Pre Budget Memorandum 2024-25-Tax Base, Avoidance, Litigations

1. Pre Budget Memorandum 2024-25: Tax Base, Avoidance, Litigations

2. Introduction: The Pre Budget Memorandum for Union Budget 2024-25 lays out a strategic roadmap for enhancing India’s taxation framework. Addressing critical areas such as tax base expansion, avoidance mitigation, litigation reduction, and Direct Tax Laws rationalization, the memorandum seeks to shape a tax ecosystem that is responsive, fair, and conducive to economic growth.1. Suggestions for widening the tax base and increasing the tax revenue: 1.1 As of now more time is spent on scrutinizing the returns filed than the time spent in roping new cases. The more the ‘Income Returned’, more the chances of getting enquiry and hearing. It is to be avoided. By existing practice, the ‘scrutiny assessments’ must be completed necessarily by increasing the income returned either by disallowing certain expenditure or by enhancing the income earned, which results in additional taxes with interest and penalty proceedings. Once the ROI is taken up for scrutiny the income returned is not accepted at all and huge demand is made by enhancing the income returned by hefty additions/disallowances. Because of this attitude, physiological fear arises among assessees, which is deterrent for the cordial relationship between the Income Tax Department and the Assessee. Hence the misconception among assessees is that if they file returns voluntarily, they will be subjected to rowing enquiry. So, they wait till a compelling situation arises. If this is taken care of, more people will come forward to file returns of income voluntarily. Of course, the assessees should be aware of the fact that if there is willful default or concealment appropriate action would be taken by the Department.

3. 1.2 Many of the properties are sold by registered documents up to Rs. 10,00,000/- (Rupees Ten Lakhs only) without PAN, since providing the PAN of the buyer and seller are not compulsory, there is a chance that such transactions may escape the attention of the Income Tax Department. Hence PAN should be made compulsory for registration of documents carrying value of Rs. 1 Lakh and above. Likewise, as per the present law tax is deducted @ 1% if the sale value exceeds Rs. 50 Lakhs. This should also be reduced to Rs. 1 Lakh. At present the public receive notice after a long time after they complete the registration of the documents exceeding Rs. 30 Lakhs based on the information available in the AIR. But this value (reporting under AIR) should also be reduced to Rs. 1 Lakh and the notices should be sent as early as possible. If the capital gains arising there from are offered as Income and the taxes are paid in time, the assessees can save the interest they are paying due to nonpayment of Advance Tax and belated filing of return of income after receipt of notice and they need not be subjected to penalty proceedings also. They can avoid capital gains tax by investing the proceeds/gains in approved securities or in house property before the stipulated time, if they are eligible, provided they are alerted in time. This will also help to increase the tax revenue. 1.3 One more area, where new assessees can be roped in is ‘Construction of new buildings’, wherein PAN should be made compulsory say for construction above 500sq.ft., at the time of approval of plan, so that one cannot build new structure without the knowledge of the Income Tax Department. 1.4 Many people including associations, clubs etc., get PAN and they don’t care to file their Return of Income irrespective of their income. If notices are sent to the registered addresses many assessees can be roped in.

4. 2. Suggestions to check tax avoidance: 2.1 As of now cash up to Rs. 2,00,000 (Rupees Two Lakhs) is allowed for the real estate transactions. To bring them into the fold of taxation any transaction above Rs. 50,000/- (Rupees Fifty Thousand only) should be carried out in digital mode only so that they can easily be traced and brought to tax net. 3. Suggestions to reduce/minimize litigations: 3.1 As per the present Act the Assessing Officer/CPC/NFAC can take four years to dispose of the rectification petition. It is not just and equitable to direct the assessee to respond within 30 days (1 month) for payment of the disputed demand and the department will take 4 years (48 months) to rectify or reject the petition. To be fair and equitable, the Income Tax Act should be amended in such a way that the Assessing Officer/CPC/NFAC will also be given time of 30 days only for rectification and if the rectification order is not passed rejecting the petition within the time allowed, the petition made should be deemed to have been allowed and once the rectification petition is filed the assessee should automatically be given time till the disposal of the petition to pay tax as well as to prefer an appeal. Many assesses are suffering because even clerical errors are not rectified, and they are compelled to pay a minimum of 20% of the demand and go for appeal.

