Every taxpayer in India is required to have PAN • Government has been recently empowered to allot PAN to certain categories/classes of persons even if not taxpayer • PAN quoting made compulsory in various transactions including opening of bank accounts

6. Key Strategies-Permanent Account Number (PAN) • Class of persons who are registered with other tax authorities eg. Sales tax, VAT, excise, Service Tax etc. are required to have PAN • Enables creation of database of existing and potential taxpayers with PAN as unique identifier and enables matching of reported transactions with tax returns

7. Key Strategies • Compulsory Maintenance and Audit of Accounts • Mandatory maintainence of accounts by businessmen and professionals having receipts above a threshold limit • Mandatory auditing of accounts by certified accountant based on threshold of turnover irrespective of level of taxable income • Financial status of business and profession is reflected in the accounts which are subject to inspection.

8. Key Strategies • Presumptive Income in non-auditable cases • Presumptive income of retailers-5% of total turnover • Presumptive income of transporters-Rs 3500 per truck per month • Presumptive income of Construction Contractors-8% of gross receipts • Simpler process. Taxpayer can prove that income is lower.

9. Key Strategies • Surveys and Searches • On the spot examination of account books to determine tax liability • Search and seizure proceedings are based on specific information regarding tax evasion • Acts as a deterrent and helps in widening the tax base

10. Key Strategies • Third Party Reporting of Transactions • Certain high value transactions made part of Annual information returns eg purchase of equity, immovable property transactions etc. • To be matched with returns filed to detect non-filers as well as to detect evasion • Acts as a deterrent and provides Income-tax Department with information which may otherwise remain unreported

11. Key Strategies • Tax Deduction/Collection at Source • Constant expansion of transactions subject to deduction of tax at source • Tax Collection at Source provisions applicable in certain hard to tax categories of businesses e.g. liquor contractors, toll plaza operators, buyers of forest produce, buyers of scrap etc. • Prevents tax leakages

12. Key Strategies • Tax Payer Education • Through various media including TV, print media • By constant interaction with trade/industry associations • Through help centers targeted towards small business taxpayers to help taxpayers in filing returns, paying taxes and filing PAN applications • Educates taxpayers about their rights and liabilities with a view to encourage voluntary compliance

13. Key Strategies • Tax Return Preparer Scheme • Introduced vide Finance Act, 2006 • Preparers to be trained by Income-tax Department to help small taxpayers file returns • Preparers to be persons other than accountants or legal practitioners or the taxpayer’s bank officer