Will FM's talk of small tax demands really make a big difference?

Withdrawal of old, petty outstanding tax demands is just the first step towards resolving tax-payer grievances

The Central government’s budget announcement that it would be withdrawing notices issued for old, petty tax demands has brought cheer to over 1 crore taxpayers.

But for many others grappling with unresolved tax disputes, especially those outside the purview of the waiver, the ordeal continues.

Pune-based chartered accountant Chetan Chandak cites the case of a city resident, who happens to be a senior citizen. He had filed his income tax return for financial year 2019-20 and paid tax of Rs 12,340, which was due, and has a challan from the income tax department confirming that payment. He made the payment marking it as a regular assessment tax instead of a self-assessment tax.

Also read: Govt to give up on Rs 3,500 crore-worth disputed direct tax demands: Revenue Secretary

“However, the tax department did not recognise the payment, and after a few months, sent him another notice asking him to pay the due amount along with interest, with the total now amounting to Rs 14,308. He did not understand the intricacies of the tax law and again made a payment towards the same demand. This time he paid the amount as a self-assessment tax instead of a regular-assessment tax,” says Chandak, founder of tax consultancy firm TaxBirbal.

Making matters worse, his refund of Rs 6,690 for FY 2020-21 was adjusted against the old tax demand. In summary, he ended up paying a total of Rs 33,338 against the original demand of Rs 12,340. Despite this, the matter still hasn’t been resolved. “Unfortunately, because of a minor technical mistake in selecting the challan type, the department is not allowing him the due credit of the legitimate taxes paid by him, even after repeated rectification and complaints. The demand is still outstanding, when in reality, he is eligible for a tax refund,” says Chandak.

In sum, many years on, instead of refunding the excess paid and closing the matter, the senior citizen is being asked to pay the due amount yet again because of the inadequacies in the income tax department’s processes.

Lack of data, the chief culprit

“In several cases, neither the client (taxpayer) nor the income tax (I-T) department have data or history of the tax demand made,” says Delhi-based chartered accountant Karan Batra, founder, Chartered Club. Take, for example, the case of his octogenarian client Shobha Gopalan (name changed), who lives in Bengaluru. For financial year 2022-23 (assessment year 2023-24), she was eligible for a tax refund of close to Rs 20,000.

However, she was in for a shock when she received a message from the tax department informing her that the refund was auto-adjusted against the amount of around Rs 30,000 mentioned in the tax demand notice pertaining to assessment year 2010-11 (financial year 2009-10).

Also read: FM Sitharaman leaves income tax rates, slabs unchanged

“Last year, a tax demand showed up all of a sudden, that took us all by surprise. Before she could respond to the notice online, it was auto-adjusted against the tax demand. We later reached out to the assessing officer, who was in a different city. But none of them have any data on the discrepancy for which the demand was issued, leaving my client in the lurch. In November 2023, she got to know that the refund, for which she was following up, was adjusted against the tax demand,” says Batra.

Gopalan and the I-T officials themselves are not aware of the discrepancy in her ITR for 2010-11. Her family’s constant pursuit to close the matter has not yielded fruit so far. Since the original demand involved a sum of over Rs 25,000, she is unlikely to be covered under the government’s plan to waive petty outstanding tax demands.

Waiver announcement

Taxpayers engaged in disputes with the I-T department over outstanding tax demands involving amounts less than Rs 25,000 have received major relief, with finance minister Nirmala Sitharaman announcing that the government has decided to withdraw such notices.

The income tax department is set to waive two categories of outstanding demands—the ones entailing amounts of less than Rs 25,000 dating to the years before 2009-10 as also sub-Rs 10,000-demands pertaining to the financial years between 2010-11 and 2014-15.

However, the I-T department will have to clarify several key doubts in the scheme or order it comes up with before such matters can be treated as settled.

Amount adjusted is money forgone?

Interim Budget 2024 states that petty, old, outstanding tax demands would be withdrawn. ‘Outstanding’ is the key word here, says Kuldip Kumar, Partner, Mainstay Tax Advisors. “It’s a welcome move to clean up records and would have triggered tax demands due to data migration or launch of the new income tax return portal. However, it is clear that the decision will only take into account outstanding cases. Tax-payers whose refunds may have been adjusted against older tax demands might not get relief as this would mean re-opening of many cases, which would be untenable,” he says.

Yet, questions remain. “For example, say, someone had a demand of Rs 50,000, which, after refund adjustment, came down to less than Rs 25,000. So, at the time of determining eligibility to withdraw the demand, will the original demand amount be considered or the amount post refund adjustment,” asks Chandak of TaxBirbal.

According to I-T, taxpayers will not have to take any steps to get their tax demands waived—the government will extinguish such records. “When manual registers were migrated online, a large number of old demands were found, for some of which there was even a discrepancy in the records. So, from a demand management perspective, the government has decided to do away with the small demands and utilise the department’s energy on the taxpayers’ ease of doing business,” Central Board of Direct Taxes (CBDT) chairman Nitin Gupta said in an interview with Moneycontrol.

However, it is not clear what recourse would be available to taxpayers who believe they are eligible but realise later that the government did not erase their petty outstanding tax demands.