Task made difficult as the form has to provide for the numerous requirements and artificial provisions of a complex law
The cash flow statement now proposed is poorly designed and will not serve the purpose of reconciling net increase in cash flow with income.
THE LATE Rajiv Gandhi wanted an income tax return that can be prepared and furnished by the ordinary taxpayer without professional assistance. The simplification of law has been a chimerical search for a non-achievable goal as in the proverbial story of a blind man in a dark room searching for a black cat that was not there. The reason is not far to seek.
There cannot be a simple form of return without a simplified tax law. Where the tax law is complex, the form has necessarily to provide for the requirements of such law as, for example, the different heads of income with sub-heads, varying methods of computation with differential tax impact apart from many artificial provisions treating what is not income as income and what is admissible as deduction as disallowance. Clubbing of income, whether automatic or conditional, is another chapter in our law. Reform of tax law now sought to be undertaken by a team of officials of the Income-tax Department does not give any hope of such simplification because of the known belief of the tax administration that tax laws by themselves can prevent evasion.
Notwithstanding the constraints placed by the complicated law, there has been a promise to simplify the form of the return. In his Budget speech on June 1, 1998, the then Finance Minister promised a new simplified form named Saral in the following words: "We must recognise that the cumbersome nature of our income tax forms coupled with complex procedures is a serious deterrent to an honest individual in becoming an assessee. I, therefore, propose to introduce, for the first time, a simple one page taxpayer-friendly return form to be hereinafter called `SARAL', applicable to all non-corporate taxpayers. SARAL can be filled in easily without the aid of chartered accountants or tax advisors."
The first step
Saral Form 2D was the first step towards simplification. It came into force vide Notification No. S.O. 794 (E) dated September 9, 1998. It was an optional form for non-corporate assessees other than persons claiming exemption under Section 11 (charities). It was indeed a simple form in one sheet (two pages), with instructions running to three pages and each instruction requiring a separate annexure. For example, requiring trading Profit and Loss account and balance sheet for business, besides details of capital gains, income from other sources, details of clubbed income, deductions, exemptions, besides statement of computation of tax, tax rebates, and interest calculations and details of computation of property income. This return may require as many as 12 annexures and at least half-a-dozen annexures for most taxpayers without business income. Most statements required in the schedule in Form 2 was now required in separate annexures making a mockery of the claim of Saral as an easier form.
The department's anxiety to get all relevant information prompted substitution of this Form vide Notification No.S.O.460(E) dated May 11, 2000, requiring further information on bank accounts and credit cards.
A step backward
Hardly a year after the revised Saral 2D was notified, the need for further substitution was felt, obviously because a simplified form was not practicable with a complicated law. Saral 2D, now styled as Form 3, was notified in S.O.No. 634(E) dated July 2, 2001, substituting the requisite annexures by schedules. The consolation offered in the guidance notes annexed to the return is that the standardised schedules attached to the new form will guide the assessees in the process of preparing the return instead of leaving the matter of computation to guesswork. It was felt that the substitution was necessary to avoid "inconvenience to the taxpayers and requiring them to seek professional help.'' It is, therefore, an admission that the earlier Saral form still required professional help, but the suggestion that Form 3 was a simpler version was misleading, since it continued to be beyond the comprehension of an ordinary taxpayer. What is more, Form 2 for which Saral was the substituted optional form, was hardly different as the latter required nearly as much information as in Form 2.
It is, therefore, not surprising that Form 3 was withdrawn post-haste. Form 2D was restored vide Notification No. S.O. 659(E) dated June 24, 2002, without the schedules but reinstating the requirement of separate annexures.
The Naya Saral
While the restored Saral 2D was in vogue with effect from July 14, 2002, a new Form 2E titled Naya Saral was notified in No.S.O.550(E) dated May 14, 2003. Naya Saral was another optional form restricted to resident individuals and Hindu Undivided Families not having income from business or profession or capital gains or agricultural income. This form is the result of a realisation that there can be no simplified form except for those with salary and property income. The threshold requirement that a person should not have agricultural income was prima facie unnecessary because of the constitutional limitation in taxing agricultural income. Even so, persons with agricultural income were barred from using the Form because of the apprehension that a taxpayer may pass off agricultural income as non-agricultural. In the result, all persons claiming agricultural income would have to file Form 2 or perhaps Form 2D, but not Form 2E. Notwithstanding this needless restriction, Form 2E is a simplified form but its use is limited to a smaller class of taxpayers.
