Tax litigation

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The world of tax is getting more complex and challenging day by day. The global economy is also changing rapidly, which leads to a continuous creation and destruction of businesses, especially in the digital sector. With the advent of GST, tax has further become complicated with exemptions and cesses on different goods and services. Keeping all this in mind, it is important for you to be aware of your tax liability at your home. This post will highlight some common situations where you might find yourself audited by the tax department. These are some prominent areas that attract audit attention from a tax perspective:

Selling Kinds of Assets

If you sell any asset and make a profit, then that would be a chargeable event under the Income Tax Act (IT Act). Therefore, you will have to report the sale of the asset in your income tax return (ITR) and pay taxes on the profit earned from the sale. Assets that attract capital gains tax are equity shares, mutual funds, gold, silver, real estate and company stocks. The capital gains tax rate in India is either 20% or 10%, depending on the slab in which you fall. If you have sold your house and made a profit, then that is called a capital gain on sale of house. This capital gain is taxable, but there is an exemption for a residential house that you have lived in for at least two years out of the five years preceding the sale.

Tax Loss Harvesting

The tax department has allowed the concept of tax loss harvesting for some taxpayers. Tax loss harvesting is the concept of selling an asset that has incurred a loss in the hope of locking it in so that it can be used to offset future gains. So, if you have any securities that have incurred losses in the last three years (short-term capital losses), you can sell those securities and book the loss. You can use the loss to offset future gains, or you can use the loss to reduce your taxes if you have made profits in the last year. If you are in the 50% income tax bracket, then you can save up to ₹ 15,000 by using up your losses. If you are in the 20% tax bracket, then you can save ₹ 10,000 by using up your losses. Note: Short-term capital losses are losses from the sale of assets held for less than one year.

Hiring Employees

The tax department is keenly monitoring the companies that have hired employees in the last few years to check if they are paying their due taxes. If you have any employees, then you must report the number of employees you have. There is a threshold of ₹ 20 lakh for this reporting. You have to report the name of the employee and their salary details. You are exempt from paying taxes on salaries of ₹ 5,000 or below.

Travel and Entertainment Expenses

The tax departments are very strict in terms of travel and entertainment expenses. No matter how small your company is, you must maintain all your travel and entertainment expenses. You have to provide the details of your travel expenses, including the name and address of the person you travelled with, the amount spent and the reason for the travel. The tax authorities can also ask for details of your entertainment expenses. You have to report the amount spent on entertainment and the name and address of the person you entertained. You can claim tax exemptions on a few items like gifts, business magazines and subscriptions, newspapers and books.

Paying Taxes on Income from Crypto Currency

While the taxation of income generated from trading in Cryptocurrencies (CCs) is not entirely clear, the department has issued a general guideline on how to report income from CCs and pay taxes on it. The Income Tax Department (ITD) is likely to declare that the sale of bitcoins, ethereum, ripple, etc., are not taxable events. However, the purchase of CCs would be taxable in India. The rate of taxation, though, is still unclear. For example, let us say that you have made ₹ 1,00,000 from trading in CCs. Out of ₹ 1,00,000, ₹ 30,000 is your capital gain. ₹ 30,000 is the amount that you will have to pay taxes on.

Conclusion

The world of taxation is complex and challenging. To succeed in this field, you have to be aware of the latest tax laws and be on top of your game. It is important to know what you’re getting into when you start a business or get a job. It is also important to keep up to date with changes in tax laws so you can be prepared. These are some prominent areas that attract audit attention from a tax perspective. If you are keeping track of your tax liability at home, it will make your life much easier. If a tax audit notice comes your way, you can respond accordingly.