Last year, a businessman from Rajkot, Gujarat, declared an income of less than ₹5 lakh in his tax return. However, information collated by the Income Tax (I-T) Department showed he had deposited ₹10 crore — and withdrawn ₹7.5 crore — in cash during the year. The department sent him six notices, a dozen SMS alerts and tried every means to contact him. He remained elusive, forcing it to raid the business premises mentioned in the I-T return. It was a wrong address. I-T officials took the home address from his bank, but he was missing from there. It is now in the process of attaching his bank account and other assets.
Far away, in Alwar, Rajasthan, another businessman deposited ₹27 crore cash in his bank account in 2017/18 and ₹22 crore in 2019/20. His declared income was ₹3-5 lakh. The department is after his case too.
Tax evaders, beware! Technology, especially its tools such as data analytics and artificial intelligence, is ending the heydays of exploiting information gaps to hide income from the taxman.
On the flip side, the nationwide drive to find evaders has also given a free hand to corrupt officials to exploit the system with arbitrary notices and demands. Businesses — small and large — remain at the receiving end of taxman’s hounding, threats and — at times — even violence.
Tax authorities, though, are detecting mismatches in tax returns using tonnes of information about large transactions from banks, mutual funds, companies issuing shares, stamp and registration departments of states, etc, and sounding alerts about possible tax evasion. Different wings of the revenue department — direct tax, indirect tax and customs — are also sharing data. Last year, the I-T Department also signed information-sharing MoUs with markets regulator Sebi and the MSME ministry. More such arrangements are in the offing. It may sound alarmist, but the revenue department is making no bones about it. In fact, it wants people to know it has more information than they think it has. “Those who earlier used to think how will the tax department know (about the transactions), would now know that tax authorities have details of those taxable transactions, and it is better to disclose them in the returns to avoid complications later,” former Revenue Secretary Ajay Bhushan Pandey told Business Today just before he superannuated in February 2021.
Finding Tax Payers
India's tax-to-GDP ratio is low compared to many of its peers in Asia and West — as low as 17.7 per cent in FY21, according to the 15th Finance Commission Report. This is way less than Brazil (36 per cent), Japan (33 per cent), UK (33 per cent), Korea (27 per cent), US (25 per cent) and China (20 per cent). The report says “distinct improvements are possible in collections from GST, direct taxes of the Union and non-GST taxes of states with institutional and administrative reforms and use of IT-based solutions”.
The Centre is going the whole hog on that path. Take the Directorate General of Analytics and Risk Management (DGARM), an arm of the Central Board of Indirect Taxes and Customs (CBIC) set up in July 2017 to analyse data and share results with different departments. It became functional in June 2018. In September 2020, DGARM shared a RED FLAG report alerting tax authorities about 38 lakh taxpayers (registered with the GST Network or GSTN) who had not filed GSTR-3B returns for at least six months. The report identified 1,850 ‘Stop Filers’ with substantial tax liabilities at the time of their last return. GST authorities issued cancellation notices. Registrations of 1.63 lakh non-filers were cancelled in October-November 2020. GSTR 3B returns are a monthly summary of sales and purchases, input tax credit available and tax paid.
Around the time DGARM was being set up, the Central Board of Direct Taxes (CBDT) launched ‘Project Insight’ with L&T Infotech to provide comprehensive big data analytics and surveillance solutions. The aim was to mine the loads of data it gets through Annual Information Returns (AIR) filed by banks and other financial institutions as well as TDS (tax deducted at source) and other information-sharing arrangements.
The results are showing. Number of income tax returns filed rose from 4.04 crore in FY15 to 6.93 crore in FY21. In the latest three years, the numbers rose by 20 per cent per annum compared to 13 per cent in the three years before that. The I-T Department added 1.1 crore new filers in FY19, and around 1.3 crore in FY20, according to CBDT's Action Plan 2019-20.
Direct tax collections (which include income and corporate taxes) rose from ₹7.4 lakh crore in FY16 to ₹11.4 lakh crore in FY19. In FY17, FY18 and FY19, they increased 14.53 per cent, 18 per cent and 13.54 per cent, respectively. The average in previous three years was around 10 per cent. In FY20, though, direct tax collections dropped to ₹10.5 lakh crore, primarily due to drastic fall in GDP growth. Direct tax buoyancy (tax growth/GDP growth) has been above one since FY17, touching a high of 1.6 times in FY18 (1.21 in FY19).
DGARM came to prominence in November 2020 when the Directorate General of GST Intelligence (DGGI) launched a data analytics-driven crackdown on fake invoices. Thanks to that, despite a shrinking economy, GST collections, which averaged ₹82,300 crore a month in FY18 and rose to ₹93,000 crore a month in FY19, have regularly crossed ₹1.10 lakh crore since December 2020, never seen before in its threeand-a-half year history (see The Pressure Pays Off ).
Compliance has also improved. The number of GSTR 3B returns filed in January 2021 was 90 lakh compared to 83 lakh in the same month of the previous year. In February, 87 lakh returns were filed compared to 83 lakh in the same month a year ago.
Casting the Net Wider: Income Tax
“With Project Insight, I-T can now create any taxpayer’s 360-degree profile. If your PAN is linked to your Aadhaar and that is linked to your mobile phone, wherever you mention your mobile number, say while booking a flight, shopping in a retail outlet or purchasing an insurance policy, the tax department knows what you spent,” says Avinash Gupta, a Delhi-based chartered accountant. The initiative was started with three goals in mind — promoting voluntary compliance and deterring non-compliance; imparting confidence so that all eligible persons pay appropriate tax; and promoting fair and judicious tax administration.
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