Tuesday, February 27, 2024

Comprehensive Analysis: CBDT Circular, Mismatch Notices, and Taxpayer Challenges

Introduction to CBDT Circular on On-Screen Functionality:

The Central Board of Direct Taxes (CBDT) has launched a new initiative to address discrepancies between income information reported by third parties (like banks and financial institutions on interest and dividend incomes) and the income declared by taxpayers in their Income Tax Returns (ITRs). This move is a part of the e-Verification Scheme-2021, designed to enhance compliance and ease the verification process for taxpayers.

Key Elements of the CBDT Circular:

  1. Purpose: Aimed at rectifying mismatches between third-party data on interest and dividend income and the figures taxpayers report in their ITRs.
  2. On-Screen Functionality: An innovative feature on the Compliance portal via the e-filing website (https://eportal.incometax.gov.in) that enables taxpayers to reconcile any mismatches by submitting their responses directly online.
  3. Notification Method: Taxpayers are alerted to mismatches through SMS and email, using the contact information they've provided to the department.
  4. Scope of Mismatches: Currently addressing mismatches for the Financial Years 2021-22 and 2022-23.
  5. User Accessibility: Registered users can directly access the Compliance portal through their e-filing account, whereas new users must register on the e-filing website to utilize this feature.
  6. Requirement of Documents: The reconciliation process is designed to be straightforward, requiring no additional documents for submission.
  7. Special Note on Interest Income: For taxpayers who have categorized their interest income under 'Others' in the ITR, the system is set to automatically resolve such mismatches without requiring further action from the taxpayer.

Detailed Overview of Taxpayer Challenges:

With the introduction of this functionality, taxpayers have encountered several hurdles:

  1. Issuance of Mismatch Notices: Numerous taxpayers received notifications from the Income Tax Department on February 24, 2024, indicating mismatches in Interest Income for the FY 2022-23 and FY 2021-22.

  2. Challenges with System Recognition: The main issue stems from the prevalent practice among taxpayers of reporting interest income from different sources under broad categories in their ITRs. Although bank interest is generally reported under "Other Sources," other interest incomes might be lumped together under "Others." The Department's system has had difficulty accurately recognizing these entries, leading to mismatches.

  3. Inadequate Response Mechanisms: Taxpayers have voiced concerns over the lack of sufficient options within the on-screen functionality to clarify that the interest income flagged as a mismatch has already been reported under different line items. This lack of options complicates the process of rectifying mismatches, potentially leading to inaccuracies in income reporting.

  4. Potential for Increased Litigation: If the issues with the AI system of the Income Tax Department are not adequately addressed, there is a risk of an increase in disputes and litigation. Taxpayers who have complied with their tax obligations might face unnecessary scrutiny and legal challenges, thereby complicating the tax compliance experience despite accurate income reporting.

Comprehensive Recommendations:

The CBDT's introduction of on-screen functionality for income mismatch reconciliation marks a significant step toward using technology to simplify tax compliance. Nonetheless, to ensure the effectiveness and user-friendliness of this system, it is essential to tackle the challenges faced by taxpayers. Improving the AI system's capability to accurately recognize and categorize various income reporting practices, along with providing more detailed options for taxpayers to explain and rectify mismatches, would mitigate the risk of disputes and enhance the efficiency of the tax compliance process. This proactive approach would benefit both the tax administration and taxpayers, leading to a smoother, more transparent, and fair tax compliance landscape.