Understanding the Surge in Income Tax Notices: Causes and Responses
In recent months, there has been a notable rise in the number of income tax notices issued to taxpayers across India. These communications encompass various issues—from defective returns to demands for additional taxes—leading to significant anxiety and confusion, particularly among individual taxpayers.
This article explores the reasons behind this increase in income tax notices and provides practical advice on effectively responding to them.
Reasons for the Surge in Income Tax Notices
The recent surge in income tax notices can be attributed to the Income Tax Department’s intensified focus on compliance and efforts to identify discrepancies in financial reporting. Key reasons include:
1. Incorrect Income Tax Return Filing
- Common Issue: Selecting the incorrect tax-return form.
- Forms Involved: Individuals have four forms—ITR 1, ITR 2, ITR 3, and ITR 4.
- Frequent Mistake: Taxpayers with first-time income from capital gains or futures and options (F&O) trading often use ITR 1 or ITR 4 instead of ITR 2 or ITR 3.
- Result: This misstep can lead to non-disclosure of such income, resulting in defective-return notices.
2. Mismatch with Form 26AS
- Context: Taxpayers who filed returns in June 2024 using data from Form 26AS are receiving notices due to mismatches in income details.
- Common Error: Failure to cross-check actual income with details in Form 26AS, which may not have reflected income from the last quarter (January to March) of FY24.
- Implication: This leads to underreporting and subsequent demand notices.
3. Non-Taxable Gifts
- Exemption: Gifts received from specified relatives are exempt from income tax.
- Gap in Forms: No provision currently exists in the income tax forms to declare these non-taxable gifts.
- Issue: Some individuals receive demand notices for not paying taxes on such gifts, highlighting a reporting gap.
4. Revised Returns Not Processed
- Scenario: Taxpayers who filed a revised return after spotting errors in their original filing receive notices based on the original returns.
- Reason: These notices are often issued because the revised return has not been processed, or an automated query requires further verification by the taxpayer.
How to Respond to Income Tax Notices
Once you receive an income tax notice, follow these steps to respond effectively:
1. Verify the Notice
- Step: Confirm the authenticity of the notice.
- Tool: Check the notice on the Income Tax Department’s e-filing portal under the ‘Pending Actions’ tab.
- Importance: This step is crucial due to widespread phishing scams, especially those related to tax refunds.
2. Understand the Type of Notice
- Section-based Notices: Notices are issued under various sections of the Income Tax Act, each requiring a specific response.
- Section 139(9): Pertains to defective returns.
- Section 143(1): Deals with processing errors.
- Action: Identifying the type of notice helps determine the necessary actions.
3. File a Timely Response
- Deadline Compliance: Each notice comes with a specific response deadline.
- Defective Return Notices: Typically allow 15 days for rectification.
- Demand Notices: Usually grant 30 days to respond.
- Significance: Meeting these deadlines is critical to avoid penalties, interest charges, or legal action. Prompt response demonstrates compliance and a willingness to cooperate with tax authorities.
4. Rectify Errors by Filing a Revised Return
- Correction: If a notice highlights errors or omissions, rectify them by filing a revised return or providing the necessary information.
- Example: Notices issued under Section 139(9) for defective returns can be addressed by correcting the errors and refiling within the stipulated 15-day period.
5. Pay Additional Tax If Required
- Action: In cases where a notice demands additional tax due to under-reported income or discrepancies, promptly calculate and pay the correct amount, including any applicable interest.
- Note: It’s important to note that filing a revised return is not necessary in such cases. Instead, reply to the outstanding demand directly through the e-filing portal’s dashboard under the Pending Actions tab.
Expanded Scope of Compliance Measures
The increase in income tax notices is also partly driven by the expanded scope of compliance measures.
Statement of Financial Transactions (SFT)
- Entities Involved: Banks, financial institutions, and other entities are now required to report high-value transactions.
- Result: This leads to increased scrutiny of taxpayer activities. Even minor discrepancies or unusual transactions can trigger a notice.
Summary and Key Takeaways
By responding promptly and accurately, and seeking professional advice when needed, taxpayers can ensure compliance, avoid delays in processing tax refunds, and minimise the risk of penalties. The surge in income tax notices underscores the importance of meticulous financial reporting and timely response. With Estabizz Fintech’s expert guidance, you can confidently navigate these challenges, ensuring your business remains compliant and thrives in the global marketplace.
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
