Senior Citizens and low-income earners could attract unwanted compliance burden due to the lower threshold

Prime Minister Narendra Modi announced several tax measures on the eve of India’s Independence Day last week honouring the honest tax-paying citizen. You will now have to file your income-tax (IT) return or pay higher percentage of tax deduction at source if you make certain spends in a year.

If you spend Rs 20,000 a year as hotel expenses, property tax or even a health insurance premium, then your transactions would be reported. Similarly, if your annual rent exceeds Rs 40,000, life insurance premium is at least Rs 50,000 or electricity bills of Rs 1 lakh or more during a financial year, then you would be answerable to the taxman either via notices or through mandatory filing of returns.

The motive of the move is to check whether your spending is in line with the income you actually disclose in your return. The Government has been shunting all doors to not only reduce the number of all cash transactions, but also increase the number of returns filed. The new move to collect spending data is another tool in the armoury to curb tax evasion.

While a formal amendment to the Statement of Financial Transaction rule is yet to be confirmed by the Government, tax experts say that the tax-payer’s burden is set to go up, thanks partly to the low threshold limits that they feel may touch many lives. “The threshold limit is very small. Consider a retired person, who would have a mediclaim premium above Rs 20,000 as typically health insurance costs shoot up when they cross 50 years. Even though he has no income, he will have to file tax returns as the transactions have been reported,” says chartered accountant Paras Savla.

Sample this: private life insurers collect an average life insurance premium of Rs 52,939, according to the regulator IRDAI.

Are transactions tracked currently?

The existing income tax rules mandate financial institutions such as banks, mutual fund houses, share registrar and transfer agents,sub-registrars to report high value transactions exceeding a specified limit during a financial year to the Income Tax Department.

So, a bank has to report details of every account holder who makes cash deposits of more than Rs 10 lakh in a year in a savings account or makes a payment of more than Rs 2 lakh from his credit card in a year. Similarly, asset management companies are required to report details of all the investors who invest more than Rs 2 lakh in a single mutual fund scheme. Now not only your investments and financial transactions, but also your specific spends will be tracked.

No. You do not have to go out of your way to inform the government or anyone, unless asked for in the tax return forms. Your purchases and expenses beyond a threshold will be mentioned in the returns of the hotel, electronic goods seller, artist, school, ceramic supplier or the Registrar in the case of property purchase, apart from banks, mutual fund houses, life and general insurance companies.

The details mapped to you would be reflected in your individual tax statement or Form 26AS. This form would be available on your income-tax website login. The moment your spends in any of the high-spend categories mentioned, exceed the respective threshold limits, your Form 26AS would capture it. In other words, you have to file your tax returns. “Make sure the Form 26AS details match while filing the returns,” says Savla.

“Non-filing of ITR may have severe consequences for a person, who is otherwise required to file an ITR. Apart from attracting interest, late fee and penalty, wilful non-filing of ITR may also attract criminal prosecution,” said Shailesh Kumar, Partner, Nangia & Co LLP.

What if I have made payments on behalf of someone else?

Yes, this could get tricky for you. You could be a frequent traveller for work and used to entertaining guests or clients over meals. Although your company would reimburse you the costs, the IT department would capture your credit card spends and assume they are all yours.

“Senior citizen parents who are used to getting money from their children living abroad, may also now need to file returns even though their income may be low or negligible,” added Savla. The Ministry of Finance indicated that the total deposits in a savings bank account exceeding Rs 25 lakh a year would have to be reported. The limit for current accounts stands at Rs 50 lakh. The moment your total bank deposits cross Rs 30 lakh you would have to ensure you file a tax return, whatever the source.

Again, you do not have to report anything yourself. Hotels, electronic goods sellers, banks, financial institutions, artists, marble suppliers and all firms where your high-value spends could occur, would need to file reports with the government against your PAN.

Then, it’s best to avoid making payments on others’ behalf?

Yes, that’s better. “Ask for separate hotel invoices in the respective names of the persons,” says Salva if you are traveling in a group.

Shilpa Bhatia, Director- Direct Taxes, AKM Global, a consulting firm suggests that if you wish to pay a consolidated bill, ask the hotel to segregate expenses on your bill that differentiates your spends versus the groups’. That’s easier said than done, though.

Do I need to preserve my bills?

Yes. Because, after the financial year, Form 26AS gets generated. You will need to compare the expenses mentioned there to make sure you indeed spent all that money. “For taxpayers having business income and claiming deduction for expenses, bills for spends too would have to be maintained,” he says.

Savla suggests that you need to keep records of your high-value expenses for 6-7 years as the returns can be re-opened later. Take a photocopy of bills on thermal paper, which tends to fade away.

I have to file my tax returns by November 30. Do I need to start pulling out my bills, rightaway?

No. The government has just announced these. The details and the date on which this would be implemented would be announced soon.

The new move has been part of the government’s move to widen the tax net and get more and more people to file their income tax returns. A total of about 55 lakh or 80 per cent of the total returns are filed by people having an income of up to Rs 5 lakh, as per the Central Board of Direct Tax’s numbers as of July 31, 2020. Only 5,066 individuals, who have an income above Rs 1 crore file returns, accounting for 0.73 per cent of the total individual tax returns.