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As Justice Oliver Wendell Holmes has famously (and rightly) said, “I like to pay taxes. With them, I buy civilization”, payment of income tax serves as a means through which every citizen contributes to the development of the nation. The responsibility of gathering data to verify the accuracy of the income tax return (‘ITR’) filed by the taxpayer always rests with the Income Tax Department (‘the Department’). Nevertheless, in recent years, India has experienced a transformation in the methods of data collection, the approach to assessments, and the process of filing ITR.

The Department has fortified the entire system to such an extent that it now possesses information on all financial transactions undertaken by taxpayers. Some of the noteworthy modifications implemented by the Department include:

• Linking of PAN to Aadhar
• Fixing responsibility on reporting entities to report on certain activities

All the information received is used by the Department in the following manner:

The conclusion of the year 2023 brought a burst of activity for taxpayers as the Department dispatched emails and SMS notifications. This initiative was based on the random screening of high-value transactions documented in the fiscal year 2022-23. The messages from the Department served as alerts to taxpayers who may have overlooked the filing of the ITRs or the reporting of high-value transactions.

What is the buzz?

The Department has initiated an e-campaign to encourage voluntary compliance with income tax regulations, providing a convenient avenue for taxpayers. The campaign specifically targets two categories of assessees or taxpayers:

a) Taxpayers who have not filed their ITRs

b) Taxpayers with discrepancies or defects in their ITRs

Should foreign companies file ITR if notice is received under e-campaign:

It is imperative to understand that the communication is being sent out to taxpayers with mismatches in the ITRs filed, especially related to high-value transactions or when an ITR is due but not filed. Hence, upon receipt of such an email or message, the company must respond appropriately. Although the Department has explicitly mentioned that the communication is advisory in nature, it is advisable to treat it as a notice and respond to avoid any assessment proceedings.

As per section 5(2) of the Income-tax Act, 1961 (‘the Act’), income earned by a non-resident (including foreign company) will be considered as income as per the provisions of the Act only if

1. such income is received or deemed to be received in India by or on behalf of such non-resident; or
2. such income accrues or arises or is deemed to accrue or arise in India to such non-resident.

Further, as per section 139 of the Act, every company (whether Indian or foreign) is required to file an ITR in India. No specific exemptions have been given to non-residents from filing ITRs in section 139. However, some sections, like section 115A, mention that if the income of a non-resident includes only section 115A income earned and appropriate taxes have been withheld on such income, then the non-resident assessee is not required to file ITR.

However, there may be a situation wherein a non-resident has income that is chargeable under the Act, but after taking recourse to the relevant tax treaty, such income is not chargeable to tax. In such a situation, based on various judicial precedents, the non-resident should file an ITR stating that income is not chargeable to tax, taking into consideration the provisions of the relevant treaty. In the ITR, it is also required to be mentioned if a particular income is not taxable as per tax treaty provisions.

Therefore, if a foreign company receives an e-campaign notice for non-filing of an ITR and such a foreign company has not filed an ITR after taking recourse to the relevant tax treaty, it is advisable that such foreign company files an ITR.

Precautions to be taken before filing of returns:

Conclusion

In conclusion, the Department has launched an e-campaign aimed at fostering voluntary compliance with income tax obligations, specifically targeting taxpayers who have not filed ITRs or those with discrepancies in their filings. Foreign companies receiving notices under this e-campaign indicating mismatches or pending ITRs should respond diligently. The e-campaign serves as a proactive measure to enhance tax compliance and streamline the resolution of discrepancies for the convenience of taxpayers.