Pre Budget Memorandum 2024-25: Tax Base, Avoidance, Litigations

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Pre Budget Memorandum 2024-25 Tax Base,
Avoidance, Litigations
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• Introduction
• The Pre Budget Memorandum for Union Budget
  2024-25 lays out a strategic roadmap for
  enhancing Indias taxation framework. Addressing
  critical areas such as tax base expansion,
  avoidance mitigation, litigation reduction, and
  Direct Tax Laws rationalization, the memorandum
  seeks to shape a tax ecosystem that is
  responsive, fair, and conducive to economic
  growth.1. Suggestions for widening the tax base
  and increasing the tax revenue
• 1.1 As of now more time is spent on scrutinizing
  the returns filed than the time spent in roping
  new cases. The more the Income Returned, more
  the chances of getting enquiry and hearing. It is
  to be avoided. By existing practice, the
  scrutiny assessments must be completed
  necessarily by increasing the income returned
  either by disallowing certain expenditure or by
  enhancing the income earned, which results in
  additional taxes with interest and penalty
  proceedings. Once the ROI is taken up for
  scrutiny the income returned is not accepted at
  all and huge demand is made by enhancing the
  income returned by hefty additions/disallowances.
  Because of this attitude, physiological fear
  arises among assessees, which is deterrent for
  the cordial relationship between the Income Tax
  Department and the Assessee. Hence the
  misconception among assessees is that if they
  file returns voluntarily, they will be subjected
  to rowing enquiry. So, they wait till a
  compelling situation arises. If this is taken
  care of, more people will come forward to file
  returns of income voluntarily. Of course, the
  assessees should be aware of the fact that if
  there is willful default or concealment
  appropriate action would be taken by the
  Department.

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• 1.2 Many of the properties are sold by registered
  documents up to Rs. 10,00,000/- (Rupees Ten Lakhs
  only) without PAN, since providing the PAN of the
  buyer and seller are not compulsory, there is a
  chance that such transactions may escape the
  attention of the Income Tax Department. Hence PAN
  should be made compulsory for registration of
  documents carrying value of Rs. 1 Lakh and above.
  Likewise, as per the present law tax is deducted
  _at_ 1 if the sale value exceeds Rs. 50 Lakhs. This
  should also be reduced to Rs. 1 Lakh. At present
  the public receive notice after a long time after
  they complete the registration of the documents
  exceeding Rs. 30 Lakhs based on the information
  available in the AIR. But this value (reporting
  under AIR) should also be reduced to Rs. 1 Lakh
  and the notices should be sent as early as
  possible. If the capital gains arising there from
  are offered as Income and the taxes are paid in
  time, the assessees can save the interest they
  are paying due to nonpayment of Advance Tax and
  belated filing of return of income after receipt
  of notice and they need not be subjected to
  penalty proceedings also. They can avoid capital
  gains tax by investing the proceeds/gains in
  approved securities or in house property before
  the stipulated time, if they are eligible,
  provided they are alerted in time. This will also
  help to increase the tax revenue.
• 1.3 One more area, where new assessees can be
  roped in is Construction of new buildings,
  wherein PAN should be made compulsory say for
  construction above 500sq.ft., at the time of
  approval of plan, so that one cannot build new
  structure without the knowledge of the Income Tax
  Department. 1.4 Many people including
  associations, clubs etc., get PAN and they dont
  care to file their Return of Income irrespective
  of their income. If notices are sent to the
  registered addresses many assessees can be roped
  in.

