A ‘direct’ dig at the tax code

By  MOHAN R. LAVI 

The Committee recommends that the Department establish a data-warehousing and data-mining infrastructure within the tax administration and modernise the outdated and ineffective scrutiny and investigation processes by shifting from the current system of carrying out a post-mortem after two years, to real-time verification of transactions reported under TDS, AIR and STRs sent by the Financial Intelligence Unit (FIU).

The Committee also recommends that quoting either the PAN or the UID number should be made mandatory for all transactions, irrespective of size and the person doing the transaction. The Committee also states that the large amount of information that the department possesses should be matched with the information contained in the AIR.

Much water has flowed down the Ganges since the time when a taxpayer with an obvious intention to avoid pre-emptive purchase of the property he intended to sell — the law at that time required prior permission of the Department for any property being sold in excess of Rs 25 lakh — entered into six sale agreements and sold the property room-by-room to the same buyer by keeping the value of each sale below the pre-emptive purchase limit.

As is the wont of the Government, such innovative tax escapades are invariably killed in the next Budget, which is what happened to the case mentioned above.

The Road Map outlined by the Kelkar Committee on Fiscal Consolidation offers a solution to pre-empt such escapades — it asks the tax department to focus on data mining and tax administration.

Data mining

The Committee is supremely confident that if the reform measures suggested by it are implemented, the share of tax revenue to GDP can go up to 10.3 per cent in the current year and 11.1 per cent in the next.

The Committee notes that since 2004, the Income Tax Department has been electronically obtaining a large volume of information from third-parties through the Tax Information Network and Annual Information Returns (AIR).

The electronic reporting of information relating to tax payments and tax deduction at source (TDS) was also introduced to facilitate error-free digitisation of tax related information.

These initiatives created a perception of enhanced ability of the Department to detect non-compliance. The Committee notes that there is a growing perception that the tax administration is unable to harness the large volume of information collected by it, since it lacks data mining skills.

The scope of AIR in terms of its coverage has remained frozen since it was first introduced in 2004. Taxpayers have found new methods and avenues for parking their undisclosed income to escape detection.

Though the Department is better equipped to detect non-compliance with the provisions of TDS, advance tax and self-assessment tax, since the reporting system (both by third parties and self) is largely computerised, there are several gaps in the administrative procedure for collection and reporting of TDS, thereby undermining the efficiency of the tax administration, both in terms of enforcement and taxpayers’ services.

To plug this gap, the Committee recommends that the Department establish a data-warehousing and data-mining infrastructure within the tax administration and modernise the outdated and ineffective scrutiny and investigation processes by shifting from the current system of carrying out a post-mortem after two years, to real-time verification of transactions reported under TDS, AIR and STRs sent by the Financial Intelligence Unit (FIU).

The Committee also recommends that quoting either the PAN or the UID number should be made mandatory for all transactions, irrespective of size and the person doing the transaction. The Committee also states that the large amount of information that the department possesses should be matched with the information contained in the AIR.

Other recommendations

The Committee gives a thumbs-down to the Direct Taxes Code, as it is of the opinion that a full-fledged implementation of the Code will result in reduction of tax revenues.

However, the Government seems to have decided to implement parts of the Code over a period of time.

While the reaction of the Committee to the Code seems to have been formed due to the impact on tax revenues, the Government should ensure that select good parts of the Code do get into the tax laws at some point in time.

The Committee recommends that all tax laws should be amended to charge interest at rates that reflect the market rate of interest to the defaulters and the penalty for such a default.

Benchmarking this with the market rate of interest for defaulting companies, the Committee comes up with a high-sounding 22-24 per cent band for interest.

This is in keeping with the principle to make the penal provisions so rigid that it incentivises the tax-payer to follow the rule-book.

The recommendations of the Committee have come at an appropriate time, as the Government seems to be running hard to catch the runaway train of reforms.

Optimism that some of these recommendations will be implemented stems from the fact that the Government has already implemented some other suggestions of the Committee — such as direct transfer of subsidies.

(The author is a Bangalore-based chartered accountant)