Global Employer Services News

In fiscal year 2020-21, India introduced a new tax regime under section 115BAC of the Income Tax Act 1961 (the IT Act) that provides concessional tax rates but fewer deductions and exemptions.  Taxpayers were given the flexibility to choose between the new and the old regime. Until FY 2022-23, the old tax regime was the default regime, whereas the new tax regime was optional, with taxpayers required to specifically opt in. To choose the new tax regime, individuals had to file Form 10-IE prior to filing their tax returns.

The parallel operation of both schemes led to many disputes. Recently, the Pune Tax Tribunal[1] had occasion to analyse whether a taxpayer could opt for the old regime in filing their tax return if they had already filed Form 10-IE. The ruling is summarised below, and our comments on the impact of this decision follow.

Facts of the Case

The taxpayer, an individual, is engaged in the business of manufacturing cloth on looms. For FY 2021-22, he decided to opt for the new regime of taxation and accordingly filed Form No.10-IE on 18 July 2022. However, he changed his mind two days later, and filed his tax return on 20 July 2022 by selecting the old tax regime, which he deemed would be more beneficial.

The tax officer processed the tax return by making an addition to income as per the new regime, on the ground that the taxpayer had exercised the option by filing the requisite form,  Form No.10-IE. The first appellate authority upheld the order.

The taxpayer appealed before the Pune Tax Tribunal. The tribuna ruled that the taxpayer's choice to opt for old regime was valid and made the following observations.

Tax Tribunal Ruling

Although the taxpayer had originally exercised the option for taxation under section 115BAC by filing Form No.10-IE on 18 July 2022, the taxpayer then filed the tax return under the old regime on 20 July 2022. The tax return was processed on 7 August 2023.

The tribunal concluded that this was not a case of the taxpayer filing Form 10-IE and the tax return under the new tax regime and thereafter filing a revised return in an attempt to withdraw his election of the new tax regime. E In that case, withdrawal would not be permissible in the fiscal year and the taxpayer could only change his choice in the following fiscal year.

However, in this case, the taxpayer opted for the old regime of taxation in the tax return after filing Form 10-IE. Therefore, the taxpayer could not be forced to adopt the new regime.

BDO Insights

This ruling is a welcome clarification that procedural complexities will not take precedence over the provisions of the IT Act. While Section 115BAC was introduced with the intention to simplify the tax structure, the procedural formalities have resulted in disputes. This decision will also be relevant when a taxpayer wishes to change from the old regime to the new regime even after filing Form 10IEA.

Recently, the Pune Tax Tribunal in Akshay Devendra Birari[2] allowed the benefit of the new tax regime even when Form 10-IE was filed after the due date for filing the tax return but before the return was processed, holding that the requirement for filing Form 10-IE is directory in nature and the beneficial provision cannot be denied merely because of a procedural lapse.

Budget 2023 made the new tax regime the default tax regime from FY 2023-24. Form 10IE has been discontinued with effect from FY 2023-24. Now, if a taxpayer wants to change from the new regime (now the default) to the old regime, they must file Form10IEA.

While from FY 2023-24 Form 10 IEA must be used for opting out of the default tax regime, the principle laid down in this decision may still be applied.

Further, taxpayers should evaluate the impact of this decision when the taxpayer has filed Form 10-IE/10-IEA at the time of filling original tax return and later wishes to switch to the default regime in a revised tax return.