What Is The Importance Of Income Tax Return Filing?

An ITR (Income Tax Return) is a government-issued form where people must declare the tax paid, income, deductions, exemptions, expenses, and more. Mandatory filing of income tax returns for people with more than Rs 5,00,000 PA income, making them eligible under sections 80D, 80C, etc., for deductions. The result of filing an ITR is that it also helps reduce taxable income. Those with income less than Rs 2.5 lakh need not file income tax returns. People are under the impression that filing an income tax return is a hassle and time-consuming, so they put it off or do not file it at all. But every working Indian citizen has an obligation to do it. Apart from that, there are several other reasons why you should do it. Read below to learn about the importance of income tax audit and filing and who started Income tax in India.

The Initiation of Income Tax

The direct tax system in India has been present since ancient times, and its references can be found in Manu Smriti and Arthashastra. They were paid in the form of materials and gold coins. In the modern era, the introduction of income tax was done by the finance minister, James Willson, when the British ruled India. The Income Tax Act was introduced by him in 1860 and formed the basis of the Income Tax Act of 1961. This became India’s tax system's foundation, and many necessary amendments have been made since then to meet modern needs and demands.

Main Features of the Income Tax System

The main feature of income tax is that it is bifurcated at different levels. It is structured at the municipal, state, and central levels. The revenue generated at the state and municipal levels is then sent to the central government. The central government uses this to strategize and plan the needs of the states and assign a budget. The state can dictate taxes and also retain the revenue generated for its own development. The taxes that the state collects are in the form of customs duties, corporate tax, excise duties, advance tax, and cess.

Managing the Revenue

There are many departments like the CBDT, the Central Board of Direct Taxes, CBEC, the Central Board of Excise and Customs, and the CBIC, the Central Board of Indirect Taxes and Customs. These are made to take care of various things related to taxes and monitor, regulate, and control all affairs related to them. The tax derived from the corporates, Trusts, funds, firms, individuals, etc., is recorded. Each of these departments has a digital portal where information on the amount of tax is available, making the system highly transparent.

Types of Taxes

There are direct and indirect taxes collected under the tax system. Direct taxes are levied on corporations and individuals and include wealth tax, income tax, etc. The indirect taxes are levied on commodities and goods and include GST for the supply of goods and services, VAT service tax, etc.

Amendments

To ensure that the tax system is relevant to current times, the Income Tax Act of 1961 is amended regularly. There are new income tax sections added and unnecessary, depending on living conditions and inflation.

Reformist Policies

The finance ministry takes suggestions from the revenue departments to make new changes. New policies and strategies are created for the development and growth of taxpayers and the country.

Taxation Objectives

There is a great importance of tax system is done with many objectives, but the most significant ones are:

• Economic development: The main objective of the Indian tax system is to have a robust economy for the country. It enables the collection of revenue from the working class and uses it to implement new policies and strategies for the development of the country.
• Employment: The tax generates revenue, and that helps develop firms, industries, etc., which are sources of jobs for people.
• Regulating price: It is one of the main reasons for taxation. Price regulation helps to check inflation and control the buyer’s purchasing power. The tax slabs for commodities are updated every year.
• Controlling fluctuations in the Economy: One of the important benefits of taxation is that it helps the country come out of recession or take less heat compared to other economies. This is done by reducing the tax rates, boosting subsidies and concessions, exemptions, and more.
• Non-Revenue Objectives: The purpose of taxation is to reduce the earning gap between the higher and lower classes of the economy. For instance, no tax needs to be paid by an individual who earns up to Rs. 7 lakh. But the tax slab rate for those earning more than 15 lakh is 30%.

Why You Should File Income Tax Returns

Many individuals are of the impression that income tax return filing is voluntary and hence dismiss it as unnecessary. But this is not the right perspective as the tax and its importance cannot be undermined, and it is a social duty of every citizen to file annual income tax returns. Using this, the government then decides the revenue expenditure for the progress of the country. Read below to know the importance of taxation for an individual.

It Showcases Your Accountability

People who have a certain annual income should file their annual tax returns within the specified date. If the person who should pay tax fails to do it, then the IT department will impose penalties. Even those who make less than the threshold annual income can voluntarily file returns. Filing income tax returns before the due date shows your accountability, and it also makes it easy for businesses and people to make subsequent transactions based on the income records after subtracting applicable tax.

Is an Obligation in Some Cases

Even if your income is below the threshold, it is still a good idea to voluntarily file income tax returns as there is importance of taxation in India. When you have to register an immovable property, the last three years of IT returns have to be submitted as proof. So if you have filed regularly, then the transaction becomes simpler as there is no tax liability.

IT Return Copy Is Needed For Loan

It is a best practice to file and then store a record of your IT returns that you do every year. This helps especially if you plan to go for a home loan in the future. The lender will insist on showing proof of your income as well as your filing IT returns. The same is applied when you want a credit card issued in your name. Companies that offer credit cards ask for proof of income as well as IT reruns filed. Any financial institution will require your previous financial years' IT returns to do business with you. There can also be a case when the government amends the current rule of optional IT return filing and makes it a compulsion to encourage people to file IT returns. So, the importance of tax returns is high if you need a bank loan at a later stage.

Required To Claim Past Losses Adjustments

There are many benefits to filing IT returns, whether you are below the threshold limit for filing or not. If you are a businessperson in non-speculative or speculative trade, you can adjust the capital for long-term or short-term losses to calculate taxes. This can then be shown as an exemption in the coming years. So it is best to regularly file returns so that you can ask for exemptions from important sections in income tax using prior losses.

Visa Processing

Whether you want to travel abroad for a vacation, a family visit, or to study abroad, you should file returns regularly. One of the prerequisites for approval of a Visa for any country is financial stability; an IT return filed is proof of that. Countries like Canada, the UK, and the US, among many others, need copies of your previous IT returns for VISA application processing. So, if you intend to travel, get your income and savings details to file before the upcoming due dates to file GST returns expire.