There is a tide in the affairs of men, Shakespeare said, which taken at the flood leads on to fortune. As of now, it is Indian banks that are swamped by the deluge of administrative work arising from the demonetisation move of November 8. But come December 30, it will be up to an arm of the Indian government — the direct tax administration — to deal with this deluge. This radical policy move can result in big pays-off for the economy — by way of a wider tax base and mainstreaming of the informal sector — only if the tax department manages to put this tsunami of data to effective use.
To really pin down evaders, the department will have to examine large cash deposits individually, map them to the already filed IT returns, identify mismatches and take prompt action. To get an idea of the magnitude of this exercise, SBI handled about 2.67 crore transactions relating to ₹1.3 lakh crore of deposits in the first week of demonetisation. Extrapolating this for the currency in circulation, the entire exercise may entail over 25 crore transactions.
Now, that’s a lot of data for the tax administration to go over with a fine-tooth comb. Obviously, this will not be done manually, but will entail active deployment of big data analytics and data mining tools. Yet the past record of the tax administration in dealing with big data suggests that this is easier said than done. Ensuring that the demonetisation drive does lead to a black money purge, may require active intervention in this exercise by the Centre.
One, since 2005, agencies such as banks, mutual funds, companies, registrars of property and credit card companies are required to report all the high-value transactions undertaken by individuals (during a year) to the IT department in the form of Annual Information Returns (AIRs). This rule covers cash deposits of over ₹10 lakh, property transactions of over ₹30 lakh, credit card payments and mutual fund investments of over ₹2 lakh and so on.
Two, PAN has been made compulsory for nearly all big-ticket transactions even when they don’t involve hard cash. Today, selling or buying a car or two wheeler, making fixed deposits with banks or post offices, buying property worth over ₹10 lakh and indeed any transaction for over ₹2 lakh in ‘goods and services’ requires one to cite a PAN. In the absence of a PAN, one must provide other ID proof.
Three, the TDS (tax deduction at source) net has been materially expanded in the last five years so that even tax-exempt citizens are forced to first pay tax and then apply for refund. A new tax collection at source (TCS) has been slapped on all cash transactions of over ₹2 lakh. This initiative sets up a clear audit trail for the taxman to follow. Electronic filing of tax returns has been made mandatory for all high income taxpayers in recent years too.
Gaps in mining Logically therefore, collating all these data points on AIR transactions, PAN transactions and TDS/TCS deductions, and mapping them to IT returns should have already yielded a rich haul of all those slippery folk who stow their unaccounted money in property, luxury goods or financial instruments.
But the reality is that it hasn’t. Data from the tax department show no remarkable improvement in India’s direct tax base in recent years. In assessment year 2014-15, only about 1.91 crore individuals shelled out income tax, less than 2 per cent of the population. The number of individuals filing IT returns climbed from 2.7 crore to 3.9 crore over a decade. That’s just a 4 per cent annual increase against a target of 15 per cent.
What is more curious, while the number of PAN holders in the country has been growing at a reasonable pace and stands at over 25 crore now, the gap between the PAN holders and taxpayers has been widening. Only a fifth of those PAN holders file an IT return. And only half of those IT return filers pay any income tax.
In fact, the Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome had flagged precisely the above gaps for immediate investigation, in its report submitted in 2015.
The report noted that though the Central Boards of Excise and Customs and Direct Taxes were pioneers in the use of information technology within the Government, their tech capabilities were being used mainly on procedural aspects — processing of IT returns, issue of PAN cards, scrutiny assessments and so on.
It pointed out that limited attempts had been made to mine this rich data for setting tax policy, or tracking down evaders.
The Shome panel offered several fixes for the problem too. It pointed out that half-hearted compliance by the reporting agencies under initiatives such as AIR undermined the quality of data being collected.
It recommended the breaking down of the silos and centralised sharing of data between the two Boards, better staffing of the research wings, lateral recruitment of big-data analytics professionals and an independent and centralised knowledge wing under the aegis of the tax administration, to make the most of the rich data flowing into their systems.
Some steps have indeed been taken to beef up the data analytics capabilities of the tax department since this report. For instance, Project Insight, expected to be rolled out over the next three years aims to track down the audit trail of high value transactions reported to the taxman.
But such projects may need to be expedited and specialised staff pulled in on an emergency basis, to cope with the data deluge post-demonetisation.
Rotten apples Of course, big data capabilities apart, most taxpayers will agree that two other aspects of the Indian tax administration sorely need fixing too.
One is corruption within the department itself. Talk to small businessmen, service providers or professionals who deal with the taxman on a regular basis, and all of them have anecdotes to relate about demands for personal tete-a-tetes and bribes. Unless these few rotten apples are identified and purged from the system, the demonetisation drive can be subject to leaks, with evaders greasing palms to slip out of the net.
Then, there is the issue of tax terrorism. One of the key payoffs from the shock-and-awe strategy used in demonetisation, is that it may bring about a behavioural change in Indian businesses and households. Citizens who were staying out of the tax net mainly due to ignorance or difficulty in understanding the rules, may now be voluntarily inclined to pay their fair share of taxes.
The best way to encourage such voluntary compliance would be for tax officers to adopt a friendly and non-adversarial approach to new tax-payers. In short, with the Prime Minister already having played ‘bad cop’, it will be up to the assessing officers to play ‘good cop’ for this exercise to succeed. But that’s not a role the taxman is comfortable with. So it will be up to the Centre to drive an attitudinal change in the tax administration, so that this big gamble can lead to fortune.
Also read
■ ‘Demonetisation will serve India well’ by Charan Singh
■ ‘Missing the elephant in the room’ by TB Kapali
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