Budget 2019: How FM Nirmala Sitharaman aims to plug tax leakages

Several proposals in the finance minister's speech aim to increase the number of tax filers and reduce the scope for tax avoidance

In the past few years, the government has been taking several steps to bring more people within the tax net. Today the tax department gathers data from a wide variety of sources, including on investments and high-value transactions, and analyses it to assess if a person ought to pay tax, or whether he is paying the right amount of tax. In this Budget, too, there were a number of measures aimed at plugging tax leakages and ensuring greater compliance.

Four conditions for filing of returns: If a person’s income exceeds the basic exemption limit, he must file tax return. “For individuals, the basic exemption limit is Rs 2.5 lakh and for senior citizens, Rs 3 lakh. Those with foreign assets too need to file return even if their income is nil,” says Kuldip Kumar, partner and leader-personal tax, PwC India.

In this Budget, the government has proposed to amend Section 139 of the Income-Tax (I-T) Act and added four situations in which filing tax will become compulsory even if a person’s income falls below the basic exemption limit. “The tax department will thus get more people to join the rank of tax filers. It is also getting information from many other sources and agencies which it can use to assess taxpayers better,” says Ashok Shah, senior partner, NA Shah Associates.

The first precondition is if a person has deposited an amount exceeding Rs 1 crore in one or more current account of a bank. The second is if a person spends more than Rs 2 lakh on foreign travel either on himself or on another person. The third is if a person’s electricity bill exceeds Rs 1 lakh in a year. Says Archit Gupta, founder and chief executive officer, ClearTax: “The government is trying to tap every channel where big expenses occur, yet the people making them do not file a tax return.”

The fourth precondition is if a person sells a house and reinvests the proceeds in another house or in bonds. People mistakenly believe that since they have fully reinvested the receipts and do not have a tax liability, they do not have any further obligation. “While it is true that such a person does not have a tax liability, he needs to file tax return to avail of any benefit laid down in the I-T Act,” says Gupta.

TDS on property transaction: According to Section 194-IA, when a buyer makes payment to a seller in case of an immovable property transaction, he needs to deduct 1 per cent as tax deducted at source (TDS). Earlier, the term “consideration” was not properly defined, so buyers would only deduct TDS on the value of the house—a lower amount. Now, it has been clarified that “consideration” will include all charges incidental to the transfer of the immovable property, such as club membership, car parking, maintenance fee, and so on.

Gift from an Indian resident: The Budget has proposed to amend Section 9 of I-T Act, which deals with incomes that are always deemed to accrue or arise in India. Suppose that X is a resident of India and Y a non-resident based in the US. X gifts Y a property. The latter may think that since he is non-resident and has received the property as gift, he need not pay any tax on it.

According to law, gifts are tax-exempt if they are from a relative, as defined in the I-T Act, received at the time of marriage, or inherited. If a gift does not fulfil these conditions, it becomes an income for the recipient (income here is the value of the gift). According to the amendment being proposed, such income will be deemed to accrue or arise in India and a non-resident cannot escape being taxed on it. He will have to file a tax return in India and can then claim relief under double tax avoidance agreement (DTAA). “This will curb the practice of Indians remitting money outside India by making gifts to non-relatives,” says Shah.

TDS on contract work of above Rs 50 lakh: At present, individuals or Hindu United Families (HUFs) are not under an obligation to deduct TDS when they give work on contract for personal purposes. Similarly, individuals and HUFs who are not subject to audit are also not under an obligation to deduct TDS even with they contract work for business or professional purpose. This leaves scope for tax evasion. Now, TDS will have to be levied at the rate of 5 per cent by an individual or HUF if the value of work contracted exceeds Rs 50 lakh in a year. “The moment the payer deducts TDS, the tax department will know the identity of the recipient. If the latter does not show that income in his tax return, the department could issue a notice,” says Shah.