Form 2E was amended with effect from July 14, 2004, and again with effect from June 20, 2005, requiring further particulars of bank accounts with modifications of form consequent on changes in law as regards tax rebates, etc. With effect from June 1, 2006, Naya Saral in Form 2E has been replaced by Form 2F though it is permitted to be used till July 31, 2006.
Saral 2D was amended by Notification No. 755(E) dated June 1, 2005, to accommodate change in the income-tax law consequent on introduction of the securities transaction tax (STT). Section 10(34) exempted long term capital gains on which STT had been paid, while short term capital gains were to suffer tax at 10 per cent only under Section 111A. This change is highlighted in amended Saral 2D to bring out, that business profit on sale of shares on which STT has been paid has to be shown under the head business, while short term capital gains on which concessional rate of tax at 10 per cent is payable have to be shown under a sub-head under capital gains to enable checking whether any business profit that is not exempt is wrongly claimed as capital gains. It is this apprehension of Revenue which had prompted the draft circular issued recently by the Central Board of Direct Taxes prescribing 15 tests, with none of them being conclusive, to distinguish capital gains from business profit.
This created commotion among taxpayers, many of whom had not appreciated the tax distinction between income and capital gains, so that the draft circular was followed with a lot of explanations in defence of the circular. But then, the amendments made to the return forms including Saral had drawn attention to limitations on the concessional treatment of STT paid transactions.
The new Naya Saral
By Notification No. 128 of 2006 dated June 1, 2006, a new Naya Saral in Form 2F has become effective from June 1, 2006, replacing Naya Saral 2E which will, however, co-exist till August 1, 2006, giving a choice to this class of taxpayers of Form 2E or 2F till this date. But both forms are available only for those who have no income from business or profession or capital gains or agriculture. The additional disqualification in Form 2F is for those claiming spreadover relief (primarily for arrears of salary) under Section 89 and those with more than one house property. The new disqualifications further restricting the use of the Saral form arise out of the apprehension that returns with claim under Section 89(1) or with more than one property would require a check of accounts, so that they must use either Form 2 or Saral 2D and not the new Naya Saral Form 2F.
More importantly, a concession that is conceded is that those with non-taxable long term capital gains on which STT is paid can use the form, because such income is exempt under Section 10(34) but then, those with profit on sale of shares taxable under the head business, though STT is paid thereon in the light of the fifteen tests given in draft circular, cannot use Form 2F.
The Press note on the new Form 2F states that the existing Naya Saral 2E can be used till July 31, 2006.
The following are claimed to be the salient features of the new form: (i) It has been expanded to four pages so that there is sufficient space to fill in the details.
(ii) No annexures are required to be attached with this Return form. If enclosed, the same shall be returned by the official receiving the return.
(iii) Detailed explanatory instructions have been provided to fill this Form.
(iv) Cross-referencing to the Instructions has been provided for most entries.
A feature of Form 2F, which has elicited some concern and adverse comment, is the requirement of cash flow statement, with the ostensible objective of verifying information gathered from annual information reports, so that such information could be checked without calling the assessee for verification. A simpler solution would be to require information of all transactions covered by Section 139A requiring PAN Number. But this is perhaps not the only purpose intended as the cash flow statement will serve the other purpose of reconciling the assessee's net increase in cash flow with income. It is a different version of the integrated tax return suggested in the 1950s by Nicholas Kaldor, the economist, along with the proposals for wealth, gift and expenditure taxes to enable cross checks. The cash flow statement is a half-hearted attempt and is poorly designed as it will not serve the purpose, while imposing an unnecessary burden on the taxpayer hardly in keeping with the objective of the Saral (easy) Form. If the income-tax return is to be framed as a letter of enquiry, it can no longer be a Saral return.
After the abolition of expenditure tax and gift tax and dilution of wealth tax, such information may not be statutorily required in every case. At any rate, even the limited number of assessees entitled to use Form 2F may shun this Form and opt for Saral 2D or even Form 2, at least till such time the other forms are amended to include such requirements. Form 2F is not any the less easy to fill in because of this requirement.
In view of the resistance to Form 2F there is a statement attributed to the Revenue Secretary that the part relating to cash flow statement will be optional, while form 2F itself will continue. There is a promise of a change in the form next year.
A simplified form can only be a distant dream, a mirage, till such time the law itself is simplified.