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• 2. Suggestions to check tax avoidance 2.1 As of
  now cash up to Rs. 2,00,000 (Rupees Two Lakhs) is
  allowed for the real estate transactions. To
  bring them into the fold of taxation any
  transaction above Rs. 50,000/- (Rupees Fifty
  Thousand only) should be carried out in digital
  mode only so that they can easily be traced and
  brought to tax net.
• 3. Suggestions to reduce/minimize litigations
• 3.1 As per the present Act the Assessing
  Officer/CPC/NFAC can take four years to dispose
  of the rectification petition. It is not just and
  equitable to direct the assessee to respond
  within 30 days (1 month) for payment of the
  disputed demand and the department will take 4
  years (48 months) to rectify or reject the
  petition. To be fair and equitable, the Income
  Tax Act should be amended in such a way that the
  Assessing Officer/CPC/NFAC will also be given
  time of 30 days only for rectification and if the
  rectification order is not passed rejecting the
  petition within the time allowed, the petition
  made should be deemed to have been allowed and
  once the rectification petition is filed the
  assessee should automatically be given time till
  the disposal of the petition to pay tax as well
  as to prefer an appeal. Many assesses are
  suffering because even clerical errors are not
  rectified, and they are compelled to pay a
  minimum of 20 of the demand and go for appeal.

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• 3.2 As per the present Act it seems there is no
  limit for disposing of the various Condonation
  Petitions filed such as petition for condonation
  of delay in filing Form 10 because of which heavy
  taxes are levied and the appellate authorities
  are not in a position to pass orders in such
  cases. Hence a time limit of say 30 days may be
  prescribed for disposing of such condonation
  petitions by the concerned authorities.
• 3.3 As of now, there is no provision in the Act
  to apply for rectification if there are mistakes
  in the orders passed u s 250 by the CIT
  (Appeals). Hence a suitable provision may be made
  in the Act to apply for rectification for
  correcting the mistakes apparent on the order.
• 3.4 For appeals made u.s. 253, for the orders
  passed us 250 by the CIT(Appeals), though
  e-appeal can be made through electronic mode,
  physical copies of the appeals and related papers
  are to be filed manually. This requirement of
  filing hard copies should be dispensed with. 4.
  Suggestions for rationalization of the provisions
  of Direct Tax Laws 4.1 As of now the rates of
  taxes arise from a lower limit of Rs. 2.5 lakhs
  and the entire tax payable up to the income of
  Rs. 5 lakhs are allowable as a rebate for which
  there is no logical reasoning. Instead, the basic
  limit itself should be raised to Rs. 5 Lakhs for
  all assessees who are below 60 years of age and
  for assessees above 60 years and below 80 years
  of age the basic limit can be increased to Rs. 8
  Lakhs and for super senior citizens, who are 80
  years and above the basic limit can be fixed as
  Rs. 10 Lakhs.
• 4.2 This TCS _at_20 on foreign travel expenses is
  exorbitant and it seems there is no logical
  reason for this increase. Why do the law makers
  fail to understand that TCS is not like TDS,
  which is nothing but collection tax in advance
  from the recipient who earns an income above a
  certain limit whereas TCS is for collecting a
  fraction of the expenses mainly for bringing such
  transactions to the knowledge of the IT
  Department so as to ascertain whether the
  particular assessee has sufficient sources of
  income or taxed money in hand to incur such an
  expenditure or make an investment is not known.
   Of late in recent years the TCS rates are
  increased without understanding the purpose for
  which TCS was introduced. This increase will
  primarily burden the foreign travelers which
  should be withdrawn and the maximum TCS rate
  should be maintained at 1 only.

