Strict regulations to manage a booming economy

On 31st March, 2017, the President of India gave his assent to the Indian Finance Bill 2017 to become the Finance Act 2017. Important changes have been made to the Income Tax Act (see below) applicable from 1st April, 2017, pertaining to the assessment year 2018 – 2019. Penalties for exceeding cash dealing limits are high so it is crucial that the ever stricter legal provisions be adhered to.

GDP growth in India is expected to be in the range of 7% – 9%, possibly even reaching double digits. This has been achieved by introducing foreign direct investment (FDI) regulations and liberal policies to encourage business environment and industrialisation. The Indian government has at the same time introduced a range of new laws to create a stable foundation for these reforms. This article summarises and explains the amendments to the new tax laws effective April 2017.

Cash payments/receipts

• The limit for cash payments for expenses has been reduced from Rs. (Indian Rupee) 20,000 to Rs. 10,000 per day in aggregate per person. Any expenditure in excess of the given limit would be disallowed.
• Cash donations exceeding Rs. 2,000 will no longer be eligible for deduction.
• Provisions governing tax collected at source (TCS) of 1% on cash sales exceeding Rs. 5 lakhs (1 lakh = 100,00 RS.) in the case of bullion/jewellery and Rs. 2 lakhs in the case of other goods/services have been withdrawn.
• The limit for the receipt of any amount in cash has been prescribed as Rs. 200,000 per person per day in any one transaction, otherwise a penalty will be incurred. Provisions exist to govern the handling of any cash receipts exceeding this limit.

Capital gains

• The holding period for immovable property to be considered long term has been reduced from 3 to 2 years. Immovable property held for two years or more therefore now attracts a tax rate of 20%, being considered long-term capital gains.
• The base year for the adjustment of prices for inflation is now 1st April, 2001 (previously 1st April, 1981).

Tax rates

• The tax rate on income between Rs. 2.5 lakhs and Rs. 5 lakhs has been reduced from 10% to 5%, thus reducing the tax by 50% for people earning between Rs. 250,000 and Rs. 500,000. Taxpayers with a higher income benefit by Rs. 12,500.
• The tax rebate is reduced to Rs. 2,500 (previously Rs. 5,000) per year for taxpayers earning up to Rs. 3.5 lakhs (previously Rs 5.0 lakhs), this means if liability to pay income tax is Rs 2,500 or less, no tax is payable by an individual.
• A tax surcharge of 10% is levied on persons earning between Rs. 50 lakhs to Rs. 1 crore (1 crore = 10 million RS.). The surcharge for persons with an income above Rs. 1 crore will remain at 15%.
• The tax rate on presumptive income from turnover below Rs. 2 crore has been revised as follows:
  For non-cash sales, net profit will be taken at 6% of turnover.
  For cash sales, it will remain at 8%.
• Individuals and Hindu Undivided Families (HUF) shall be required to deduct TDS at 5% on rental payments above Rs. 50,000 per month, effective from 1st June 2017.

The indian numbering systems

Large amounts of money in India are often written in terms of lakhs and crores.

1 lakh = 100.000 Indian rupees (RS, iR or RE)
For example, in India 150,000 rupees becomes 1.5 lakh rupees.

1 crore = 10 million RS. (equal to 100 lakh)
For example, 150,000,000 (one hundred fifty million) Indian rupees is written as fifteen crore rupees, 15 crore or Rs 15 crore.
– R. L. Kabra
Chairman, Ecovis, Mumbai, India

Filing income tax returns

• Tax filing will be simplified and converted to a one-page document for people with a taxable income of up to Rs. 50 lakhs (excluding business income).
• Any delay in filing income tax returns for 2017 – 18 will attract a penalty of Rs. 5,000 if filed by 31st December, 2018, and Rs. 10,000 if filed later.

Other changes

• Income tax officials will be able to reopen cases as old as 10 years if search operations reveal undisclosed income and assets of over Rs. 50 lakhs.
• From July 1st 2017, it will be mandatory for the personal ID no. (Aadhar number) to be quoted when applying for a permanent account number (PAN) card and when filing income tax returns.

Income tax forms

As of the financial year 2016 – 12017, there are only seven types of income tax return (ITR) forms, instead of nine. These are ITR-1 for those with a salaried income, ITR-2 for partners in partnership firms and for salaried persons who have income from capital gains, ITR-3 for businesses and professions, ITR-4 for those earning income on a presumptive basis, ITR-5 for partnership firms, ITR-6 for companies and ITR-7 for trusts and other taxpayers.

The major changes in the ITR forms are as follows:

1. The most important change is that the Aadhar no./enrolment no. is now compulsory for all income tax returns. In the case of partnership firms, the Aadhar no. of all the partners must be mentioned. This will reduce the number of duplicate PANs and will help in identifying the correct addresses of tax evaders, etc.
2. Details of any cash deposited equal to or above Rs. 200,000 in the demonetisation period 9/11/2016 to 30/12/2016 have to be mentioned in the income tax return for cross-checking purposes and to enable tax evaders to be traced post-demonetisation.
3. Unexplained credit or investment attracts tax at a rate of 60% plus a surcharge, irrespective of slab rates. (When there is a different rate for different levels of income it is called slab rate. This is a term predominantly in use in India).
4. Where income from dividends exceeds Rs. 10 lakhs, tax at a rate of 10% is applicable.
5. The government has created a simplified one page form known as ITR-1 Sahaj for individuals earning income from a salary or awarded a pension, owning one house and deriving income from other sources. It covers the most frequent types of deductions claimed such as for life insurance premiums, savings contributions (PPF), mediclaim premiums, donations and interest on savings.
6. The new ITR forms also provide for deductions on home loan interest for first time homebuyers.
7. New ITR forms require individuals and HUF to declare the value of assets and liabilities if their total income exceeds Rs. 50 lakhs. Taxpayers are now also required to disclose the address of immovable property and submit a description of movable properties, as well as interest held in the assets of a firm or an association of persons (AOP) as a partner or member, including the name, address and PAN of the firm or AOP.
8. Taxpayers liable to presumptive taxation need not maintain any books of accounts, which means they have to pay tax on profit calculated on the turnover. The rates vary between 6% and 8%, depending on the circumstances, and taxpayers may opt for the presumptive taxation scheme under certain circumstances.
9. Trusts are now obliged to mention any audits conducted in form ITR-7 as well as to give details about the utilisation of funds for capital or charity purposes.

Conclusion

Whilst the tax laws in India have been simplified, compliance has been made stricter. The present government is aiming for a cashless digital economy to stem the circulation of black money. The steps taken towards introducing the new income declaration scheme (IDS) and de-monetisation and the Pradhan Mantri Gharib Kalyan Yojna (PMGKY) amnesty scheme were a mild warning by authorities. The introduction of the goods and service tax (GST) in India is also designed to curb evasion of taxes.