Tax returns: Make full disclosures and preserve records of financial transactions

Management of tax has always been a complicated process, often ungraspable even by the best of minds. Further, factors such as increased use of technology, automation and cross-linking of information already available with the tax authorities have made it necessary for taxpayers to reconsider how they manage their financial information, so they can smartly manage their own tax affairs. Here are some tips that can help in tax management and prepare taxpayers better for the future.

Maintain records of residency in India

As per the law, taxability in India depends on the payer’s tax residency. Tax residency is determined by the number of days a taxpayer has been physically present in India. To determine the tax residency for any particular year, one may need to go back to up to the previous 10 years, to test the residency rules. Tracking of such residency rules becomes very important as the tax return forms require the taxpayers to correctly select the residential status.

If one declares him/herself to be a non-resident of India, the tax rules require the person to provide overseas residency information, along with taxpayer identification number issued by the overseas tax authorities. 

As per the amended requirements, an Overseas Citizen of India (OCI) and a Person of Indian Origin (PIO) who qualify as non-residents are required to report the actual number of days spent in India in the last four financial years preceding the relevant/current financial year as well.

Therefore, it is advisable for the taxpayers to carefully record and maintain records related to the duration of their stay in India.

It is also important to make the correct disclosures related to the following aspects.

Directorship

If an individual taxpayer holds the position of a director in any company, he/she must collate important details such as the company’s name, its Permanent Account Number (PAN), whether the company is a listed/unlisted enterprise, and a valid Director Identification Number. A taxpaying director of an organisation needs to make such disclosures in the tax return form.

Unlisted equity shares

If a taxpayer holds unlisted equity shares in any company, details of opening balance, closing balance, acquisition and disposal during the relevant financial year must be disclosed. Taxpayers holding shares in multinational companies should take note of this requirement, as such shares are usually unlisted.

Assets and liabilities

Individual taxpayers who have an annual total income exceeding Rs 5o lakh, need to report  their assets and corresponding liabilities in the income-tax return form. Assets include immovable property, movable assets such as jewellery, bullion, archaeological collections, drawings, paintings, sculptures or any works of art, vehicles, yachts, boats and aircraft, financial assets such as shares and securities, insurance policies, loan advances given and cash in hand.

It is mandatory for the taxpayers to quote the PAN for several financial transactions and those collecting the information are required to share these details with government authorities. Therefore, while filing returns, taxpayers must provide accurate details of their financial transactions, as they will be cross-checked with details already available with the government and any discrepancy or inconsistency could raise questions about the taxpayer’s financial transactions.

Foreign assets

Ordinarily residents having foreign assets must provide details of their overseas accounts and assets when filing their income tax returns. Such details include overseas bank accounts, including foreign depository accounts, foreign custodian accounts, holdings of foreign equity/debt, if any, and foreign cash value of insurance policies or any other investments. Taxpayers must be careful, honest and accurate in declaring foreign assets, as missing out on any foreign asset may result in action under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. If a taxpayer is found guilty of concealing details of foreign assets, he/she would be liable to pay penalties and even prosecution, as per the severity of the offence. With financial information getting exchanged among countries, details provided of foreign assets will be cross-checked with details already available with the government and any discrepancy will result in the taxpayer being questioned.

Preservation of records

It is important for a taxpayer to carefully preserve records of all financial transactions, though physical proofs of transactions are not required to be filed with the tax returns. Nevertheless, preservation of records could be useful, because in case the tax return is audited, authorities may ask for the records for verification purposes. Tax authorities can go back up to seven years or 16 years (in case of foreign income), where they find out of any undeclared income. A taxpayer can scan details of his/her financial transactions and records of income and create year-wise folders for easy access. The information one needs to preserve includes all details as explained above, documents in support of exemptions, deductions claimed in tax returns, bank and credit card statements, and proof of major financial transactions, expenditures, acquiring or source of assets, liabilities, etc.

Upskilling yourself

Like financial transactions, taxation and associated activities have largely been digitised. As the taxation structure is rapidly being digitised, it is both desirable and necessary to become tech-savvy. Taxpayers should go through the income tax website and familiarise themselves with the various services available. It is recommended that taxpayers check their own e-filing account, go through details of taxes paid, returns filed for financial years and other relevant information. This will ensure that the taxpayer becomes gradually familiar with the dashboard on the income tax website and begins managing tax affairs smartly.