Tax returns must report assets from FY13 as govt closes in on rich evaders
People sitting on huge assets but paying little income tax may have reason to worry. In an ambitious bid to counter tax evasion, the government has decided to introduce a new income tax return form effective financial year 2012-13, that will require individuals to disclose all their assets and liabilities, rather than just annual income from various sources. The new return, therefore, will be a comprehensive balance sheet of assets and liabilities, disclosing ownership of houses, jewellery, urban land, motor cars and other personal effects such as yachts and aircraft, along with outstanding debt.
The idea is to extend the scope of tax return to include information that is in the domain of wealth tax — a levy that has poor compliance history in the country. The department wants to zero in on individuals, mainly traders and businessmen, who disclose modest income, but own fancy SUVs, houses at posh locations and other assets that clearly do not agree with the reported income. Rich farmers who don’t report taxable income, other than agriculture income might escape the new reporting norm also, as farm income is not taxable, analysts say.
At present, the requirement for individuals and Hindu Undivided Families to pay a wealth tax of 1% on ‘net wealth’ (total assets minus debt) above Rs. 30 lakh and file wealth tax returns is not strictly complied with. The country reported a wealth tax collection of just Rs. 866 crore in 2012-13, way below the budget estimate of Rs.1,244 crore, itself a shadow of what independent analysts have estimated this tax’s potential to be.
Tax experts say there are many assessees who disclose a modest income, but have substantially high unreported or indirectly held net wealth, the funding source of which will have to be explained once the proposed changes in the IT return comes into force. Compliance in IT return filing has been much more than in wealth tax return filings, making the short-staffed revenue department tap the new format for gathering information on assets.
Suppose an assessee declares only one house in a particular year and shows two in the next, the department could ask him to explain the source of income for the second house, explained Sunil Shah, direct taxes partner, Deloitte. “It will not be infeasible for the department to call for such information as it would readily be available with assessees. It would help the department in the assessment process,” said Shah.
Individuals who stay in their own house, the value of which may have gone up in the recent real estate boom, will not necessarily have to report its current market value as they have the option to declare the value of the house applicable in the year they came to own it. Schedule three of the Wealth Tax Act gives guidance on valuation of assets.
Reporting of assets in the IT return will, however, help the department in profiling an assessee accurately and ask relevant questions if his or her assets are disproportionate to the known sources of income, said Amit Maheshwari, partner, Ashok Maheshwary & Associates. “It could also form the basis for seeking an explanation on why wealth tax return has not been filed in case the net assets are more than the threshold limit. This is another measure aimed to check tax evasion and boost tax collections,” said Maheshwari.
The move is in line with the revenue department’s recent combing of large credit card transactions, investments in mutual funds and bonds and cases of very high spending to question certain individuals’ apparently understated income. Last year, the government had made it compulsory for tax payers to disclose all their overseas assets in the IT return. With revenue buoyancy being hit by the economic slowdown, exploring all avenues to expand the taxpayer base is critical to increase tax inflows.
The requirement of reporting assets in the IT return will put pressure on assessees to declare an income that agrees with his or her assets, explained Prashant Khatore, tax partner, Ernst & Young.
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