There has been tremendous growth in the number of foreign enterprises which work on short-term projects in India. As per the prevailing tax deducted at source (TDS) provisions, their entire income is subject to TDS at the applicable rates which fully covers their Indian tax liability. The question then arises as to whether filing of a tax return is necessary in India.
Enterprises not well versed with the Indian tax laws generally believe (on the basis of their experience in other countries) that once income has been subjected to TDS, there should be no requirement to file a tax return in India.
The concerns raised are not without reason. Filing of a tax return in India involves compliance fee to be paid to the tax consultant while the possibility of an audit by the tax authorities is omnipresent once a return is filed.
While there was previously a sound legal basis which enabled one to take an aggressive position that filing of a tax return is not really necessary as long as the tax liability has been discharged in full, there have been radical changes in the income tax laws which now need to be taken into account. The consequences of not filing tax returns are harsh and can lead to considerable distress for a taxpayer and its principal officers. These have been discussed below:
Penalty under section 270A
With effect from April 1, 2017, Section 270A of the I-T Act provides for levy of penalty for under-reporting and mis-reporting of income. The basic structure of these provisions in so far as non-filing of return is concerned, is given below:
# A person shall be considered to have under-reported his income if the income assessed is greater than the maximum amount not chargeable to tax (Please note that for corporate taxpayers, there is no maximum amount not chargeable to tax).
# In a case where the return of income has not been furnished, the amount of under-reported income in the case of a company shall be the amount of income assessed to tax.
# Where no return is furnished, the “tax payable on under-reported income” shall be the amount of tax determined (regardless of whether the same has been discharged in full by way of withholding-tax) on the income of the taxpayer.The penalty shall be equal to 50% of the amount of tax payable on the under-reported income.
Prosecution under Section 276CC
Prosecution can be initiated by the tax authorities under Section 276CC in cases of failure to furnish returns of income. Changes were made to this section by the Finance Act, 2018.
Prior to its amendment, prosecution under Section 276CC could have been initiated only in cases where a return of income was not filed voluntarily under Section 139(1) and there was a tax payable (after credit of advance tax / withholding tax) exceeding Rs 3,000.
The amendment made to the law in 2018 changed the position whereby the saving from prosecution proceedings where tax payable (after credit of advance tax / withholding tax) exceeds Rs 3,000 is now available only to individuals.
As such, corporate and other non-Individual taxpayers risk prosecution under Section 276CC even though there may not be any additional tax payable over and above the withholding tax.
Section 278E provides for a presumption of culpable mental state wherein courts shall presume the existence of such state and the onus of proving that there was no such mental state shall be on the taxpayer—a challenging task at best.
The government has made noises over the past two years that the tax authorities will initiate prosecution proceedings on taxpayers who do not file their returns. This is being followed up by the authorities in letter and spirit going by the ramp-up in prosecution notices that have been served on the taxpayers for even small offences. One can only expect this trend to continue.
With the amendments in the law, it is advisable for taxpayers earning income from India to file their tax returns. Not filing a return will leave taxpayer in an incredibly vulnerable position.