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• 4.3 The Income Tax Department was boasting itself
  by making announcements in Newspaper that they
  are going to refund Rs. 3.5 trillion during the
  financial year 2023-24. But this is not a news to
  rejoice because it means that there are more TDS
  than required. If by AI or by any other method if
  they are able to find out and reduce or remove
  the TDS in unwanted areas it will save a lot of
  money for the assesses and a lot of time for the
  Department.
• 4.4 Applicability of sections 44AD, 44ADA 44AE
  As of now there is no clarity. Each section has
  got its own definition of the assessees to whom
  it is applicable. All the sections should be made
  applicable to all resident assesses excluding the
  assessees whose accounts are necessarily to be
  audited under any other Act.
• 4.5 Under Section 44AD income is arrived _at_ 8 of
  the turnover and the rate is lowered to 6 for
  receipts other than cash. But such a concession
  is not made available u.s. 44ADA and 44AE. For
  section 44ADA the income is calculated _at_ 50 of
  the gross receipts, wherein to promote non-cash
  transactions in this category also for receipts
  other than cash, 40 may be taken as income.
  Likewise u.s 44AE Rs. 1,000/- p.m. per ton for
  Heavy Goods Vehicle and Rs. 7,500/- for other
  vehicles are estimated as income. Here also
  concessions may be given for promoting non-cash
  transactions by allowing deduction of 5 of the
  receipts in mode other than cash.
• 4.6 Under section 44AD the turnover is taken
  into account, which is nothing but net sales
  (i.e. sales less returns, if any), whereas under
  section 44ADA the rate of income is arrived from
  the Gross Receipts, which may include
  reimbursement of expenses also, wherein
  calculation of income _at_ 50 on the receipt of
  reimbursement of expenses in not correct. Hence
  such receipts should be allowed to be deducted
  from the gross receipts for arriving at the
  calculation of 50.

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• 4.7 Section 44AD (4) reads as under Where an
  eligible assessee declares profit for any
  previous year in accordance with the provisions
  of this section and he declares profit for any of
  the five assessment years relevant to the
  previous year succeeding such previous year not
  in accordance with the provisions of sub-section
  (1), he shall not be eligible to claim the
  benefit of the provisions of this section for
  five assessment years subsequent to the
  assessment year relevant to the previous year in
  which the profit has not been declared in
  accordance with the provisions of sub-section
  (1). From the above clause it is clear that the
  assessee cannot opt for Presumptive Tax for six
  years (including the year in which he has come
  out of the scheme), if he has not offered income
  under this scheme for consecutively for six years
  including the first year in which he has opted
  for the scheme. Does it mean that if he has opted
  for the scheme for six years consecutively,
  afterwards he is free to opt for the scheme,
  whenever he likes? If the intention of the
  statute is to deny the benefit to those who opts
  out of the scheme, it is sufficient to mention
  that once if he fails to opt for the benefit of
  this section in any year (instead five years)
  subsequent to the year he has availed the benefit
  he cannot claim the same for next five years,
  i.e., he cannot return for five years.
• Hence the clause 4 is to be replaced as Where an
  eligible assessee declares profit for any
  previous year in accordance with the provisions
  of this section and he declares profit for any
  year relevant to the previous year succeeding
  such previous year not in accordance with the
  provisions of sub-section (1), he shall not be
  eligible to claim the benefit of the provisions
  of this section for five assessment years
  subsequent to the assessment year relevant to the
  previous year in which the profit has not been
  declared in accordance with the provisions of
  sub-section (1).

