The new Income Tax Act has placed a major focus on more “data-driven” reporting by companies, which, in the short-to-medium term, is likely to lead to more tax disputes, according to tax consultants.
But government officials believe that more granular reporting of payments, transactions, digital assets, etc., will improve the quality and usability of data available with the tax administration, and subsequently result in higher tax collections, as the “gaps will be plugged”.
The new Act, read with the Income Tax Rules, has introduced a significantly expanded disclosure framework, say consultants. “On the surface, this looks like a simplification (with reduction in sections, rules and forms), but a critical reading reveals the opposite for data reporting. Fewer forms do not mean less data. It means more data consolidated into each form,” an tax expert notes.
The new data points
The new tax audit report (TAR) contains segment-wise clauses, with a far more detailed reporting structure.
They include:
- Foreign Payments / International Remittances — Even Without TDS TAR now requires reporting on secondary adjustments, interest limitation provisions, remittances, and other applicable international tax provisions.
‘Secondary adjustment’ is a method of pricing the transaction with a foreign entity to calculate the appropriate tax to be paid by the Indian entity. ‘Interest limitation’ is a bar on the interest that Indian entities pay to their foreign affiliates (on the loan they take) to prevent over-claiming of deductions.
Further, every foreign remittance, whether or not TDS was deducted, must be captured and cross-referenced in TAR.
- Statutory auditor qualifications, adverse remarks and their impact The auditor is now required to provide the impact (if any) on the profit, loss, or book profit of any observations, qualifications, adverse remarks, disclaimers, or emphasis of matters in the statutory audit findings. This will enable the department to ensure that statutory audit findings are also incorporated into the computation of income, if so required.
- Tax identification number The scope of reporting in Form 145 has been expanded, where the taxpayer is now required to also provide the tax identification number issued by the tax authorities of the country in which such non-resident payee is resident.
- Virtual digital assets
The new framework requires reporting of information on profits and gains from the transfer of VDAs, a breakdown of VDA transactions including purchase date, cost, sale date, and consideration, and confirmation that losses from VDAs have not been set off against other income and that certain deductions have not been claimed against VDA income.
‘Reasons for higher litigation’
While the government’s intent is to improve transparency, the expanded reporting framework is likely to increase litigation in the near term, say consultants.
“Greater data granularity is likely to invite greater scrutiny by the tax department, particularly in cases of exempt foreign tax payments, crypto asset transactions, etc. This combination is expected to lead to issuance of more notices to verify transactions,” another tax expert said.
“As data becomes more detailed and machine-readable, differences between the audit report, TDS returns and the income tax returns are likely to be automatically flagged, potentially resulting in adjustments and increased scrutiny. Litigation may spike in the initial years simply because new law typically generates new disputes and open areas for interpretation,” he said.
The government’s view
Government officials say the intent is not to overburden taxpayers or auditors, but to improve the quality and usability of the data available to the tax administration. “What we are trying to achieve is a more structured reporting system where information can be cross verified across different databases,” one official told Moneycontrol.
“It moves towards expanding the scope of reporting and strengthening cross-verification mechanisms. This will lead to higher scrutiny, particularly in areas where data mismatches or inconsistencies emerge. However, that does not automatically mean an increase in tax disputes in the long run,” the official added.
Over time, the expectation is that this data-driven approach will actually improve voluntary compliance,” a second official noted. “Taxpayers are likely to be more cautious in their reporting, which should lead to better tax realisation and reduce the need for enforcement.”
