There’s actually more to your return of income than what meets your eye.
A return of income is:
A) a declaration of your income in the prescribed format. The Department and the Country need to know where is this money coming from. Don’t they?
Imagine, if there were no returns, then I’d always say I earned money from a source on which the resultant tax would be minimum.
Take for instance-
I’m a retailer. I purchase my merchandise in both black and white. Therefore, I’ll now have material with me, a portion of which I’ve paid no input taxes on. Thus, it wouldn’t affect me if I didn’t report it on paper because I don’t have any Tax Credit due from the Government.
So, I make a sale. 40% of that is black. But I’m a tad afraid to stash all the 40% as black money. I choose to report 20% and the other 20%, well, I choose not to.
But, on the 20%, I’ve reported- I have collected VAT from the consumers. Let’s assume the VAT rate applicable is 10%. Therefore, I legally owe the government 10% of 20% which is 2% of my sale. But wait, I haven’t reported this sale at all.
What do I do?- I pay my taxes on this amount saying it is my Interest Income.
Now, this money is Perfectly White. I saved VAT payable. I immaculately laundered black money and perfectly parked it in a legal financial system.
Worse still, I’ll say I earned 60% of this money by selling shares I had bought 15 months ago in BSE. This income is exempt u/s 10(36).
Even worse, I’ll say I earned all of this money by way of dividends paid by an Indian company. This income is exempt u/s 10(34).
These are just crude ways I’ve mentioned for the purpose of easy understanding. There can be more elaborately crafted ways than the abovementioned which will make sure I don’t pay any taxes at all.
This would send the whole department in a series of snafus.
We’ve already got enough problems as it is and the lack of Return of Incomes would make the problems even graver.
B) a signed declaration verifying that everything you’ve reported in the return is True & Correct. This is equivalent to a legal affidavit.
The department now holds you to your words and if they find out something you know they shouldn’t they start sending you what is known as Notices.
Your Return of Income is the starting point of the entire Assessment Procedure.
Also, you’ve now given the IT department more rights to act on you since you’ve deposed that whatever information you’re providing is true, and should they find out that it is not the case- They’ll kick ass.
C) is legally required of you. Not all laws have indisputable logic behind them but they are all invariably binding on everyone residing in their jurisdiction. So a return of income is pretty much mandatory.
Ideally, in a perfect world without paper cash and a UID/ PAN, a return of income would have been redundant. But, we live in a world that’s not even half ideal hence the need for a return.
Author: Sagar Pandurangi
Source: Quora