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• 4.8 In the case of Partnership Firms, Partners
  Interest and Salary are specifically not allowed
  as deduction under section 44AD whereas the
  section 44ADA is silent about the same. While
  books of accounts are maintained and audited,
  before arriving at the taxable income, interest _at_
  12 p.a. on the amounts invested in the
  Partnership Firm either in Capital Account or in
  Current Account of the Partners and salary up to
  the limits provided u.s 40b are allowed as
  deduction before arriving at the Taxable Income.
  It will be fair and just to allow interest and
  salary to partners so that those Partnership
  Firms which opt for presumptive tax are also
  treated on par with others who get their accounts
  audited. Further in the present situation if a
  partner gets interest and salary from a
  Partnership Firm, which has offered income under
  presumptive taxation scheme, whether such
  interest and salary are exempt from Income Tax in
  the hands of the partners is not specified in the
  Act though they are not allowed as expenditure in
  Firms hands. Since all the expenditure is deemed
  to have been allowed in Firms hands the interest
  and salary would be subject to tax in partners
  hands also, which will lead to double taxation.
  In the normal course in the case Firms, which are
  subject to audit and offer less income than the
  rates prescribed under this scheme, such interest
  and salary (which are allowed as deduction) are
  not taxable in the hands of the partners as
  Income from Business/Profession, Hence it
  suggested that the assessees who offer income
  under this scheme are to be allowed to deduct
  interest and salary to partners up to the
  existing limits from the income offered at the
  prescribed rates so that they are also treated on
  par with those who offer less income with audited
  accounts. As of now the salary to partners is
  allowed to be deducted from the percentage of
  profit arrived under presumptive basis u.s 44AE
  only.
• 4.9 As of now under section 40A(3) the
  expenditure made in cash is totally disallowed if
  it exceeds Rs. 10,000/- (Rs. 35,000/- in case of
  lorry hire charges). Instead, the excess payment
  above the limit may be disallowed. For such
  expenditure for the Trusts they have to pay
  income tax _at_30 in addition to disallowance for
  the calculation of 85 of the receipts. It is
  sufficient to disallow, and payment of tax _at_ 30
  should be dispensed with because as per the law
  that exists nw, the Trusts are given double
  punishment for a single default.

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• 4.10 Trusts have to pay Exit Tax at the rate of
  maximum marginal rate on the fair market value of
  assets minus liabilities at certain circumstances
  prescribed in the Act such as non-functioning of
  the trust, modification of objects etc., and one
  of the conditions among them is Cancellation of
  Registration. This Exit Tax is in addition to
  income-tax chargeable in hands of entity and
  leviable at the maximum marginal rate on the
  accreted income due to cancellation of
  registration. This is nothing bur double penalty
  for the same offence. Hence it is suggested that
  Exit Tax should not be levied while the
  registration is cancelled in addition to taxing
  the income at the maximum marginal rate.4.11 By
  promoting the New Tax Regime (NTR) the Government
  discourages the savings habit of the assessees,
  which is not a healthy sign for a growing
  economy. Suddenly, the assessees cannot switch
  over to NTR from the Old Tax Regime (OTR) because
  they would have long standing commitments such as
  payment premium for Life Insurance Policies,
  Repayment of Housing Loans etc. The assessees
  have made such long-standing commitments since
  tax relief was given to them for such payments.
  The NTR should be scrapped and if not, they
  should be given marginal relief which is
  available for followers of NTR only. Likewise,
  while the limit for claiming marginal relief or
  NTR is Rs. 7 Lakhs, the limit for OTR is kept at
  Rs. 5 lakhs only. It should also be increased to
  Rs. 7 lakhs for OTR also.

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• 4.12 Regarding cash transactions u.s 269SS, 269T,
  269ST for acceptance and repayment of loans and
  u.s. 40A(3) and 43B for expenditure allowable
  under the Act exemption may be provided for
  direct payment of cash in the other partys
  account by the assessee, because now-a-days due
  to Anywhere Banking the public can deposit cash
  at any Branch near to them. If the amendment is
  made it will go a long way in augmenting
  large-scale business transactions, because these
  sections were brought in to curb the black money
  transactions.4.13 While re-opening cases u.s
  148, the reasons for opening the case should be
  mentioned in the notice itself, because many such
  re-openings were structed down at appellate
  stages because there is no valid reason at all
  for re-opening. Because of this so many man hours
  are wasted in ascertaining the reasons from the
  department and then contesting the same about the
  reasons spelt out or valid or not by appeals and
  writs.

