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Interesting Articles and News items << Back to Articles **Guidelines to filing your income tax return
Vikas Gandhi
Come the month of June or July and it is time to file the income tax returns. By this time, individuals will have received Form No.16 (Salary income) and Form No.16A (tax deducted on Other Income).
Similarly individuals engaged in either business or profession may have completed adjustments and finalisation of yearly accounts. To avoid hassles for you and your tax professional, it is advisable to get ready for filing return as early as possible instead of waiting for the due date to arrive.
At the same time it is equally important to know your obligations and other intricacies of filing return of income.
Obligations of filing tax returns
It is a legal obligation for every individual to file a return of income, whose taxable income during the year has exceeded the exemption limit of Rs 100,000 (Rs 135,000 in case of females and Rs 185,000 in case of senior citizens).
Additional exemption limits stated above are not applicable to the individuals who are Non-Resident Indians.
Documents to keep ready
It is fruitless to go to the war front without proper arms and ammunition. Hence, it is always advisable to keep all the documents required for preparation of the income tax return ready and handy before calculating your tax liability and preparing your tax return. Some common documents required by an individual for preparing the return are:
Form No. 16 (received from the employer): This will help to know your income from salary and tax deducted by your employer from your salary income.
Form No. 16A (received from all the payers who have deducted tax): You will first have to get this form collected from the parties who have deducted tax while making payment to you during the year. This includes banks and companies (with whom you have kept fixed deposits), parties to whom you have given loan, tenant to whom you have rented your property, et cetera.
Summary of all bank accounts operated during the year: This summary will give an idea about all the income earned during the year and investments and expenditure incurred. This assures that no part of income is left out and you do not miss out any eligible deductions.
Details of property owned during the year: If you have bought some property during the year, you will need details of rent received and receipts of municipal tax paid during the year. In addition to this, if you have taken this property through a loan, do carry the loan details and a copy of certificate of interest paid during the year.
Sale & purchase bill / documents / contract note in respect of investments / assets sold during the year: You will also need purchase documents corresponding to the sales made during the year. In case of a large number of transactions, it is advisable that you prepare a statement of sale and corresponding purchase of these investments and arrive at the amount of profit or loss, before actually calculating your taxable income.
Details of tax payments made during the year: This is required only if you have made advance tax payment during the year.
Which ITR Form is applicable to you?
With the introduction of new income tax return forms based on nature of income earned during the year, one needs to know relevance of each return form and select the right form.
For an individual, four forms have been introduced, the details of which are as under:
Form No.
Applicability
ITR : 1
Meant for Individuals, who have
a) Income from salary
b) Interest income (taxable / exempt)
c) Family pension
d) Income from agricultural activities
In other words, this form is not applicable in the following situations:
a) Individual having any income (taxable / exempt) other than mentioned above
b) Any brought forward loss of earlier years
c) Any income of other person to be included
ITR : 2
Individuals / HUF not having any income on account of carrying out business / profession or on account of being a partner in a partnership firm.
ITR : 3
Individuals / HUF who are partner in a partnership firm and does not carry out any other separate business / profession.
ITR : 4
Individuals / HUF who is carrying out business / profession under a proprietary concern.
Last date for filing tax returns
The last date for filing return of income for the year ended March 31, 2007 is July 31, 2007 and for individuals who are required to get their books of accounts audited under the Income Tax Act, it is October 31, 2007.
Consequences for not filing tax return by the last date
If individuals file their returns after the last date mentioned above, they will be charged a penal interest at the rate of 1% per month of delay. However, if such a return is filed after March 31, 2008, apart from the penal interest, they will also be liable for a penalty of Rs 5,000.
How to file the tax return
Today there are two options available to the individuals to file their return of income:
Electronic filing;
Physical filing
Under Electronic filing, the individual will have to follow the following procedure:
Get the tax return in a valid XML format (through the Income Tax department site or other online tax preparation sites)
Visit the Income Tax site
Log on using the user-ID and password
Select the respective ITR form
Upload the XML file generated
Upon uploading, an acknowledgement will be generated.
If the file is uploaded with a digital signature, then the process of filing return is completed.
