These may not impact ultimate tax liability but are critical from a reporting standpoint
As most individual taxpayers approach the income tax return filing deadline, unfamiliarity with income tax laws and recurrently changing disclosure requirements in income tax returns tend to send shivers down their spine. The regulators have incessantly endeavoured to make the tax return preparation and filing process seamless through concepts such as pre-filled ITR among others, especially for individuals who are often in a state of hem and haw on whether their income tax return adequately discloses information sought for. However, paradoxically, the regulators have also, over time, imperceptibly amplified the quantum of disclosures in income tax return, making the taxpayers, worrywart.
Foreign assets and foreign income
The often-overlooked section is reporting of foreign assets and income in the earmarked Schedule-FA in income tax return form. Due to its extensivity, taxpayers commonly skim through the Schedule for any ostensibly applicable mandate and in the process omit reporting certain foreign assets and income that are not apparent but could possibly fall within its frame.
One such aspect is the disclosure of shares received pursuant to exercise of employee stock options, by Indian resident individuals from the foreign parent of their employer companies. The individual should know that, pursuant to sale of such shares later, to an overseas buyer, one may face challenge in getting the inward remittance processed through AD Bank, due to non-disclosure of shares held in a foreign company in the return filed for previous years.
Recently, markets have witnessed a surge in investments in crypto-currencies due to super normal returns they offer. However, there is a lack of guidance on disclosure requirements with respect to such investments. Considering these are digital assets, location of server and the law of the land which regulates the transaction could be said to be the location where such cryptos are situated. If one determines that cryptos are situated outside India, such investments also needs to be reported in Schedule-FA in the return form.
An inadvertent stumble on reporting foreign assets and income by the taxpayer could get masqueraded as a clandestine move to un-disclose and attract a tax liability of 30 per cent of the value of such foreign asset or income and an additional penalty of 3 times of tax computed under the Black Money Act.
Overall, a taxpayer may end up paying a heavy cost of 120 percent of the value of foreign asset or income for a lapse in disclosure diligence while filing return of income.
Disclosure of unlisted shares
The ‘General’ section of ITR requires detailed disclosures of unlisted equity shares held anytime during the year. The intent of laying emphasis on this reporting requirement is to caution taxpayers for laying the groundwork ahead of the deadline and being prepared with details such as name of Company, PAN, cost of acquisition of shares lying in opening balance, purchase price and sale consideration of transactions in such shares during the year, closing balances, etc. A duplication of the details in Schedule-FA could be inevitable where unlisted equity shares are that of a foreign company.
Disclosure of all assets & liabilities
Increase in total income not only raises income tax liability but also necessitates additional disclosure requirements in ITR. Where total income of an individual exceeds ₹50 lakh, there is a requirement to disclose all assets held at end of relevant year together with corresponding liabilities in relation to such assets. The asset categories are dissected into immovable, movable and financial assets thereby seeking to constellate various contours of one’s wealth. Providing details of income in parallel with details of assets enables the taxmen to uncover inconsistencies between disclosed income and assets possessed and scrutinise under-reporting of income, if any. Here, taxpayers encounter difficulties in meeting the requisition of disclosing cost where assets are inherited or gifted. Taking cue from provisions in the IT Act, cost in the hands of previous owner could be disclosed.
Nil or deficient disclosures in ITR have vexed taxpayers with defect notices subjecting them to the rigmarole of revising returns. The thrust is therefore to be diligent in understanding the information needs and dot the i’s and cross the t’s well before the countdown to the due date begins.
The author is Partner, Nangia Andersen LLP; with inputs from Amita Jivrajani and Abhishek