Union Budget 2019: Measures taken to tighten the screws on tax avoidance

Steps like widening the scope of TDS and compelling businesses with revenue above a threshold to offer electronic payment will make tax avoidance harder

One of the key messages this Budget has sent out is the government’s determination to stay focused on compliance as it was in its previous term. It has worked hard to expand the taxpayer base, and succeeded to a great extent. The number of individual tax filers rose from 42.9 million in 2015-16 to 64.3 million in 2017-18. Personal tax collections have also risen. They have, in fact, been growing at double-digit rate year-on-year after demonetisation and introduction of the goods and services tax (GST). The government believes there is still significant scope to bring more people under the tax net and collect the right amount of taxes, in cases where taxpayers are underpaying. Here are some of the key proposals announced in the Union Budget that should reduce tax leakage and improve compliance. 

Expanding the TDS net 

Tax withholding not only enables collection of taxes in advance, but also provides an opportunity to the tax authorities to review payments to check whether proper taxes have been paid. Several provisions under the Income-tax Act, 1961, (Act) already exist that provide for withholding of tax at source. However, this Budget has made a few more proposals that will bring more transactions under the tax withholding net. For example, withdrawal of cash exceeding Rs 1 crore from a bank or post office account during the year will attract tax deduction at source (TDS) of 2 per cent. And when taxpayers claim credit for TDS at the time they file returns, their transactions will be audited for why some of them withdrew large cash amounts and to whom this was paid. This will help check the generation of ‘black money’. 

Section 194-IA of the Act provides for deduction of TDS by the buyer if the consideration exceeds Rs 50 lakh. It is proposed that this consideration should include other charges, including parking charges, club fees, electricity and water facility fees, maintenance fees, advance fees, or any other fees of a similar nature. This amendment will ensure that the consideration is not split into various charges so that taxpayers avoid reporting property-related transactions and thereby escape the attention of the tax authorities. 

• Withdrawal of cash exceeding Rs 1 crore during the year will attract TDS of 2%
• If payments by individuals or HUFs to resident contractors or professionals exceeds Rs 50 lakh, TDS of 5% to be paid
• Aadhaar can be used interchangeably with PAN. Will help tackle problems arising from one person holding multiple PAN cards 
• Scope of statement of financial transactions (SFT) expanded. Threshold of Rs 50,000 to be done away with and even small transactions to be reported 

Aadhaar to trace trail of financial transactions

The tax authorities have been facing the issue of people having multiple PANs. This Budget has proposed linking of PAN with Aadhaar. Taxpayers who do not have PAN can now quote their Aadhaar while undertaking specified transactions where PAN needs to be quoted. PAN numbers that are not linked with Aadhaar till now will soon become inoperative. It is clear that the government is determined to drive compliance through Aadhaar to track the trail of financial transactions and catch those who may not be paying the rightful taxes. 

Assault on black money 

One of the key agendas of this government in its previous term was to unearth the black money stashed overseas. It introduced the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BM Act). Since then, the rules for reporting overseas assets in tax returns have been expanded and tightened. However, these disclosure-related rules only apply to ordinarily residents. To clarify the intent behind the enactment of the BM Act, the government proposes to amend the definition of assessee under the BM Act, and also include non-residents and not ordinarily residents (NR/RNOR) under its ambit, if they have failed to disclose their overseas income and/or assets when they were ordinarily residents of India. This will empower the tax authorities to take action against those NR/RNOR, who had committed violations that are punishable under the BM Act when they were residents of India. This clarification should be a deterrent and ensure proper disclosure of foreign income and assets in their returns. This is doubly important, since India is strongly pursuing the issue of extradition of defaulters under its mutual cooperation agreements or diplomatic ties with other countries to book such defaulters. 

‘Less cash’ economy

There are several proposals in the Budget to discourage the use of cash and promote increased digital transactions. Several sections such as section 13A, 35AD, 40A, 43, 43 CA, 44DA, 80JJAA,269SS, 269ST and 269 T, which prohibit acceptance of payments in cash and/or prescribe certain limits. Amendments have been proposed to these sections to include other electronic modes that may be prescribed, apart from the non-cash modes that have been already prescribed, for accepting payments.

Technology to enhance compliance

The tax authorities are now using technology and adopting automated processes to enhance compliance. The benefits of these measures have begun flowing to taxpayers. The government intends to make available pre-filled tax return forms, which will include details such as capital gains and/or other financial transactions undertaken by taxpayers. To facilitate this, the scope of statement of financial transactions (SFT) will be expanded. Presently, Section 285BA of the Act provides for furnishing of SFT by the persons specified therein. These SFTs include, for example, the registrar reporting sale or purchase of immovable property, the registering authority reporting registration of cars, banks reporting spending on credit cards, etc. A proposal has been made in the Budget, wherein the existing threshold limit for reporting financial transactions of Rs 50,000 will be done away with and even a small transaction will need to be reported mandatorily. Changes have also been proposed to ensure accurate disclosure of details, and if there is a discrepancy, this will have to be rectified within a specified timeline. 

It has been proposed that Section 271FFA should be amended to widen the scope of penalty to ensure proper compliance. These changes will help to capture and report (in pre-filled return forms) all relevant transactions, bring in transparency, and eliminate the scope for hiding details. In fact, this will also create a strong case at some point for relaxation of the requirement to file tax returns, when the compliance level rises and individual taxpayers have simpler sources of income such as salaries and bank interest, and their tax liability is discharged through TDS.  

Other initiatives have also been proposed, such as faceless audits or online applications being made for lower or nil withholding certificates for payments to non-residents, etc., which will ultimately eliminate personal interactions and the possibility of corruption, and help the tax authorities collect the right amount of tax from taxpayers.

We hope this journey of tightening compliance will ultimately result in improved collections and lead to reduced taxes in the near future. 

The writer is partner and leader-personal tax, PwC India. Manavi Gupta,  associate director, also contributed to the article.