The buyer of a sedan at the Premsons Maruti showroom at Kanke Road, Ranchi, last Diwali, looked infuriated. He had just been told he had to pay an additional Rs 10,800 - or one per cent of the cost of the car he was buying - which had not been incorporated in the invoice earlier prepared for him. This was a tax introduced in the last union budget on purchase of all vehicles costing over Rs 10 lakh, which had to be collected at source (TCS). For other goods and services, the TCS base set was even lower, at Rs 2 lakh. For jewellery purchases of more than Rs 5 lakh, TCS has existed since 2012.
The sedan buyer would have been still more angry had he known that the purpose of TCS is not just to collect an extra crumb of revenue. Rather, it is to build a database of individuals making costly purchases and examining their tax returns - if filed at all - to see if their declared annual income is commensurate. It is no secret that there is no match in the spending patterns of many with what they claim they earn. Only 39.1 million Indians out of a working population of 660 million (those in the age group 18-60) paid income tax in 2014/15. And of the 39.1 million, only 93,76,033 admitted to an annual income above Rs 5 lakh.
Income tax collection in India is based on self-disclosure by taxpayers. The ugly truth is that many earning more than Rs 2.5 lakh a year - the minimum to be assessed for income tax - do not file their returns or under-report their incomes. To pinpoint these evaders, the income tax department, which has built a large database over years using different sources, has begun working towards building data mining and analytics capabilities.
First Step
The first such step was the Non-filers Monitoring System (NMS) started in 2013 in which data obtained from three sources was correlated with the income tax return filed by suspect individuals. The first was the Annual Information Return (AIR) in which transactions above a certain amount - be it the opening of a high value fixed deposit, a large investment in mutual funds, buying of property or spending heavily using a credit card - are reported to the department. Alongside, the list of TCS payers and their purchases was examined, together with the data on Tax Deduction at Source (TDS). If suspicion was aroused, the services of the Centralised Information Branch (CIB) - a part of the income tax department which collates information on financial transactions from numerous sources - was also sought. "The NMS has resulted in around 10 million new tax assesses being unearthed since 2013 and an additional Rs 12,000 crore in the income tax kitty so far," says Rani Singh Nair, former chairperson, Central Board of Direct Taxes.
What happens once tax evading suspects are identified through NMS? Those who do not file tax returns at all are asked to explain why. "Once they are confronted with the data we have, they usually admit their mistake and start filing," says the official. The procedure is similar with those under-reporting their incomes, with the relevant penalties also being slapped.All Knowing Platform
To complement NMS, the first phase of a new programme called Project Insight is likely to go live from May 2017. Using data analytics, it has been mapping different localities based on the amount of tax paid by its residents and comparing that with the high value transaction engaged in by the same residents. "The large volume of data necessitated development of a comprehensive platform for effective utilisation of information," says an Income Tax Department statement. "The department initiated Project Insight to strengthen the non-intrusive information driven approach for improving tax compliance." Non intrusive implies that human intervention will be minimal, with the effort relying as much as possible on algorithms to track tax evaders. "We dont want the process to be abused," says Nair, who initiated the project.
The integrated platform will also be leveraged to exchange financial information with companies and investors based overseas, especially the US, G20 and OECD countries. The compliance management system being developed under the project will also ensure that reporting by entities like banks, mutual funds, companies, etc, is timely and accurate. "We have been building the database since 1995," says Nair. "With Project Insight, we want to integrate all the data sets and use them more effectively."
Leading tech and data companies L&T Infotech, MapmyIndia and Teradata, and consultants EY, have been roped in to prepare a robust platform. MapmyIndia is carrying out the geo-coding for the project, providing the latitude and longitude of the postal addresses compiled by the department. "The analysis will help the department concentrate more on areas where wealth and assets created are disproportionately high compared to the tax collected," says Sapna Ahuja, Vice President (Business Operations), MapmyIndia. "The addresses the department has are also not standardised - one might have vidyalaya (school) spelt in a particular way and another in a different way. It becomes difficult to analyse such data. We are helping in the standardisation too."
With the cash economy set to shrink while the digital economy grows following demonetisation, more and more financial transactions will leave an electronic trail and plenty of data for the tax enforcing officers to follow up. Again, the forthcoming Goods and Services Tax (GST) will have an inbuilt mechanism to record details of every transaction, all of which will further strengthen the departments hands in its fight against tax evasion.
@Dipak_Journo