As Budget 2025 approaches and Finance Minister Nirmala Sitharaman prepares to present her 8th Budget, there is keen anticipation among tax experts and taxpayers regarding direct taxes. Many are hopeful that the Modi government will alleviate the tax burden on the middle class, address high inflation concerns, and streamline compliance processes.
In addition to tax cuts, there is a desire for simplification of the tax filing process. Taxpayers have been requesting sufficient time post-financial year-end to complete their income tax return filings. As of now, original tax returns must be filed by July 31 of the assessment year, and revised or belated returns must be filed by December 31 of the assessment year. Although the income tax department has made efforts to automate the filing process, the tight deadlines have proven challenging for taxpayers.
Alok Agrawal, Partner with Deloitte India, in a column, noted: "Considering the number of ITRs that get filed and the short period of 1.5 months available for filing the income tax returns, the income tax portal tends to face an excessive load. As a result, taxpayers often face technical glitches on the e-filing website during the last few days while filing income tax returns."
He suggested the following changes in the tax filing process:
45-day window for tax filing
Employers are required to issue Form 16 to salaried taxpayers by June 15 of the assessment year, providing them with a 45-day window to prepare and file their income tax returns. Prior to filing, taxpayers should consider various activities such as reconciling bank account statements, analysing joint income with spouses, reviewing Form 26AS and Annual Information Statement (AIS), and ensuring funds are available to pay any outstanding taxes.
Additionally, taxpayers may need to gather information from multiple sources for capital gains calculations, including sales of shares, mutual funds, bonds, and properties. Due to the high volume of ITRs being filed within a short timeframe, the income tax portal often experiences heavy traffic, leading to technical issues for taxpayers during the last few days of the filing period on the e-filing website.
Overseas income, assets for tax filing
It is compulsory for Indian taxpayers classified as ordinary residents to disclose all foreign incomes and assets. Taxpayers face challenges in gathering and organizing necessary information for the financial year in India due to varying tax periods in other countries. Even for countries with the same financial year, income tax returns from overseas jurisdictions are typically not accessible until July 31. Extending the deadline for filing income tax returns would provide relief to taxpayers, particularly those seeking credit for foreign taxes.
Missing the July 31 deadline
If the original Income Tax Return (ITR) is filed by the deadline of July 31, individual taxpayers have the choice between the old and new tax regimes. Missing this deadline may result in additional tax liability when filing a belated tax return, as the option to select the old tax regime is no longer available. Furthermore, according to income tax regulations, in the case of filing a belated return, taxpayers cannot carry forward losses for the year, with the exception of house property loss.
Additionally, there will be additional interest charged on any outstanding tax payments, as well as late filing fees of up to Rs 5,000, which can have a significant financial impact on certain taxpayers.
Calendar year and tax year
Residents and Ordinarily Residents (ROR) in India who qualify as taxpayers are subject to global income taxation in India. They are required to disclose their global assets and liabilities in their Indian income tax returns. Countries like the United States, Canada, and Singapore operate on a calendar year tax year cycle.
It can be challenging to obtain income and asset information for these countries before the deadline for filing revised returns. For instance, in the US, tax returns for the 2024 calendar year will not be finalised until at least April 2025. Conversely, India allows for the submission of revised or belated returns for the financial year 2023-24 (assessment year 2024-25) until December 31, 2024, in order to claim credit for taxes paid from January to March 2024. These credits will only be confirmed after the completion of the 2024 US tax return process.
In this context, Aakash Uppal, Partner & Leader (North & East), Corporate Tax, Tax and Regulatory Services, BDO India, said: “The DTC is expected to bring about several other important changes. These include shifting to a calendar year for tax purposes instead of the financial year, simplifying the residential status for individuals by removing complex categories like ‘Resident but not Ordinary Resident’, introducing unified tax rates for domestic and foreign companies, and expanding the tax base for withholding taxes. Additionally, further rationalising of withholding tax rates and provisions is anticipated.”
Overseas tax returns, tax filing
In various scenarios, Resident Ordinary (ROR) taxpayers may need to claim foreign tax credit for taxes paid outside of India. Additionally, there are different types of tax benefits available under the Double Tax Avoidance Agreement (DTAA) that such taxpayers must claim. To ensure accurate calculations and reporting, it is crucial to have overseas tax returns and payment proof. Failure to extend the due date for filing belated or revised returns could result in FTC claims and DTAA relief being based on taxes deducted at source and income reported on payslips from the foreign country. This could potentially lead to litigation during an audit by the Income Tax Department.
Belated, revised tax returns
If the deadline for submitting a revised, belated tax return is missed, taxpayers in India must file an updated tax return as the only available option, which may incur penalties. An updated return can only be filed if there is an additional tax liability in the Income Tax Return (ITR); it cannot be filed to claim or increase tax refund amounts, or if it results in lower tax liability.
Taxpayers have up to two years from the end of the relevant assessment year to file an updated return. During the period from January 1, 2025, to March 31, 2025, no tax returns can be filed for the FY 2023-24. Failure to pay any balance tax liabilities leads to additional interest implications for taxpayers.