Your income tax returns just got tougher

You now have to account for expenditures and all bank and cash transactions.

NEW DELHI: The government turned the "Saral" (simple) form for filing tax returns on its head on Friday. It notified a "New Saral" form for mandatory use from August that would require individuals and Hindu undivided families (HUFs) to furnish expenditure and cash-flow data in addition to information on income.

The existing one-page "Saral" form will be replaced by a new four-page form called 2F that tax consultants have dubbed "tough". It’s tough enough to call for two additional pages of detailed instructions on how to fill in the form.

However, the New Saral does make some things easier - especially documentation. If you are able to get through the ordeal of filling up the four pages without angst, you don’t need to attach anything else with the return - not even Form 16, the document issued by employers to salaried employees. These documents have, however, to be retained at your end, and may be called for by the taxman.

In the new form, you not only have to account for the money in your bank, but also the money in your pocket. Schedule 5 of the form specifically asks you to declare the cash you were holding at the start of the previous financial year (April 1, 2005, for the returns you will file this year). Since you didn’t know about this rule last year, you are spared from having to furnish these details this time, but from next year you had better keep a little notebook for noting your cash holdings on April 1 this year.

The new form is ostensibly aimed at detecting undisclosed income by capturing expenditure details. But tax consultants view it as a hassle for taxpayers, particularly those only with salary incomes to report, and in whose case tax is deducted at source.

"Making it apply to a class of people for whom most of the income is deducted at source is bewildering," says Sandeep Shanbhag, director of a Mumbai-based tax and investment consulting firm.

Revenue secretary KM Chandrashekhar, however, stoutly defends the new form. He told reporters in Delhi that the form has been introduced "to make return filing easier, with little or no help from tax experts."

Chandrashekhar claimed the main advantage of furnishing cash-flow statements is that it would reduce the probability of scrutiny or any other kind of intrusive investigation. If the amount of expenditure given in the tax return roughly matches the details given by third party information received through annual information returns (AIRs), the banking cash transaction tax and field officers, there would not be any need for scrutiny, he said.

AIRs are filed with the tax department by intermediaries such as car dealers and sellers of high-value goods, property registrars and banks. Chandrashekhar also claimed that the new form would be simpler in the sense that it would not require any annexures.

Apart from giving details of your cash and bank balances, the new form requires you to give additional data on "other receipts" such as loans and gifts taken during the year as well as expenses, investments and "other outgoings." This, tax consultants say, would require taxpayers to maintain careful accounts of their receipts and expenditures and make compliance tedious.

"Having to make a cash flow statement has converted the income tax return to an expenditure return", says Shanbhag. Instead of asking for a cash-flow statement, the authorities could as well have asked for a copy of bank statements to be attached with the return. All in all, the new form will leave chartered accountants and other income tax return preparers licking their lips as the charges for preparing returns will increase.

The joint secretary in the revenue department, Arbind Modi, denied that asking for expenditure statements was like prying into the private affairs of people. No details of household expenses would be asked and assessees would be required to fill in only lump sum amounts.

A member of the Central Board of Direct Taxes, Arun Bhargava, said the new form is meant to make taxpayers disclose major expenditures so that they are also made to disclose their incomes correctly. An income tax department survey has shown that 50 per cent of assessees claim to be spending less than Rs50,000 in a year, which is not true in fact.

The new form can be filed electronically without a digital signature to http://www.incometaxindiaefiling.gov.in, but you still have to file a proper paper return, duly signed, after that. So the paperwork remains.