Companies will also get to  update tax  returns

Companies can update tax returns within two years of the end of the assessment year under a new scheme proposed in Finance Bill 2022, but if any misuse is noticed, the government will limit its use to select classes of taxpayers in future, a government official said.

Last week, finance minister Nirmala Sitharaman announced in her Union budget speech that a new provision being introduced in the Income Tax Act would allow updating income tax returns to fix omissions or mistakes in estimating the income for tax payment.

The proposal is so worded that it will cover not only personal income taxpayers but also corporate taxpayers, including startups, said an official who spoke on condition of anonymity.

The Finance Bill describes the eligible entity as a “person”, which covers both individual and corporate taxpayers.

“However, if any misuse of this provision is noticed, the government can exclude any particular class of assessees from the purview of this scheme,” the official said.

The updated return filing scheme complements another scheme brought out by the Central Board of Direct Taxes (CBDT) last year, the e-Verification Scheme, 2021.

This deals with collecting information about transactions and its verification in a faceless way, helping detect mismatches between the information available with the department and what has been reported by the taxpayer to identify any possible untaxed income.

Such e-verification covers information available with the designated officials or shared by other official arms, including the Director-General of Income-tax (Intelligence and Criminal Investigation).

If the e-verification leads to detection of previously untaxed income, penal consequences were to follow, but the new option to update the return within two years of the assessment year offers an opportunity to the taxpayer to pay the tax and put the matter to an end.

This helps to avoid reopening of assessments, issuing notices, appellate proceedings and penalty in the range of 100-300% if found guilty, explained the official.

An email sent to the finance ministry seeking comments remained unanswered at the time of publishing.

The scheme is not just about correcting errors. “The scheme for updating tax returns allows an assessee to come out clean on income that has escaped assessment in the past,” said Ved Jain, a former president of the Institute of Chartered Accountants of India.

Depending on when the updated return is filed within the two years allowed, there is an additional tax of 25-50% of the aggregate tax and interest payable.

This payment is to be made before the filing of the updated return.

The bill says that an updated return is not allowed to be filed if it has the effect of showing a loss or reducing the total tax liability determined previously or resulting in a refund or increases the refund.

Also, income tax assessees who have faced a search, survey or seizure of jewellery, money or valuables in relevant years cannot file updated returns.

The tax department has been gradually scaling up oversight of transactions in the economy based on third-party reporting and the use of taxes to be paid or collected at source. This enables it to profile taxpayers and nudge them to pay the correct amount of tax.

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