5. 3.2 As per the present Act it seems there is no limit for disposing of the various Condonation Petitions filed such as petition for condonation of delay in filing Form 10 because of which heavy taxes are levied and the appellate authorities are not in a position to pass orders in such cases. Hence a time limit of say 30 days may be prescribed for disposing of such condonation petitions by the concerned authorities. 3.3 As of now, there is no provision in the Act to apply for rectification if there are mistakes in the orders passed u s 250 by the CIT (Appeals). Hence a suitable provision may be made in the Act to apply for rectification for correcting the mistakes apparent on the order. 3.4 For appeals made u.s. 253, for the orders passed us 250 by the CIT(Appeals), though e-appeal can be made through electronic mode, physical copies of the appeals and related papers are to be filed manually. This requirement of filing hard copies should be dispensed with. 4. Suggestions for rationalization of the provisions of Direct Tax Laws: 4.1 As of now the rates of taxes arise from a lower limit of Rs. 2.5 lakhs and the entire tax payable up to the income of Rs. 5 lakhs are allowable as a rebate for which there is no logical reasoning. Instead, the basic limit itself should be raised to Rs. 5 Lakhs for all assessees who are below 60 years of age and for assessees above 60 years and below 80 years of age the basic limit can be increased to Rs. 8 Lakhs and for super senior citizens, who are 80 years and above the basic limit can be fixed as Rs. 10 Lakhs. 4.2 This TCS @20% on foreign travel expenses is exorbitant and it seems there is no logical reason for this increase. Why do the law makers fail to understand that TCS is not like TDS, which is nothing but collection tax in advance from the recipient who earns an income above a certain limit whereas TCS is for collecting a fraction of the expenses mainly for bringing such transactions to the knowledge of the IT Department so as to ascertain whether the particular assessee has sufficient sources of income or taxed money in hand to incur such an expenditure or make an investment is not known.  Of late in recent years the TCS rates are increased without understanding the purpose for which TCS was introduced. This increase will primarily burden the foreign travelers which should be withdrawn and the maximum TCS rate should be maintained at 1% only.

6. 4.3 The Income Tax Department was boasting itself by making announcements in Newspaper that they are going to refund Rs. 3.5 trillion during the financial year 2023-24. But this is not a news to rejoice because it means that there are more TDS than required. If by AI or by any other method if they are able to find out and reduce or remove the TDS in unwanted areas it will save a lot of money for the assesses and a lot of time for the Department. 4.4 Applicability of sections 44AD, 44ADA & 44AE: As of now there is no clarity. Each section has got its own definition of the assessees to whom it is applicable. All the sections should be made applicable to all resident assesses excluding the assessees whose accounts are necessarily to be audited under any other Act. 4.5 Under Section 44AD income is arrived @ 8% of the turnover and the rate is lowered to 6% for receipts other than cash. But such a concession is not made available u.s. 44ADA and 44AE. For section 44ADA the income is calculated @ 50% of the gross receipts, wherein to promote non-cash transactions in this category also for receipts other than cash, 40% may be taken as income. Likewise u.s 44AE Rs. 1,000/- p.m. per ton for Heavy Goods Vehicle and Rs. 7,500/- for other vehicles are estimated as income. Here also concessions may be given for promoting non-cash transactions by allowing deduction of 5% of the receipts in mode other than cash. 4.6 Under section 44AD the turnover is taken into account, which is nothing but net sales (i.e. sales less returns, if any), whereas under section 44ADA the rate of income is arrived from the Gross Receipts, which may include reimbursement of expenses also, wherein calculation of income @ 50% on the receipt of reimbursement of expenses in not correct. Hence such receipts should be allowed to be deducted from the gross receipts for arriving at the calculation of 50%.

