Tax department short of staff to scrutinize deposits

The government says banks will alert it about deposits above Rs2.5 lakh by a single depositor, but going after each of them may be next to impossible


Photo: Mint
Photo: Mint

A staff shortage at the tax department and lack of legal teeth to extract stiff penalties may scupper the government’s plans to derive windfall gains from the demonetization drive, three officials from the income tax department said.

The withdrawal of Rs500 and Rs1,000 notes from the midnight of 8 November sparked a chase for scarce currency notes and brought a tsunami of deposits into the banking system. The government says banks will alert it about deposits above Rs2.5 lakh by a single depositor, but going after each of them may be next to impossible.

According to one of the three officials mentioned above, the income tax department typically scrutinizes unexplained bank deposits of Rs10 lakh and above, which are picked by its Computer Assisted Scrutiny Selection (CASS). “Post the demonetization, there are too many deposits and may require mass scrutiny and the tax department is short-staffed to effect such mass examination. We would need a temporary work force to scrutinize these entries,” he added, requesting not to be identified.

Since the beginning of demonetization till 13 November, India’s largest lender State Bank of India (SBI) has received Rs75,945 crore in over 16.5 million deposits.

According to Girish Vanvari, national leader-tax at KPMG India, considering its staff situation, the tax department may have to focus on materially important transactions. “But, this is not to say that they cannot go after smaller deposits as per the income tax law; the tax man is empowered to scrutinize deposits of any amount,” Vanvari said.

Rahul Garg, head-direct tax, and partner at PricewaterhouseCoopers said selecting cases for scrutiny was more of an administrative decision and governed by what policy the income tax department wants to adopt.

According to tax department data, only 1-2% of individual tax filings and 4-5% of corporate filings have been scrutinized in the past 2-3 years.

Choosing the deposits to scrutinize them is only part of the story.

According to revenue secretary Hasmukh Adhia, individuals depositing cash which does not match their declared income will be treated as tax evaders and asked to cough up the applicable tax, besides 200% of the tax as penalty. This may be easier said than done.

“If there is deposit in an individual’s account which is not in consonance with his/her declared source of income then a query is raised. If the individual declares this as income from other sources, he would be levied a maximum tax rate of 30% with additional cess which roughly comes to 36%,” said a second income tax official.

“We need to go by the provisions of law. To penalize such unexplained high-value cash deposits being declared in current year would require an amendment to the tax laws that will happen only in the budget session,” a third income tax official said.

The penalty will be payable if the tax department is convinced of misreporting or underreporting, Vanvari said. Section 270(A) of IT Act empowers the taxman to levy the penalty if there is mis-reporting or under-reporting of income.

“There could be litigation in future where taxpayers can dispute levy of 200% penalty. To avoid the situation, it would be best to make legal provisions in the law,” said Garg.

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