Presumptive Taxpayers to Receive Investment Disclosure Section in ITR Forms

India's Presumptive Tax Regime Gets Stricter: Taxpayers Must Now Disclose Investments Alongside Returns

India's presumptive tax regime, which has been popular among small businesses and consultants due to its low compliance requirements and ease of filing, has undergone a significant change. Taxpayers under this scheme are now required to disclose their investments alongside their returns when filing their Income Tax Return (ITR).

The presumptive tax scheme simplifies filing for small businesses with a turnover of up to Rs 2 crore, or Rs 3 crore with 95 percent digital transactions, by allowing them to declare 6-8 percent of sales as profit. Similarly, specified professionals, such as freelancers and consultants, with receipts up to Rs 50 lakh, or Rs 75 lakh if cash receipts are under 5 percent, can declare 50 percent of receipts as profit.

Changes to the ITR Form

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The government has added a new column to the ITR form for presumptive taxpayers to report their year-end investments alongside their income. This is the first time that details relating to investments are being required under ITR 4, and while reporting such details is optional for now, taxpayers are required to report if details are available.

The tax department could previously spot inconsistencies by relying on external data, such as bank reports, property transactions, and the AIS. However, this new requirement within the return itself will directly flag inconsistencies, making it easier for the tax authority to verify whether a person's assets are commensurate with the income they have declared in their returns under the presumptive scheme.

Consequences of Mismatch

Analysts believe that the tax authority's move to add an investment column is intended to verify whether a person's assets are commensurate with the income they have declared in their returns under the presumptive scheme. If the investments exceed the income returned or reported, this may invite a scrutiny assessment, and taxpayers will be required to justify the source of funds used to make such investments.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Penalties for Incorrect Disclosure

If a presumptive taxpayer has significantly understated their income, this mismatch can now be flagged much more easily. Analysts warn that such a mismatch could lead to scrutiny, and any unexplained investments may be treated as income and taxed accordingly, often at higher rates.

The penalty for under-reporting of income is levied at 50 percent of tax, whereas, in case of misreporting, the penalty is levied at 200 percent as per Section 270A of the Income Tax Act, 1961.

Correcting Mistakes

In case a presumptive taxpayer finds that the income of a particular year is declared at an amount lesser than the actual figures, they have an option to file an updated return within 4 years from the end of the assessment year to which the return relates.

Presumptive Tax Regime: To Continue or Exit?

As long as the investments are commensurate with the income declared over the years, there should be no reason to exit the presumptive regime.