7. 4.7 Section 44AD (4) reads as under: Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1). From the above clause it is clear that the assessee cannot opt for ‘Presumptive Tax’ for six years (including the year in which he has come out of the scheme), if he has not offered income under this scheme for consecutively for six years including the first year in which he has opted for the scheme. Does it mean that if he has opted for the scheme for six years consecutively, afterwards he is free to opt for the scheme, whenever he likes? If the intention of the statute is to deny the benefit to those who opts out of the scheme, it is sufficient to mention that once if he fails to opt for the benefit of this section in any year (instead five years) subsequent to the year he has availed the benefit he cannot claim the same for next five years, i.e., he cannot return for five years. Hence the clause 4 is to be replaced as: Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any year relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

8. 4.8 In the case of Partnership Firms, Partners’ Interest and Salary are specifically not allowed as deduction under section 44AD whereas the section 44ADA is silent about the same. While books of accounts are maintained and audited, before arriving at the taxable income, interest @ 12% p.a. on the amounts invested in the Partnership Firm either in Capital Account or in Current Account of the Partners and salary up to the limits provided u.s 40b are allowed as deduction before arriving at the Taxable Income. It will be fair and just to allow interest and salary to partners so that those Partnership Firms which opt for presumptive tax are also treated on par with others who get their accounts audited. Further in the present situation if a partner gets interest and salary from a Partnership Firm, which has offered income under presumptive taxation scheme, whether such interest and salary are exempt from Income Tax in the hands of the partners is not specified in the Act though they are not allowed as expenditure in Firm’s hands. Since all the expenditure is deemed to have been allowed in Firm’s hands the interest and salary would be subject to tax in partners’ hands also, which will lead to double taxation. In the normal course in the case Firms, which are subject to audit and offer less income than the rates prescribed under this scheme, such interest and salary (which are allowed as deduction) are not taxable in the hands of the partners as Income from Business/Profession, Hence it suggested that the assessees who offer income under this scheme are to be allowed to deduct interest and salary to partners up to the existing limits from the income offered at the prescribed rates so that they are also treated on par with those who offer less income with audited accounts. As of now the salary to partners is allowed to be deducted from the percentage of profit arrived under presumptive basis u.s 44AE only. 4.9 As of now under section 40A(3) the expenditure made in cash is totally disallowed if it exceeds Rs. 10,000/- (Rs. 35,000/- in case of lorry hire charges). Instead, the excess payment above the limit may be disallowed. For such expenditure for the Trusts they have to pay income tax @30% in addition to disallowance for the calculation of 85% of the receipts. It is sufficient to disallow, and payment of tax @ 30% should be dispensed with because as per the law that exists nw, the Trusts are given double punishment for a single default.

9. 4.10 Trusts have to pay ‘Exit Tax’ at the rate of maximum marginal rate on the fair market value of assets minus liabilities at certain circumstances prescribed in the Act such as non-functioning of the trust, modification of objects etc., and one of the conditions among them is ‘Cancellation of Registration’. This ‘Exit Tax’ is in addition to income-tax chargeable in hands of entity and leviable at the maximum marginal rate on the accreted income due to cancellation of registration. This is nothing bur double penalty for the same offence. Hence it is suggested that ‘Exit Tax’ should not be levied while the registration is cancelled in addition to taxing the income at the maximum marginal rate.4.11 By promoting the New Tax Regime (NTR) the Government discourages the savings habit of the assessees, which is not a healthy sign for a growing economy. Suddenly, the assessees cannot switch over to NTR from the Old Tax Regime (OTR) because they would have long standing commitments such as payment premium for Life Insurance Policies, Repayment of Housing Loans etc. The assessees have made such long-standing commitments since tax relief was given to them for such payments. The NTR should be scrapped and if not, they should be given marginal relief which is available for followers of NTR only. Likewise, while the limit for claiming marginal relief or NTR is Rs. 7 Lakhs, the limit for OTR is kept at Rs. 5 lakhs only. It should also be increased to Rs. 7 lakhs for OTR also.

10. 4.12 Regarding cash transactions u.s 269SS, 269T, 269ST for acceptance and repayment of loans and u.s. 40A(3) and 43B for expenditure allowable under the Act exemption may be provided for direct payment of cash in the other party’s account by the assessee, because now-a-days due to ‘Anywhere Banking’ the public can deposit cash at any Branch near to them. If the amendment is made it will go a long way in augmenting large-scale business transactions, because these sections were brought in to curb the black money transactions.4.13 While re-opening cases u.s 148, the reasons for opening the case should be mentioned in the notice itself, because many such re-openings were structed down at appellate stages because there is no valid reason at all for re-opening. Because of this so many man hours are wasted in ascertaining the reasons from the department and then contesting the same about the reasons spelt out or valid or not by appeals and writs.