However if the file is uploaded without a digital signature, the individual will have to print form ITR-V and submit the same to the Income Tax department physically. The process of filing return will be completed only on physical filing of ITR-V.
For Physical filing, the individual will have to take a print out of the respective ITR form along with the Acknowledgment form and file it with the Income Tax Officer.
Whether it is electronic filing or physical filing, under the new procedure, individuals do not have to attach any documents or enclosures with the return of income.
Documents to preserve
Since the tax-payer is not required to submit any additional documents along with the return of income, the documents may be called at the later stage by the Income Tax Officer to check the correctness of the claim made. Hence, it is advised that the individual preserve all the documents required to substantiate the return of income filed. Some of the documents are enumerated below:
Detailed calculation of taxable income and amount of tax payable / refundable.
Form No. 16 / 16A (original).
Counterfoil of all the tax payments made during the year.
Copy of documents concerning sale of investments and properties.
Copy of bank statements.
Copy of proof for all the deductions and exemptions claimed in the return of income.
Common mistakes people make while filing tax returns
The most common notion among salaried employees is that since tax has already been deducted from their salary, there is no need to file their income tax returns. This is not at all true or legal. Even though tax has been deducted and there is no further liability to pay tax, an employee has to compulsorily file his / her income tax return. Form No. 16 received from employer is not their income tax return.
Employees do not include the interest that they receive on their savings bank account. The entire interest earned on your savings bank account is taxable.
Omission of income received by a minor child. A minor child is not required to file a separate return of income. However, this income has to be included in the hands of either of the parents, although it might be a small amount of bank interest.
The author is Group Head-Direct Taxes and founder member of Taxsmile.com India Pvt. Ltd. He is a practicing chartered accountant with over 10 years of experience.
[Source : Rediff News]
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**SC: Failure to file I-T returns not suppression of income
Omission or negligence on the part of an assessee to disclose proper particulars of his income-tax returns would not necessarily
constitute a deliberate act of suppression to invite punitive action from tax officials, the Supreme Court has ruled.
Concealment of income and furnishing of inaccurate particulars carry different connotations. Concealment refers to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression or false declaration, the apex court said.
The order imposing penalty is quasicriminal in nature and thus, the burden lies on the department to establish that the assessee had concealed his income, a Bench of Justices S B Sinha and Markandeya Katju said while upholding an appeal filed by an assessee. Appellant T Ashok Pai, an engineer had challenged a judgment of the Karnataka high court, which rejected his plea that the alleged false assessment was prepared by the Syndicate Bank, his banker to whom he had given the general power of attorney.
The high court had upheld the argument of tax officials that if the explanation of Pai was to be accepted, every tax evader could take shelter by shifting the blame on his/her clerk or accountants.
However, the SC held that if an explanation given by the assessee with regard to the mistake committed by him has been treated to be bona fide and it has been found that he had acted on the basis of wrong legal advice, the question of imposing a penalty does not arise.
[Source: The times of India.]
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**Indian Accounting Standards: Some are `very out of date and need to be reworked'
D. Murali, C. Ramesh
Indian business has gone global in a big way in recent years, which is clearly reflected in more companies setting up overseas arms, raising money from the market and acquiring companies. The coming years will only see an increase in the number of companies getting more globalised in their operations. In such a scenario, there is a pressing need for adoption of global Accounting Standards (AS), says Mr R. Narayanaswamy, Professor of Finance and Control at IIM- Bangalore.
Speaking to Business Line on the wide-ranging implications of adopting global AS and how it can benefit corporates and the country as a whole, he urges the shift towards these standards as they have "wide international recognition because of their quality, coverage and acceptability. Indian companies can communicate cost-effectively with the rest of the world if their financial statements comply with global standards."
According to him, investors — especially from overseas — customers, suppliers and employees will then have more faith in the numbers that the companies churn out. Other benefits include lower cost of raising equity and debt capital, greater liquidity for shares and lower bid-ask spreads. "All of these result from reduced information asymmetry between managers and outsiders."
Global Standards
Currently, the standards and other pronouncements issued by the IASB and FASB are the two systems that are competing for this status.
