Disclosure of assets in return form may fox taxpayers

The new income-tax return forms for individuals for the financial year just ended (2012-13) have been notified a few days ago. A major change in these forms this time relates to the requirement of disclosure of the cost of assets and liabilities as at the end of the year by all individuals who have business or professional income (whether from a proprietary concern, in their individual capacity or as a partner of a partnership firm) and whose taxable income exceeds 25 lakh. Fortunately, this requirement does not apply to persons who do not have business or professional income, such as salaried employees or persons having only investment income. However, persons employed on a consultancy basis having taxable income exceeding 25 lakh would need to make such disclosure.

The assets to be disclosed are land, building, financial assets (bank deposits, shares and securities, insurance policies, loans and advances given, and cash in hand), jewellery, bullion, archaeological collections, drawings, paintings, sculpture or any work of art, vehicles, yachts, boats and aircraft and any liabilities in relation to the above assets. All these assets to be disclosed are personal assets, other than business assets disclosed in the business or professional balance sheet, in respect of which typically a person does not maintain and is not required by law to maintain books of accounts.

There are various practical difficulties arising in relation to such disclosure. The first is that since no books of accounts are maintained for personal transactions, it is difficult to find out such details. While there should be no problem in relation to immovable properties, whose cost would be readily available, there are various problems in relation to other assets.

For instance, in the case of jewellery, typically, most people do not have details as to the cost of jewellery acquired over the past years or decades, particularly when the value of such jewellery is not very high and is therefore not subject to wealth tax. Besides, some jewellery may have been received as gifts from close relatives, say at the time of wedding. Further, everybody has some amount of inherited jewellery, in respect of which one does not know what is the cost and when it was acquired by one’s parents. What is the cost to be taken for such jewellery? If not, strictly going by the definition of cost under tax laws, one has to find out what is the cost incurred by the person who has given the gift or from whom it was inherited or find out the market value as on that date and take that as the cost—practically, a task which most taxpayers would find impossible to carry out.

Since income-tax returns in these cases have to be e-filed, one cannot fill up anything other than the number in this field of cost, such as “not determined”. Most people may, therefore, prefer to just take the cost as zero, which could attract difficulty in the future when one is asked for a list of such jewellery at the time of assessment as this would possibly amount to concealment of assets.

Similarly, a friend may have gifted you a drawing or painting or you may have purchased a painting many years ago, which you have hung up on your walls. You will now have to find out what is the cost of such a painting and reflected in your tax returns. If your friend himself is the artist, what is the cost is a question which has no answer.

There are various other practical issues and difficulties. For instance, is a house under construction to be disclosed, even if it is not complete? Is agricultural land to be disclosed? Is a Public Provident Fund (PPF) account maintained with a bank to be disclosed as a bank deposit? Are you supposed to deduct the cheques which were issued before the year-end, but not yet presented to your bank, and include cheques deposited before the year-end, but not credited by the bank till the year-end, when you disclose the bank balances? Is a company deposit required to be disclosed, since it is not a security nor a loan or advance? Do you have to include the loans given to your household servants which are outstanding as at the end of the year? Would an advance payment for purchase of a house have to be disclosed under loans and advances? What is the cost of insurance policies—is it the sum total of the premiums that you have paid over the years in respect of that policy? Do you have to disclose antique coins or your stamp collections in the list of assets?

There would be many more questions which would fox taxpayers when filing their returns. One wonders as to what purpose this disclosure would serve, particularly when wealth tax is payable only on certain specified assets and not on financial assets and when this disclosure requirement does not apply to all taxpayers, but only to a limited class of taxpayers. Would taxpayers be tempted to reduce their income to below 25 lakh to avoid such disclosure? Would this disclosure merely lead to further harassment of honest taxpayers? Only time will provide the answers.

It is important that the government realizes that tax compliance should not be made so burdensome as to put off honest taxpayers from full compliance or increase their burden due to enhanced compliance costs. Simplification of procedures has certainly led to better tax compliance in the past and a proper balance needs to be struck between disclosure requirements on taxpayers and ensuring better tax compliance by tax authorities.

Gautam Nayak is a chartered accountant.