Home / Opinion / Views /  Outsmarting the tax system is getting difficult

A record 74 lakh (7.4 million) returns were uploaded on the income tax e-filing portal on Sunday, the last date for filing returns on incomes earned in the financial year 2021-22 for a majority of taxpayers such as the salaried, professionals and small businesses. In effect, more than 12% of all income tax returns were filed on the last day, as taxpayers and tax professionals scrambled to meet the deadline and avoid a penalty for late filing. The Income Tax Act requires all taxpayers who were not required to get their accounts audited to file their returns by July 31 or pay a penalty for delayed filing.

Significantly, most returns were filed in the last 10 days. Of the 5.83 crore (58.3 million) returns uploaded by the deadline, about 3.35 crore (33.5 million) were filed after July 22 when the finance ministry firmly ruled out any extension of the July 31 deadline. Still, the total returns uploaded fell a little short of the 5.89 crore (58.9 million) returns filed by the December 31, 2021 deadline for the financial year 2020-21.

Commendably, despite the large volume of returns uploaded on the last day, there weren’t any complaints of the income tax e-filing portal crashing. There were moments when it was accepting as many as 570 returns per second, according to data shared by the revenue department in the finance ministry. Some glitches were reported in the previous few days, which seem to have been fixed promptly. This is in sharp contrast to the situation a year ago, when the finance ministry was forced to extend the deadline twice, first to September 30 and then to December 31, as the tax portal, redeveloped by Infosys Ltd, was ridden with glitches.

The new portal has made the process of filing income tax returns smoother though some forms such as ITR-3 are complicated for ordinary taxpayers to navigate on their own. Filing returns is a simple affair for a vast majority of taxpayers, particularly those with income from salary, interest, dividends, and a home loan. They have the option of using pre-filled forms, given that most incomes are captured by the tax system via the permanent account number (PAN). The e-verification of returns using an OTP delivered to a mobile phone linked to the Aadhaar obviates the need to send a printed acknowledgement of returns to the tax department, making the entire process of filing returns paperless. Until e-verification was launched a few years ago, taxpayers had to print the acknowledgement and post it to the central processing centre of the income tax department to complete the process of filing their tax returns.

Taxpayers who have filed their returns for the current and previous assessment years would also have realised that dodging the income tax system has become tougher. The tax department has information on all the financial transactions undertaken by assessees in a financial year, irrespective of whether that transaction is subject to tax. This can be seen from the annual information statements (AIS) and taxpayer information statements (TIS) that the tax system prepares for every assessee in addition to Form 26AS.

The AIS and TIS were made available on the tax filing portal from late 2021 onwards. These statements serve multiple purposes as they are very comprehensive. Taxpayers get information on almost all of their financial transactions during a year in one place. The AIS also provides information on the amount of tax deducted at source by employers, banks on interest, corporates on dividends and so on. That makes the task of computing total income and tax liability easier. There could be some discrepancy in the statement, which will need to be verified and reconciled. It is also useful information to file returns accurately to avoid disputes with the tax department, as taxpayers know what information is with the tax department and what demands could be made. That goes on to improve compliance, widen the tax net, lower instances of under-reporting of incomes and thus deepen the tax net.

Yet, the number of people filing tax returns and paying income taxes continues to be very small at under 5% of the population. It may be argued that India has a very young population, that vast numbers are engaged in the poorly paid informal sector and that most women do not work. Therefore the number of people liable to pay taxes on their incomes is small. But surely, more than 5.83 crore people should be filing tax returns when nearly 10.55 crore have registered on the income tax portal.

The tax department is using a variety of tools such as artificial intelligence to track financial transactions. The implementation of the Goods and Service Tax that has increased the formalisation of the economy and led to the greater recording of transactions is another tool that helps track the flow of money in the economy and identify beneficiaries. The revenue department is now in a position to compare data from various tax databases to identify evasion. The rise in the number of raids by income tax and indirect tax authorities is an outcome of the use of artificial intelligence with traditional intelligence such as a network of informers.

Is India finally set to plug tax leakages then? Tax dodgers might continue to find ways to avoid paying taxes but continuously outsmarting technology will be difficult. Particularly, when the government means business. No system can be foolproof. But gaming it is getting difficult and expensive. In time, the real gains in terms of collections should start materialising. Especially, if needed reforms in tax policy, such as the long-pending Direct Taxes Code, are implemented.

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