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• 5. Suggestions for removing administrative and
  procedural difficulties relating to Direct Taxes
  
• 5.1 As of now if discrepancies are found in Form
  No. 26AS such as receipt of maturity amount of
  the Policy and the TDS are found in the Policy
  whereas the assessee in whose Form No. 26AS it
  appears has not received any such amount during
  the year or Interest and if the return is filed
  without taking into account such information, the
  assessee will be getting notice from CPC for the
  differences in Form No. 26AS enhancing the income
  and demanding additional tax. Filing
  rectification or appeal for such issues is time
  consuming. Hence it is suggested that in such
  instances the assessee should be given an
  opportunity to apply for rectification with the
  concerned entity which had uploaded the wrong
  information with an option to inform the CPC also
  about the discrepancies. For this purpose, a
  separate window may be provided on the site for
  the assessees to make representations so that
  automatic alerts may be sent to the concerned
  authorities who had uploaded incorrect
  information.
• 5.2 Presently the NFAC gives 24 hours time with
  intermittent holidays for submitting the required
  particulars, which is too short. It is suggested
  that time of at least 15 days is given for
  responding to notices. From the notices received
  from NFAC, it is understood that back files are
  not given to the Assessment Team either in
  physical mode or in electronic mode and hence
  they raise primitive questions on the nature of
  business, maintenance of accounts, investments in
  foreign country etc. The very same questions are
  asked to the assessee regarding nature of
  business, source of income etc., every year. It
  can be avoided if they are supplied with basic
  records of the assessee so that the time spent on
  collecting basic information can be avoided.
  Moreover, the questions raised are in the form of
  taking an interview of a candidate who is seeking
  employment or applying for loan. Irrelevant
  questions are raised by NFAC for example,
  Details of Insurance Commission earned/paid
  during the year is asked for. How can an
  individual give insurance commission? Likewise
  details of godown and warehouses owned are asked
  for an individual who runs cars on hire.

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• 5.3 NFAC uses the sections 68 69
  indiscriminately and taxes are levied u.s 115 BBE
  _at_ 60 with interest, wherein the tax and interest
  exceed the income assessed especially in old
  cases opened u.s 148. In addition, penalty
  proceedings are initiated and if penalties are
  levied the taxes and penalties are many times
  more than the assessed income, which is unfair.
  These sections are brought into the statute for
  the main purpose of assessing the cash deposits
  of SBNs made during the demonetisation period.
  Since they are widely used to harass the
  assessees as seen by the orders of appellate
  authorities and writs of High Courts, it is high
  time sections 68, 69 115BBE are scrapped.
• 5.4 Only 4000 characters are allowed for filing
  response during assessment/appeal proceedings and
  that too a small box is provided for typing the
  arguments and for furnishing particulars. In
  addition, since the same is done in online mode
  while typing the response for a longer time,
  often continue session pops in which hinders
  the flow of providing too many data. It would be
  better to allow the assesses upload the response
  in PDF format separately typed instead of typing
  in the small box.
• 5.5 For filing responses for queries raised by
  the CPC about the mis matches in TDS, wrong
  claims etc., only 500 characters are allowed.
  This should be increased to at least 1000
  characters. As of now there is no provision to
  attach documents. Attaching few documents in pdf
  format should be allowed in order to explain
  fully the issues involved.
• 5.6 As of now while filing an appeal, the
  assessment order against which the appeal is
  preferred is to be uploaded by the assessee,
  which should be avoided. It should be made
  sufficient to mention the order number and date
  so that the appellate authorities can view the
  same in the system itself.
• 5.7 There are lots of cases pending before
  Appellate Authorities viz. NFAC (National
  Faceless Appeal Centre) and ITAT (Income Tax
  Appellate Tribunal). It is high time that a time
  limit is fixed for disposal of appeals by both of
  them. Time limit should be fixed for taking up
  the case for hearing in appellate stage say they
  should be taken up for hearing within at least
  six months from the date of filing an appeal.
  Once the case is taken up for hearing another
  time limit should be made mandatory, say three or
  six months from the date of first hearing, the
  appellate order should be passed unless the delay
  is attributable to the assessee. This will reduce
  the pending cases and finality will be reached
  faster.Read more at https//taxguru.in/income-t
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