Hide and Seek

The wealthy would never tire of tax games, but with the growing use of data-driven analytics and sophisticated audit tools, it is becoming easy to connect the dots
Rani Singh Nair   New Delhi     Print Edition: September 24, 2017
Hide and Seek

There are various ways of camouflaging one's income to avoid paying taxes. The easiest way out is to be a part of the informal/cash economy and stay under the radar of the Income Tax (IT) Department. On the other hand, many taxpayers do not make a full and true disclosure of their taxable income. Bigger businesses might be filing IT returns but they are not disclosing their real income either. The most common way of doing it is to keep a part of the transactions or turnover out of the account books. In fact, the business components where the entire chain of buyer, supplier and manufacturer operates in cash, mostly fall under these off-the-record transactions. Siphoning off profits is another way of evading taxes.

What happens to the money generated by off-the-book transactions? It is often used for conspicuous consumption such as spending on lavish marriages, big events, expensive jewellery and luxury hotel stays. Such money finds its way back into the economy but the challenge is how to introduce the unaccounted profits in the books of account. One can easily show it as a loan as a business would have many creditors and enquiries are limited to less than one per cent cases, which are selected for audit. Hundreds of such (bogus) creditors, mostly unbanked entities, remain on the balance sheet for years while a look into the source of funds invariably leads to agricultural income.

Rani Singh Nair is former Chairperson of the Central Board of Direct Taxes (Photo: Vivan Mehrs)

Unaccounted money could be introduced through shell companies, through overvaluation of non-traded shares or by inflating the value of closing stock. The money is often used to buy properties in the name of benamidars who would bring in more black money by raising 'loans' against those properties and lending it back to the business.

Catching Tax Cheats

The emphasis today is on non-intrusive tax administration that involves data analytics, data mining and use of Big Data to track evaders. The IT Department has both intrusive and non-intrusive ways of detecting tax evasion. In the intrusive method, extensive searches and surveys are carried out, including on-the-spot verification of stocks, cash sales and books of accounts. The non-intrusive method is a system-based 360-degree verification of the information collected through financial transactions vis-a-vis tax records. Project Insight is the data mining initiative of the tax department and it will revolutionise compliance management.

I recall an old case where the investigation wing detected that the promoters of the company were making bogus donations. At the lower level, the cheques were prepared in the name of a well-known trust, but when they went to the top management, they were endorsed to another account managed by the directors. While the company claimed weighted deduction under the IT Act for the donation, the promoters were transferring the money to their account. Consequently, the original cheques, which were endorsed to another account in the name of the trust but which was not the account of the actual trust, were seized as evidence. We also checked with the actual trust who denied receiving any donation. The promoters of the company reversed the donations in the account books and paid the taxes due. However, the department impounded the books and did not accept the write-back. It took decades for the prosecutions to be finalised and the courts to decide.

The methods of physical verification with necessary due diligence have been refined over the years. We have a very robust system for selecting cases for searches and surveys. The department gathers a lot of information both directly and from third parties. We also receive complaints and petitions and direct information from informers. After receiving the information, the department undertakes necessary due diligence and supervisory oversight before undertaking a search.

Interestingly, new initiatives like linking of Aadhar with PAN has helped check tax evasion. Earlier, a taxpayer could have done 10 transactions using different PANs. De-duplication was the first endeavour to halt that practice. Linking of PAN with Aadhar will ensure one PAN per taxpayer and prevent its misuse for tax evasion.

Going forward, I feel there is a need for sophisticated audit tools. As company accounts are getting more complicated and digitally sophisticated, it is difficult for tax officers to go through them during audits. So, there is a need for sophisticated auditing tools and software, which can set up exception reporting and anomalies.

We also need higher accountability from tax professionals so that we see an audited account as a stamp of correctness and transparency. Prudential regulation by tax professionals is also the wake-up call that the Prime Minister sent to the tax fraternity.

As told to Dipak Mondal

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