Individual taxpayers spared of tax demands for filing discrepancies

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The tax department will no longer send demand notices to individuals even if it finds discrepancies in the income reported in the tax return with the information the department collects from entities such as banks, stock exchanges and car dealers.

Amendments to the existing law were proposed in the Union budget presented on 1 February.

“We found that a large number of tax returns could not be processed due to such discrepancies. There can be many legitimate reasons for the mismatch (in the income). We do not want to take up income adjustments at the Centralized Processing Centre (CPC), Bangalore. If there is a large variation, we can pick up those cases for limited scrutiny,” Central Board of Direct Taxes (CBDT) chairman Sushil Chandra said in an interview.

Implicitly, the move signals the belief of the tax authorities that the majority of those who file returns are honest taxpayers, while easing compliance.

It also reverses the amendment introduced last year which allowed tax authorities to raise extra demands when they detected discrepancies between tax returns and information reported to tax authorities by other entities like employers, banks, financial institutions, stock exchanges and car dealers.

Chandra said the decision was taken to give relief to small taxpayers and is applicable from assessment year 2018-19.

Adjusting the taxable income reported by the assessee in the light of the statements of employers and other entities was introduced with effect from April 2017, through the Finance Act of 2016. Considering the hardships that followed, the tax department in October instructed field officers to go for income adjustments only in select cases.

The CBDT instruction to officials on 11 October said that a process to adjust the taxable income will be initiated only in cases where a source of income, say salary, interest income or income from house property, has altogether been omitted in the tax return. If no source of income is entirely omitted, mismatches will be ignored.

The Finance Bill, 2018, however, entirely bars income adjustments for discrepancies in all cases at the return processing stage. It is also expected to ease the workload of officials as a large number of small taxpayers account for only a small share of the overall tax receipts.

The provision for adjustments to taxable income on account of discrepancies in returns had led to a lot of hardships to taxpayers, said Archit Gupta, founder and chief executive officer of ClearTax, a company providing tax-related services.

“There are many genuine situations where the numbers do not match. The proposed amendment will bring relief to them including senior citizens,” said Gupta.livemint