Why can’t we get rid of income tax returns?

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We cannot afford to get rid of income tax, but why can’t we get rid of income tax returns? Difficulty in figuring out which ITR form to use, which rows to fill, delays in processing, delay in refunds, hassles with TDS, irritating notifications to respond to, I could go on. All this makes you want to ask, is there a way for the government to collect the correct tax amount and save us the hassle of filing returns? Perhaps what I suggest in this post might seem childish to taxation experts, but this is a scratch I need to itch. I welcome experts and non-experts to (a) agree, (b) partially agree or (c) disagree with me (now where have I see this multiple choice before?!)

It is a no-brainer that the salaried class are among the most regular taxpayers in the country. For the simple reason that they do not have a choice. Employers will have to report income paid out and tax deducted as per slab to the IT dept. This means, that one has no choice but to file returns if the income after deductions is taxable. Bank deduct TDS by default unless we submit forms 15H/G (which in many cases is either wrong or fraudulent). If we extend the same accountability to all financial transactions we can do away with return filing.

Consider the following: Tax from your income is deducted by your employer. A default 5% TDS is deducted by the bank, mutual funds or depository participants can do the same for stocks, bonds and mutual funds (already done for NRIs). The full capital gains tax can be withheld by the AMC/DP until validation by us and the ITO. All this can be done with existing information and a single ID no – the PAN card.

Say every April first week, the ITO sends everyone holding a PAN a list of all transactions that occurred in their name the previous financial year. This will have all cash inflows to our bank accounts, the interest earned in FDs, RDs, small saving schemes, capital gains incurred on relevant transactions  – stocks, bonds, gold ETFs, cryptocurrency etc. With a little effort, the ITO can trace rental income even from landlords refusing to part with PAN just from the residence address. Fraudulent income clubbing practices like “investing in wife’s name” can be detected.

The point is, once we get a list of all financial transactions done in an FY from the ITO and we need to account for them, classify them as income, CG, tax-exempt and so on, we are automatically filing our tax return. They already have an account of all our dealings and this will way will only be seeking our validation. With all details already available, we only need to verify, ahem (a) agree, (b) partially agree or (c) disagree!

How about offsetting capital gains? What if the TDS is higher than necessary?  Employers already account for tax savings. Banks or AMCs or DPs can withhold TDS but not actually credit to the ITO. Upon our validation and excess TDS can be credited back to us and the whole process can be a lot smoother with a little will. Losses can be automatically offset or carried forward. The ITO will only gain from this move. Their tax collections will increase as cheating is not possible and it is less paperwork for them and us.

We have all the machine power, the security, the know-how to pull this off. Sure there will be bugs and glitches but given a bit of time, things will iron out. The question is, do we have the will to accept a system that deducts tax from every transaction that we make and adjusts after our validation at the end of the FY? Considering how we crib for everything, I would guess not.

As a society, we see tax as a burden and not as an investment. This is not going to change anytime soon, so tighter controls are necessary and in this case, will result in less work for us. The salaried middle-class in this country anyway pay most of the tax that they need to and will not be affected much by this.

With GST firmly in place, it should not be difficult to trace profit and loss by business owners and independent service providers and implement the same with them. Small business owners, Independent professionals like doctors who get paid often in cash or real estate dealings can be a problem among others. However, technically no real estate dealing should be in cash now. So accountability is not difficult if every builder is forced to report transactions. It might even regularize the market.

 What about privacy? What about it? Does it exist now? There is no new data to be collected. Only data that should be reported by us is being reported by the financial institution involved and we validate it. With a little effort, I strongly believe tax returns can be replaced by a simple validation system It may help everyone concerned. Naturally, it will not solve every issue that we or the ITO faces, but I think will benefit at least regular return filers.

What do you think? I don’t claim to see all ends in this matter, but as far as my thinking takes me, there is no disadvantage and it will only reduce the current hassles that we face. Now over to you.


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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Isn’t this called self-assessment tax Professor?. We asses what we have to pay and if there are any discrepancies they will let you know and we pay it, making their job easy.

    I guess the system is moving forward albeit slowly with technology, for the tax paying people I mean. The day is not far where like you said, we don’t have to do anything, they will have all the data and we pay accordingly, until then, enjoy number-crunching.

  2. You are perfectly correct. For example in Singapore and Hongkong, the income tax return is populated with the salary particulars given by the employer. They do not have any capital gains tax on shares which are taken delivery. Capital gains do not add any value to the country. It is zero value transaction. What you gain is the loss of somebody. Once the salary details are populated the assessee has to fill up the deduction and other income. For 90% of the tax payers there is no other income. So for them they just submit the return after verifying the figures. For salary employee the filing is 5 minute job. In India it is nothing but hell created by the tax terrorists. In Singapore and Hongkong you can argue with the Income tax authorities and point out their mistakes. They correct themselves. Here if you say the ITO is wrong then your premises will be raided. We are still a third rate third world country on these matters.

  3. While the idea is solid, this doesn’t have strong business case at present. Based on the recent initiatives from ITO, 3 things are prioritized: (i) bring more people/organizations under tax net (ii) plug loopholes in the existing tax calculations and notices, and back-calculations (iii) Aadhaar-based and GST filings to formalize the transactions.
    Based on this, does this drag more people into the net, or force them to pay? Or make internal accounting better? My take is 7-10 years before a proper concept paper is even initiated. In the mean time, the focus will be more on (i) widening the paying base (ii) streamlining GST and strengthen the framework for reporting consolidation (like what happened in jewellery industry, where transaction reporting is more formalized) (iii) Improving internal process efficiency.

  4. Totally agreed. The bottom-line is the easier it gets for tax payers the more will be the tax compliance rate. This system suggested by Mr. Pattu can even easily be operated by a mobile based application.

  5. Return-free filing is already used in several countries (ex: Norway). I guess the 26AS and stuff we have is a stepping stone towards this.

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