Photo: iStock
Photo: iStock

Opinion | Let the system tell you your capital gains tax

A government plan to pre-fill income tax return forms online with details of your capital gains could ease your compliance burden. In time, its coverage could become comprehensive

Anyone who has invested in shares or mutual funds would vouch for the difficulty in determining the amount of capital gains tax one has to pay during a financial year. Working it out is a complicated task because financial assets are often bought through multiple orders—via systematic investment plans, for instance—and can’t easily be distinguished from the same company’s shares or mutual fund units bought previously, which makes it hard to calculate how long the assets were held. The general rule is to go by “first-in-first-out", under which the longest held stock or unit is assumed to have been sold first. Still, active investors have it especially hard ploughing through the records of their gains and assessing what money needs to be paid by way of tax. While some can do it on their own, most are left with no choice but to seek the help of such professionals as chartered accountants to do the job for them. After all, nobody wants to risk falling afoul of the taxman.

Thankfully, all this might change from next year. According to a media report, the revenue department is in talks with the Securities and Exchange Board of India, the capital markets regulator, to devise a way that eliminates the need for the taxpayer to do all these complex calculations. Instead, all information of an assessee’s equity and mutual fund transactions would be shared with the tax authorities, based on which the money due would automatically be calculated and pre-filled into his or her income tax return form. All that the taxpayer would need to do is to check that the transactions are correctly reflected, pay the tax shown as due, and submit the form. This isn’t all. To ease the return-filing process further, information on the interest earned on all of his or her bank accounts would show up as well. So too, would all the dividends received.

If such a system is put in place, it would be a relief to those struggling to get the math right. Some failures to disclose the full extent of capital gains arise from genuine gaps in memory, and honest taxpayers often get sleepless nights out of anxiety of having made an unwitting omission. Interest sums on bank deposits, for instance, are often overlooked, and banks usually send statements on this income only if requested. Dividend credits tend to get missed, too. A small slip-up, however, can earn a tax notice. Pre-filled forms will not only help the government increase its revenues by casting its net across an assessee’s assets, it will also go well with its effort to minimize the harassment of those who have shown no intent to duck their contribution to the exchequer. This new system will prove most effective, however, only once all classes of assets, including real estate, are drawn into the auto-filling process. To enable this, diverse databases across the country would need to be linked. This may make some taxpayers uneasy, no doubt, particularly those who worry about the cyber-security of a network that has their entire financial status available for viewing on a single screen. But for most, it’s safe to assume that the ease of compliance would outweigh privacy concerns. There is still more that could be done before the country’s tax interface online turns truly user-friendly. But this proposal suggests that the revenue department’s direction is broadly correct.