11. 5. Suggestions for removing administrative and procedural difficulties relating to Direct Taxes: 5.1 As of now if discrepancies are found in Form No. 26AS such as ‘receipt of maturity amount of the Policy and the TDS’ are found in the Policy whereas the assessee in whose Form No. 26AS it appears has not received any such amount during the year or Interest and if the return is filed without taking into account such information, the assessee will be getting notice from CPC for the differences in Form No. 26AS enhancing the income and demanding additional tax. Filing rectification or appeal for such issues is time consuming. Hence it is suggested that in such instances the assessee should be given an opportunity to apply for rectification with the concerned entity which had uploaded the wrong information with an option to inform the CPC also about the discrepancies. For this purpose, a separate window may be provided on the site for the assessees to make representations so that automatic alerts may be sent to the concerned authorities who had uploaded incorrect information. 5.2 Presently the NFAC gives 24 hours’ time with intermittent holidays for submitting the required particulars, which is too short. It is suggested that time of at least 15 days is given for responding to notices. From the notices received from NFAC, it is understood that back files are not given to the Assessment Team either in physical mode or in electronic mode and hence they raise primitive questions on the nature of business, maintenance of accounts, investments in foreign country etc. The very same questions are asked to the assessee regarding nature of business, source of income etc., every year. It can be avoided if they are supplied with basic records of the assessee so that the time spent on collecting basic information can be avoided. Moreover, the questions raised are in the form of taking an interview of a candidate who is seeking employment or applying for loan. Irrelevant questions are raised by NFAC; for example, ‘Details of Insurance Commission earned/paid during the year’ is asked for. How can an individual give insurance commission? Likewise details of godown and warehouses owned are asked for an individual who runs cars on hire.

12. 5.3 NFAC uses the sections 68 & 69 indiscriminately and taxes are levied u.s 115 BBE @ 60% with interest, wherein the tax and interest exceed the income assessed especially in old cases opened u.s 148. In addition, penalty proceedings are initiated and if penalties are levied the taxes and penalties are many times more than the assessed income, which is unfair. These sections are brought into the statute for the main purpose of assessing the cash deposits of SBNs made during the demonetisation period. Since they are widely used to harass the assessees as seen by the orders of appellate authorities and writs of High Courts, it is high time sections 68, 69 & 115BBE are scrapped. 5.4 Only 4000 characters are allowed for filing response during assessment/appeal proceedings and that too a small box is provided for typing the arguments and for furnishing particulars. In addition, since the same is done in online mode while typing the response for a longer time, often ‘continue session’ pops in which hinders the flow of providing too many data. It would be better to allow the assesses upload the response in PDF format separately typed instead of typing in the small box. 5.5 For filing responses for queries raised by the CPC about the mis matches in TDS, wrong claims etc., only 500 characters are allowed. This should be increased to at least 1000 characters. As of now there is no provision to attach documents. Attaching few documents in pdf format should be allowed in order to explain fully the issues involved. 5.6 As of now while filing an appeal, the assessment order against which the appeal is preferred is to be uploaded by the assessee, which should be avoided. It should be made sufficient to mention the order number and date so that the appellate authorities can view the same in the system itself. 5.7 There are lots of cases pending before Appellate Authorities viz. NFAC (National Faceless Appeal Centre) and ITAT (Income Tax Appellate Tribunal). It is high time that a time limit is fixed for disposal of appeals by both of them. Time limit should be fixed for taking up the case for hearing in appellate stage; say they should be taken up for hearing within at least six months from the date of filing an appeal. Once the case is taken up for hearing another time limit should be made mandatory, say three or six months from the date of first hearing, the appellate order should be passed unless the delay is attributable to the assessee. This will reduce the pending cases and finality will be reached faster.Read more at: https://taxguru.in/income-tax/pre-budget-memorandum-union-budget.htmlCopyright © Taxguru.in