Taxation Myths- Relying or Breaking

[Dr. Sanjiv Agarwal]

Many a times, we carry a view, which is actually not the case, and infact, the legal position is otherwise. Should PAN be obtained by all, are all gifts tax-free or that insurance is only a tax planning tool and such other myths.  Taxpayers often carry the (mis) understanding of law based on what they have been doing or the impressions they gather on hear say, rumours or on seeing what others are doing. Here are some of such so-called impressions and in contrast, what the reality is.

· There is no tax on gifts in India now

There is no doubt to the fact that Gift Tax Act was abolished in India w.e.f. 1^st October 1998. Common understanding is that gifts are, therefore, tax-free but this may not be the case always. Under the provisions of Section 56(2)(vi) of Income Tax Act 1961, certain gifts are liable to income tax as 'income from other sources' and as such, gift tax has been brought back under the garb of Income Tax.

Certain gifts are taxable to income tax if the sum of money, whether in cash, cheque or a bank draft is received from non- relatives or certain non- specified persons (after 1.4.2006) exceeding Rs. 50000. Gifts in kind like shares, gift of land, house, mutual funds, jewellery etc. would not be liable to any income tax at all.

However, any gift from relatives of any amount during the financial year is completely exempt from tax. Gift received by an individual from his brother or sister, or from the brother or sister of the spouse, parents, or from any lineal ascendant or descendant of himself or his spouse would normally be fully tax exempt. Any gift of any amount received from any person on the occasion of the marriage of the gift recipient would not be liable to income tax at all. However, if a husband gives gift to his wife or father-in-law gives gift to his daughter in law, then it would come in clubbing provisions of Section 64 of Income Tax Act, 1961 and would be taxed. Gifts received under a will or by way of inheritance, gift in contemplation of death of the donor, gift from any local authority, from specific fund or foundation or university, from specific trust or institutions are exempt from income tax.

So, it would be desirable to be careful while accepting gifts from non-relatives. These provisions of Income Tax are applicable only to individuals and hindu undivided families (HUFs).

· Tax planning is always complex and risky. It is better to pay taxes.
Contrary to popular belief, the most efficient form of tax planning is one that is fairly simple, hassle free and is understood by the assesses. Of course, it has to be legal, otherwise it is not a planning but tax avoidance. Simplicity, objectivity and wealth creation should be inbuilt in your tax planning. One should adopt tax planning but never overdo it. Understanding of the tax laws and applying it to use is what tax planning is. One need not to spend too much time or effort. Complicated tax-planning schemes may result in protracted litigation with the tax department. And, since the prevailing tax rates seem to be so reasonable, they may not yield results commensurate with the effort. Besides, if the schemes are not successful, you will end up with substantial interest and penalties in addition to the tax liability.

Tax planning is always useful. It tempts you to make savings, offer social security schemes, which are otherwise not available in our country and provide avenues for earning higher returns as compared to traditional sources like bank or post office deposits. Investment in Section 80C instruments is a live example, which is so simple to comprehend. However, in certain cases, procedural aspects may cause some problem but in pure and simple terms, tax planning always yields dividends.

Tax planning can at best reduce the tax liability and so the benefits are limited. One would be financially better off spending time and effort on exploring avenues to increase his/her income rather on planning, administering and defending complex tax-planning schemes.

· The less tax one pays, the more he stands to benefit

This may not always hold true. Sometimes, paying more tax can be fruitful and it can help in achieving the ultimate goal of maximization of wealth. At times, it is more profitable to pay the tax rather than trying to save it! This is the principle of 'opportunity cost of tax planning.'

For example, 'A' is having two-investment choices- first, 15 % return (taxable) and second, 8.5 % return (tax-free). Even if 'A'  is in maximum tax bracket of 30 %, other things being equal, an investment at 15 % return will result in a post-tax yield of 10.5 %, after paying 4.5 % as tax. Thus, investment in 15 % will yield a superior post-tax return of 10.5 %, the incremental yield over the tax-free investment being 2%. Thus, consideration of post tax return is also very important. At times, there may not be any sense in blocking your money for a long period of 6 years and getting 8% taxable return on instruments like NSC, just to take benefit of section 80C in Income Tax. Instead of it, it could be advisable to invest in equities and fetch relatively better returns only by paying a capital gains tax of 10% and STT also. It will provide liquidity and help in maximizing the returns. By paying lower taxes, one may gain in terms of cash outgo but the decision should be taken considering the net yield after tax impact. One should also consider time value of money while taking such decisions.

· All persons born in India are required to obtain Permanent Account Number (PAN) of Income Tax
 
Permanent Account Number (PAN) is a ten-digit alpha-numeric number, issued in the form of a laminated card, by the Income Tax Department. According to Section 139A (5) (c) of Income Tax Act, 1961 any person, who intends to enter into financial transaction where quoting PAN is mandatory, must obtain PAN and under section 139A (1) and (1A), all existing assessees or taxpayers or persons who are required to furnish a return of income, even on behalf of others, must obtain PAN. The Assessing Officer may also allot PAN to any person either on his own or on a specific request from such person. Obtaining or possessing more than one PAN is against the law and is not permissible.
Thus, all existing and future (where gross sale or receipts are likely to be more than Rs. 5 lakh) assessees who are required to file income tax return or enter into certain financial transactions are required to obtain PAN. The obtaining and quoting of PAN is mandatory in such cases. Form 49A is used for applying for PAN. A person is required to apply for PAN if he falls under any such category even if tax payable by him is nil. Certain transactions where quoting of PAN is mandatory include purchase or sale of immovable property over Rs. 5 lakh, deposits with bank over Rs. 50,000/- securities transaction of value exceeding Rs. 1 lakh, opening of bank account, telephone connection, investing in shares in IPOs exceeding Rs. 50,000/- etc. Since investments can be made in the name of minor for which PAN quoting is mandatory, minors also apply for PAN. However, for bank account, a minor may quote his parent's / guardian's PAN. The law does not stipulate that PAN should be obtained by all minors or all those who are born in India or are residents of India.

· If the employer deducts TDS, there is no need not to file income tax return

One is required to file Income Tax return if the total income exceeds the maximum exemption amount under the Income Tax Act that is currently Rs 110000 for general category. Even if the employer deducts full TDS due from salary, one needs to file his / her Income-Tax Return because income has to be filed and assessed under five different heads: salary, income from house property, profits or gains of business or profession, capital gains and income from other sources. Deduction of tax on salary does not absolve from the liability of filing returns. One needs to file the return even if his employer has deducted his tax because he needs to show his taxable income under various other heads. Deduction of tax is the employer's obligation whereas filing of returns is taxpayer's obligation. While filing the return, due credit will be given for TDS deducted by the employer.

· Once a return of Income Tax is filled, assessment is deemed to be completed
 
Though the assessment procedure starts from filing of tax return which is of course a pre requisite to have an assessment, it is not true that filing of return is equivalent to assessment. Assessment involves checking of return, verification of contents and computation, issuing of notices (wherever required), tax computation and refund of income tax received in advance by the Income tax department.

While returns are filed by the taxpayer, assessment cannot be done by him unless it is a case of self-assessment. The assessment is done by the assessing officer based on certain criteria and law. The assessment is the logical conclusion of filing of return and filing is not the assessment. The assessment could lead to acceptance of return as filed or there could be addition/deletion to income returned by the assessee. It will, therefore, not be correct to say that filing of returns is assessment or completion of assessment. Filing only completes the assessee's obligation.