India’s Tax Authority Considers Common Income Tax Return, to Include Crypto Assets Declaration

India’s direct tax authority, CBDT, recently introduced a draft common income tax return (ITR), which proposes to merge all existing returns of income except ITR-7. The new common ITR will ease the tax return filing process and places greater emphasis on disclosing income from crypto assets, foreign equity, and debt instruments held by the resident Indians. The government is inviting stakeholder comments till December 15, 2022.

India’s tax authority – the Central Board of Direct Taxes (CBDT) – recently proposed a new common income tax return (ITR), which proposes to merge all existing returns of income except ITR-7. The new common ITR will require disclosing income from crypto assets, foreign equity, and debt instruments held by the resident Indians.

The federal government has published the draft ITR via a notification dated November 1, 2022 and invited stakeholder comments till December 15, 2022.

For non-resident Indians (NRIs), the draft ITR seeks exhaustive details, including the type of business, the nature of the business, etc.

How are income tax returns presently filed in India?

Presently, taxpayers are required to furnish their tax returns in forms ITR-1 to ITR-7, depending on the type of taxpayer and nature of income. In the current ITR filing system, the taxpayer is mandatorily required to go through all the schedules in designated forms, irrespective of whether that particular schedule is applicable to them or not. This procedure is lengthy and time consuming for the taxpayer.

Why is the government introducing a new common income tax return?

The draft ITR intends to ease the tax return filing process and reduce the time for filing the returns by individuals and non-business-type taxpayers considerably. It intends to increase the scope of pre-filing through better arrangement and logical flow of information.

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In the new common ITR, the taxpayers will not be required to see the schedules that do not apply to them.

The new common ITR will also facilitate the proper reconciliation of third-party data available with the Income Tax Department regarding the data to be reported in the ITR to reduce the compliance burden on the taxpayers.

What are the changes introduced in the new common income tax return?

The new draft ITR draws influence from international best practices and proposes to merge all the existing returns of income except ITR-7, which is applicable for charitable institutions, business trusts, and investment funds, among others. However, it must be noted that the current ITR-1 and ITR-4 will continue to operate as usual.

Taxpayers will be given an option to file the return either in the existing form (ITR-1 or ITR-4) or the proposed common ITR.

Details of the scheme of the new common ITR

• Basic information (comprising parts A to E), schedule for computation of total income (Schedule TI), schedule for computation of tax (schedule TTI), details of bank accounts, and a schedule for the tax payments (schedule TXP) is applicable for all the taxpayers.
• The ITR is customized for the taxpayers with applicable schedules based on certain questions answered by the taxpayers (wizard questions).
• The questions have been designed in such a manner and order that if the answer to any question is ‘no’, the other questions linked to this question will not be shown to them.
• Instructions have been added to assist the filing of the return containing the directions regarding the applicable schedules.
• The proposed ITR has been designed in such a manner that each row contains only one distinct value. This will simplify the return filing process.
• The utility for the ITR will be rolled out in such a manner that only applicable fields of the schedule will be visible and wherever necessary, the set of fields will appear more than once. For example, in the case of more than one house property (HP), the schedule HP will be repeated for each property. Similarly, where the taxpayer has capital gains from the sale of shares taxable under section 112A only, applicable fields of schedule CG, relating to 112A, shall be visible to them.

What is the protocol for NRIs when filing the new common income tax return?

For NRI entities, the draft ITR seeks comprehensive information ranging from nature of business, permanent establishment (PE), business connection, whether the entity has significant economic presence (SEP) in India, number of users in India, etc.

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The ITR protocol for NRIs could widen the scope of the SEP principle that was introduced in the Finance Bill for financial year 2018-19 (FY 2019). This SEP principle explicitly defined ‘business connection’ to include the provision of download of data or software, if aggregate payments from such transactions exceed a prescribed amount, or if a multinational’s interaction is with a prescribed number of users.

The SEP provision was deferred until FY 2022-2023 on the premise that a global solution by the Organization for Economic Co-operation and Development (OECD), under which all tax treaties would be automatically modified, is being considered.

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