A year into demonetisation, big data new weapon in fight against black money
Leveraging reams of data generated after demonetisation has served the income tax department well in making its search and enforcement operations more precise
New Delhi: Income tax officers last week searched the house of a financial brokerage firm’s founders in Jaipur and a private locker, seizing Rs3.5 crore. The promoters admitted to previously untaxed income of Rs15 crore.
In a similar search in the first week of October at a Gurugram-based auto-components maker, tax officials unearthed Rs8 crore in cash from the promoter’s home and 40 kilogrammes of gold and several diamonds from a private locker.
These searches and many other similar raids had one thing in common—the rich prefer to hide their wealth in private vaults, mostly under the names of others, said a tax official, who spoke on condition of anonymity.
What led the tax sleuths to the precise location of the hidden wealth was intensive mining of data on cash withdrawals sourced from banks and transaction details of gold merchants followed by months of careful observation of the suspected tax evaders.
In one case, a tax official worked as the servant of a suspect at his residence for months before the search team finally moved in for the kill.
That approach, leveraging reams of data generated after last November’s demonetisation, has served the department well in making its search and enforcement operations more precise, said the official cited above.
“We have been able to cut down the number of cases chosen for scrutiny drastically. Only less than 0.5% of tax returns filed in assessment year 2016-17 (relating to income for financial year 2015-16) have been chosen for scrutiny, compared to about 1% of returns in the previous years. The tax department is reposing more faith in the assessees,” said the official.
After last November’s high-value currency ban aimed at striking at the root of unaccounted wealth generated in the past, the income tax department stepped up its data mining exercise under ‘Operation Clean Money’ in January.
The current effort is to profile those who deposited high amounts of cash in light of their tax payment track record and lifestyle. The department’s drive to get permanent account numbers used in tax filings with Aadhaar, the biometric identification number, is meant to make such profiling more effective.
“Many partners in firms and directors on the boards of companies use luxury cars but disclose far less income than an ordinary government or private sector employee. In such cases, everything from the car, the house, services of servants and the chauffer will be in the name of the company, which may be sinking and therefore not be paying corporate tax. The partner or the director, at the same time, prospers,” said the official quoted above.
According to Sudhir Kapadia, national tax leader at EY India, there has been a sea change in the tax administration, especially after demonetisation and launch of ‘Operation Clean Money’.
Digital processing of personal income tax returns and swift refunds has resulted in very minimal physical interface between the taxman and the assessee, he said.
“This almost ‘ silent’ revolution has largely gone unnoticed but those tax payers who have experienced dealing with tax departments in the ‘pre-digital’ age have been pleasantly surprised by this transformation brought about by embrace of technology,” said Kapadia.
Data mining is now increasingly being done with help from outside experts under an initiative called ‘project insight’.
The Narendra Modi administration, which came to power in 2014 on the promise of minimizing generation of unaccounted wealth and tracking down black money stashed in foreign banks, set up a special investigation team in its first month in office to oversee the effort.
Since then, it enacted the Black Money (Undisclosed Foreign Income and Assets) Imposition of Tax Act in 2015 to penalize concealment of wealth abroad, amended the Prevention of Money Laundering Act in 2015 to attach domestic property equivalent to any proceeds of crime funnelled out of the country and enacted a Benami Transactions (Prohibition) Amendment Act in 2016 to modify the original 1988 law to confiscate property held by proxies and prosecute the offenders.
The finance ministry also took a series of steps to curb the flow of tax-evaded funds out of the country re-entering Indian shores in the guise of foreign direct investment through companies set up in countries with which India has tax avoidance treaties.
That include renegotiating the double tax avoidance agreement with Mauritius, a major foreign direct investment (FDI) source, enabling taxation of capital gains in India on investments made by Mauritius entities.
Abhishek A. Rastogi, partner, Khaitan & Co., said most reformative steps tend to be intrusive especially as people move out of traditional comfort zones.
“Both demonetisation and goods and service tax (GST) will certainly have positive impact on the economy in the long run as leakages would be tracked and traced,” said Rastogi.
The indirect tax reform of GST, rolled out on 1 July, is also expected to bring more of the cash-driven informal economy into the formal economy, resulting in higher personal income tax filings.
According to Archit Gupta, chief executive of ClearTax, a taxpayer service firm, the real effects of GST on direct taxes will surface when income tax returns for financial year 2017-18 are submitted.
“We believe the government has displayed commitment in bringing out reforms to the benefit of taxpayers as well in reviewing them wherever they were challenging,” said Gupta.
Kapadia of EY said the key challenge for the tax administration is to ensure that all the analysis is done at the back end with minimum disruption to the tax payer. “Care should be taken to solicit specific, precise and relevant information from the tax payer and not conduct a ‘ fishing inquiry’,” he said.
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