Would such a move entail dismantling of national AS structures such as the ASB of the ICAI? Mr Narayanaswamy, a PhD in Accounting from the University of New South Wales, Sydney, clarifies that a country that adopts international standards examines them for conformity with national laws and practices. "We would still need a national accounting standard-setter with superior technical and financial resources."
He cites the example of the Australian Accounting Standards Board, which continues to exist and play an important role, though Australia has adopted IAS/IFRS. There are no international standards that do not apply to India, he adds. On the Indian system of AS generation, which involves authorities and organisations such as the RBI, the SEBI, the ICAI and the CBDT, the biggest problem is multiplicity, "which happened mainly because the accountants were slow and lukewarm in their response. For a long time, I have been making a case for an independent accounting standards body with full-time members."
After all, accounting is too serious a matter to entrust to accountants, he quips.
No Monitoring
On a more serious note, Mr Narayanaswamy, a member of the ICAI, the ICWAI and the ICSI, expresses concern that there is little effective monitoring of reporting entities following the mandatory AS.
"I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff they need. This is a task that the ICAI cannot do satisfactorily, because there are obvious conflicts."
According to him, the Securities Exchange Commission (of the US) provides an excellent model for high-quality monitoring of all corporate filings. In the UK, the Financial Reporting Review Panel raises important questions and in many instances gets the statements amended. These are worthy of emulation, he adds.
On the gaps in Indian GAAP, and how they can be plugged, he says: "We do not have a set of Indian standards dealing with financial instruments, but the exposure drafts have been out for a while. There is no standard on business combinations; the one that we have — AS 14 — deals only with amalgamation, but businesses largely come together by means of inter-company investments."
According to him, some of our standards are "very much out of date and need to be reworked," especially those relating to revenue recognition, leases and presentation of financial statements. To most readers of annual reports, AS references may be abstruse. So, how does a company go about effectively communicating to the business reader the effect accounting standards have on reported financial performance?
"The lay reader needs assurance that managers prepare financial statements faithfully in accordance with high-quality AS and the company's auditors are satisfied with the statements."
But, increasingly, standards seem to getting more complex and addressing the needs of professional analysts and investors more than shareholders. "This is because business transactions are getting more complex."
He adds: "For example, to be able to understand the standards on financial instruments, stock options, pensions or segments, the reader should have a good knowledge of business and financial operations. However, management should make its point in plain English."
Mr Narayanaswamy is all for accountants understanding how business organisations work. "Accounting follows business. So, it would be useful for accountants to understand how new products are developed, how projects are managed, what drives M&As, how tax planning relates to business planning, or how risk is managed using financial instruments such as derivatives."
According to him, providing comparisons with other jurisdictions, and then explaining reasons for any differences in AS, is another way of igniting interest in standards. Another "appealing method" is using published annual reports and media reports to illustrate the difference between good and bad accounting.
Can changes in the law give AS a boost? "A simple way would be to empower shareholders by allowing private shareholder litigation against company management and auditors. As the company and securities laws stand now, only the company can sue its managers and auditors for damages for their failure to show due care and diligence in their work, " says Mr Narayanaswamy whose current research interests include corporate disclosure policy, earnings management and strategic cost management.
Since shareholders cannot sue even though they are the real losers in company failures, he wants them to be allowed to take care of their interests. "That would be a major step forward, though I am not for class action suits at the moment."
Equally important is strengthening the corporate governance system, especially independent directors and audit committees, improving audit quality and independence, and reforming the legal regime.
Are software hardwired?
Do accounting software products factor in AS, thus reducing the compliance worry for accountants? "Gradually, many products are becoming XBRL-compliant. Adoption of XBRL will greatly reduce the cost of preparing financial statements for multiple purposes, such as shareholder reporting, tax reporting and reporting to regulatory agencies. Nevertheless, costly modifications to information systems are often unavoidable."
Going beyond technicalities and looking at the bigger picture, he says that managers should understand that "bad accounting is eventually bad for all of us. Accountants should focus on the larger purpose of financial reporting. Principle-based accounting standards presumes that we can the trust accounting and business professionals to make fair and reasonable judgements. If someone breaches that trust, everyone will have end up having to pay a huge cost by having to comply with horrible rule-based accounting standards. I hope we don't have to get there."
