Former finance minister Yashwant Sinha sought to make life easy for a taxpayer when he introduced a one page simple return form Saral for all non-corporate taxpayers in 1999. Mr Sinha embarked on such a move considering the fact that income-tax forms were cumbersome and and as he himself admitted a serious deterrent to an honest individual in becoming a tax assessee. Saral was meant to be filled by taxpayers without the help of tax advisors. It was reckoned that a simple form would help enlarge the tax base.
Four years later in 2003-04, his successor Jaswant Singh introduced Naya Saral — again a one page return form for individual taxpayers, with income to boot from besides salary, house property, interest and other sources. Some taxpayers complained then saying there was insufficient space to fill various columns in this form. But trouble broke out last year, when the revenue department announced the discontinuation of Naya Saral or Form 2E. Salaried taxpayers — without business or agricultural income or capital gains — instead had to use a new Form 2F. Tax payer resistance was not really about using a new form perse.
What irked them was the mandatory requirement to furnish a cash-flow statement along with Form 2F. The cash flow statement is a summary of income and receipts such as loans and gifts, investments and expenses of the assessee during the year. However, a detailed break up of each item of expenditure is not needed. A taxpayer does not have to give his monthly grocery bills. The revenue department justified its move to have a cash flow statement saying that this input would help tax authorities check whether the taxpayer has made investments and met all expenses from his earnings and receipts during the year.
If expenses overshoot receipts, there is a possibility that some of the investments could have been funded from undeclared sources of income. This means a taxpayer has assets disproportionate to his known sources of income. However, the resistance from taxpayers forced the department to make the cash flow statement optional for returns filed during assessment year 2006-07. Some parliamentarians felt that this was intrusive method of collecting information. The standing committee on finance recommended scrapping the cash flow statement. The committee of secretaries representing civil servants rejected the proposal for a cash flow statement. Yet, the revenue department is in no mood to give up. The last word on this statement, perhaps, will be said when the government reviews Form 2F in the coming fiscal.
Most people agree that taxpayers in India need user-friendly simple return forms. But there are divergent views on the nature of information that tax authorities can collect. In the US, for instance, a form can be simple or complicated depending on the type of filer. The simplest form is the 1040-EZ, which is for a single or married filer (joint filers) with no dependents, having salaried income and interest income from banks.
All reporting of income for any individual is parallely done by the employer, financial institutions directly to the Indian Revenue Service under his or her social security number. Form 1040 also covers other income: income from businesses, self-employed persons. In the most simple case, it does not go beyond two pages with a few attachments (forms received from the employer, banks for mortgage interest paid, interest received from banks and so on).
In countries such as Canada, UK, Australia, taxpayers need to give a reasonable amount of information on their earnings to revenue authorities. In Singapore, revenue authorities prepare a draft income-tax return form which the taxpayer can verify and endorse electronically — if he exercises this option. Revenue authorities in these countries are perhaps placed better than their counterparts in India to track evaders because every economic activity is captured electronically and these transactions can be correlated with tax returns of an individual.
In a couple of years, this could be a reality in India with the tax authorities at work on capturing information on multiple sources of income of an individual. Once that is collated, the information can be cross checked with the income return filed by the individual. Back home, the tax department has drawn up plans for complete state of the art computerisation to mine the enormous amount of information flowing from various sources.
Meanwhile NSDL — which hosts the tax information network — has been successful in tracking high value purchases of individuals through annual information returns filed by banks, credit card companies, registrar of property, mutual funds and so on. It has created individual transaction statements (ITS) which can be matched with each taxpayers return. However, the AIR is yet to stabilise because many transactions do not have a PAN. This means several IT returns cannot be matched with the information collated through the AIR.
Revenue authorities say that a cash flow statement simplifies the task of verification as it captures the receipts and investments made by the taxpayer. If the investments indicated in the cash flow statement are lower than the total value of investments captured through AIR, then the tax authorities can pin down the tax payer for having undisclosed income. Only such cases will be taken up for scrutiny. Currently, seven lakh returns are taken up for scrutiny or close examination by assessing officers, where taxpayers are asked to furnish what can be loosely called a cash flow statement. They have to explain the source of income that has funded their investments.
Over the next couple of years, the government will widen the AIR to cover more transactions. This would automatically mean expanding the PAN basket as well. Eventually, PAN has to be made compulsory for every financial transaction. A cash flow statement may not be needed if all economic activities can be captured electronically based on a unique identification number, which could be PAN.
Therefore, a cash flow statement may be needed until the revenue authorities are in a position to be guided by the electronic tracking of all investment and economic activities in the country. For the government, the focus now should be on accelerating the pace of computerisation of tax department to ensure effective data mining and correlation with taxpayers returns.
But here are some basic facts: there are nearly 3.5 crore tax assesses. Of this around 1,20,000 declare taxable income of over Rs 10 lakhs. Surely, many more could fall in this bracket, going by the surge in consumer spends and investment trends in the last couple of years.