Budget 2023: 5 ways to simplify tax compliances

However, on the flip side, the Government has also made tax filing a much more comprehensive and detailed exercise. Filing the tax return is not just about reporting the correct income and paying the requisite tax. There is also a very detailed exercise of reporting assets and liabilities, more so, foreign assets. It is now perhaps time to take some measures to simplify tax compliances. This article is on five such aspects which need specific attention.

1. Streamline tax rates

Today, the tax rates under old tax regime as well as the New Personal Tax Regime (“NPTR») are too cumbersome. Under the old regime there are four rates and five rates of surcharge. Surcharge is NIL for income up to Rs. 50 lacs, levied at 10% between income level Rs. 50 lacs – 1 crore, 15% for income between Rs. 1-2 crore, 25% for income between Rs. 2-5 crore and 37% for income above Rs. 5 crores.

The various rates of surcharge make estimation of taxes very complex as it is not always possible to predict which rate of surcharge will be applicable for the year. This can have serious adverse effect on interest payable on shortfall in advance tax paid during the year. For instance, one ad hoc source of income at the end of the year (say capital gains) can push the effective tax rate immediately to a higher rate and has a domino effect on the entire income thereby affecting prior advance tax instalments also. This can pose a huge financial burden on the taxpayer at the end of the year.

On the other hand, in case of NPTR, there are too many slabs and rates. With seven slabs for tax rates (see below) and four for surcharge (no change from the old regime), it is very difficult for a common man to calculate taxes without use of an external help.

Taxable income Rate

Up to Rs. 250,000 NIL

Rs. 250,000 – Rs. 500,000 5%

Rs. 500,000 – Rs. 750,000 10%

Rs. 750,000 – Rs. 1,000,000 15%

Rs. 1,000,000 – Rs. 1,250,000 20%

Rs. 1,250,000 – 1,500,000 25%

Above Rs. 1,500,000 30%

It would be better to reduce the number of slabs. Furthermore, it is common knowledge that the NPTR has not picked up as per expectations as most taxpayers preferred to avail of exemptions/deductions arising from HRA, investments/payments under Chapter VIA, housing loan interest, etc. It is important to keep in mind that not having any tax deduction available for these expenditures can also have a detrimental effect on these industries. Bringing few of the exemptions/ deductions in the gamut of NPTR will encourage public to opt for it and avail concessional rates 

It might be a win-win to merge the two regimes, simplify the tax rates and allow some deductions to continue encouraging people to invest for the future.

2. Simplification of capital gains taxation

Capital gains taxation is one of the most vexatious parts of the Income-tax Act. There are far too many permutations and combinations of factors to determine the applicable tax rate. The holding period for determining whether a capital asset is long term or short term varies depends on too many factors — type of asset (financial assets vs. real estate), situs of assets (Indian shares/mutual funds vs. foreign financial assets), types of mutual funds (equity oriented or otherwise), holding period, varying tax rates, deeming and grandfathering provisions etc. This can make it very confusing for taxpayers. It would be hugely helpful to align the holding period amongst different types of assets.

3. Foreign Assets reporting

One of the most onerous schedules in the ITR forms is the FA Schedule. While the schedule is mandatory to be filled for an ordinarily resident of India, the details sought in the schedule needs too much of preparation by the taxpayer. The schedule is divided into sections like bank accounts, depository and custodial accounts, equity and debt interest, cash value insurance contracts, financial interest, immovable property etc. Each section has number of disclosure requirements, and it is onerous for the taxpayer to collate details like peak balance, cost of investment etc. To add the woes, the form or instructions to the form do not clarify the period for which such assets need to be reported, e.g.  whether the reporting of foreign assets and income from any source outside India is to be reported for the Indian fiscal year (31 March) or Accounting Year (the foreign country's Tax Year) or Calendar Year (Y/E 31st December). Simplifying the form schedule or adding clear instructions will ease out the process for taxpayers and avoid chance of misreporting too.

4. Income from House Property

A peculiar aspect under the Indian tax regulations is the concept of deemed rental income. Under the Act, if a person owns more than two house properties which are self-occupied, the additional properties will be deemed to be let out and the notional income needs to be offered for tax. While the provision for this deeming fiction would have been brought in to bring additional real estate wealth into the taxable ambit, in today’s world when returns from real estate are not very rewarding, it might be time to relook at this notional means of taxing wealth. Further, where an individual is living in his own house and rent out the same for part of the year, then under the current tax provisions, he/ she ends up paying tax for the full year i.e., on the actual rent received plus notional rent for the period for which individual occupied the house during the year. While in the similar situation, where the individual did not occupy the house and was lying vacant and rented it out for part of the year, then is it taxed only for the actual rent received during the year.

This is a hardship especially in today’s scenario where the mobility of individuals for employment outside India has gone up. Hence, only the part of the year where property was let out should be subject to tax. This will also help simplify the taxation of house property in general. Deduction for interest paid on housing loan, deductibility of pre-construction interest, carry forward of loss from house property – in general, these provisions need to be simplified.

5. Claiming treaty benefits in India

Any treaty relief claimed by an individual is subject to prescribed conditions under the relevant tax treaty between both the countries. Further, the timing difference between the tax years of both the countries add to the concerns. Practically, it is difficult for the taxpayer to submit the proof of taxes paid outside India along with filing of Form 67 given that the overseas return is not available till the due date of filing India tax return. Further, non-availability of Tax Residency Certificate (“TRC») from the overseas tax authorities at the time of filing India tax return, limited mode of verifying the Form 67 etc. are other challenges faced by the taxpayers. Even after filing the tax return, treaty reliefs are disallowed during processing of the returns and create hardships for the taxpayers to approach the authorities and explain the claims. Given all these issues, the Government may take steps to simplify the process of claiming such treaty reliefs or establish a separate wing/ team to take care of such cases where section 90/ 91 is invoked. A dedicated helpline for affected taxpayers may also be seen as a solution to such problems.

(By Ishita Sengupta, Partner and Leader, Vialto Partners, India, with inputs from Manavi Gupta, Associate Director)