[Source: The Hindu, Bussiness Line]
-------------------------------------------------------------------------------- **SarbOx Doesn’t Go Far Enough
By DON A. MOORE
Whatever the verdict in the current trial of Enron Corp.’s two former top executives, key failures that cost investors and employees tens of billions of dollars are all but sure to happen again. The calamitous scandals at Enron and many other companies were possible only because of breaches in a bulwark of our free-market system: auditor independence. Unfortunately, the Sarbanes-Oxley Act, congress’ response to the scandals, largely overlooks the conflicts of interest that represent the greatest threat to auditor objectivity. Only a radical reorganization of the current system will eliminate this risk.
As Philip Tetlock, Lloyd Tanlu, Max Bazerman, and I point out in a recent article in the Academy of Management Review, Sarbanes-Oxley, for all its reputation as a hard-hitting law, fails to correct a crucial accounting system weakness: the potential for what we call “moral seduction” of outside auditors.
This corruption remains likely for several reasons. Executives still have too much control over hiring and firing auditors, which discourages accountants from filing critical reports. SarbOx puts only minimal restrictions on auditors’ taking jobs with their clients, a prospect that inclines accountants to curry favor with potential employers. And the law still lets auditors provide some types of nonaudit services, including SarbOx compliance work, despite longtime Securities & Exchange Commission concerns that such services increase auditors’ likelihood of yielding to client pressures on auditing issues.
The principal reason SarbOx leaves the door open to moral seduction is that it assumes the most common threat to auditor independence is intentionally corrupt behavior. But psychological research on conflicts of interest demonstrates that the real threat to impartiality is unconscious bias, not unlike attachments and loyalties pervasive in life. In one experiment, auditors were asked to evaluate a fictional company’s accounting practices, and those who were told that they had been hired for the taskby the company itself were for more lenient than auditors who were told they had been retained by a firm doing business with that company.
To see the real-world consequences here, just look at Enron. Its auditor, Arthur Andersen, came to identify so strongly with the client that its judgement was compromised, and the demise of one led to the demise of the other.
SarbOx was supposed to change all that. Yet the law leaves in place strong incentives for auditors to please clients even as it mandates complex new rules that are supposed to make corporate books more credible. The one that has received the most attention makes a company’s chief executive and chief financial officers personally liable for inaccuracies in financial reporting. But while fear of lawsuits and prosecution may avert some intentional fraud at the top, it won’t prevent unconscious bias - or the skewed financial reports that result from it. That’s why we need to change the system, not simply search for smoking guns and lock up guilty individuals.
Either of two alternatives would be superior to the present system. One would be a stiffer regulatory approach whereby the government requires that auditing firms perform audit services solely; be retained for a fixed period without the chance of being rehired; prohibit employees from takings jobs with clients; make independent assessments instead of just ratifying clients’ accounting; and be hired by boards rather than company executives.
The second solution, relying on market principles, would require companies to buy financial-statement insurance, meaning their underwriters would hire auditors and be on the hook for any blowups. Premiums that insurers charged would publicly signal their confidence in the accuracy of the financial reports, just as higher interest rates on a companys’ bonds signal fears about its risk of default. This approach isn’t too different from laws that force drivers to have auto insurance coverage that protects everyone else.
Despite objections that such reforms would be too costly, it is unlikely that either approach would greatly increase the tab for the average audit. But the larger point is this: Without independence, the outside auditor is redundant with a company’s own internal accounting staff, and the benefit of having an auditor is of questionable value to begin with. Indeed, if it’s not worth some cost to create independence, we need to question why we even have an auditing profession.
Don A. Moore, an associate professor at the Tepper School of Business at Carnegie Mellon University.
[Source: BusinessWeek]
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**Wrong PAN in Form 16? What to do?
The time to file your tax returns is here. This is the time when you ponder over the tax you paid and the investments you made.
Were you prudent with your investments last year? Did they help you save tax? Or did you end up paying more than you could afford? What investment mistakes did you make last year? Are their ways to rectify them? What investment options should you go for this year? What should you do to bring your tax liability to the minimum level? more...
[Source:www.rediff.com]
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