Taxman's Data War

Taxman's Data War

As tech helps tax authorities check evasion and fraud, taxpayers complain of harassment and misuse of powers

Illustration by Nilanjan Das Illustration by Nilanjan Das

Last year, a businessman from Rajkot, Gujarat, declared an income of less than Rs 5 lakh in his tax return. However, information collated by the Income Tax (I-T) Department showed he had deposited Rs 10 crore - and withdrawn Rs 7.5 crore - in cash during the year.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 Rs 27 crore cash in his bank account in 2017/18 and Rs 22 crore in 2019/20. His declared income was Rs 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

Indias 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 CBDTs Action Plan 2019-20.

Direct tax collections (which include income and corporate taxes) rose from Rs 7.4 lakh crore in FY16 to Rs 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 Rs 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 Rs 82,300 crore a month in FY18 and rose to Rs 93,000 crore a month in FY19, have regularly crossed Rs 1.10 lakh crore since December 2020, never seen before in its three-and-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.

The tax department creates the profile by analysing information in AIR, Statement of Financial Transactions, TDS/TCS statements and securities transactions. It then matches the income disclosed with the profile. Project Insight has helped the income tax department not only identify non-filers but also those who are paying less than what they are supposed to.

Shailesh Kumar, Partner, Nangia & Co, says when the tax department gets to know about any high-value transaction, it sends an SMS to the taxpayer and asks him/her to pay appropriate advance tax (if required). "This is a way to also make the taxpayer aware that the department is watching him," he says. A typical alert asks the taxpayer to log on to the compliance portal and take the steps mentioned there.

That is not all. Under Project Insight, the I-T department has rolled out an integrated data warehousing and a business intelligence platform: Income Tax Transaction Analysis Centre (INTRAC) and Compliance Management Centralised Processing Centre (CMCPC). INTRAC not just finds large inconsistencies and anomalies in taxpayers' disclosed income and expense patterns but also enforces compliance, identifies patterns and makes predictions for future revenue collections. The CMCPC uses emails, SMSes, reminders, outbound calls, letters to encourage voluntary compliance and resolution of compliance issues. A dedicated compliance portal has also been created. It's a two-way communication platform where a taxpayer and tax officers can interact.

On a Mountain of Data: Indirect Tax

The indirect tax department, which collects taxes such as GST and excise duty, hit a jackpot with the implementation of GST. In 2019, the GSTN - which has data of 1.27 crore registered taxpayers, 63 crore returns filed, 1,165 core invoices and 174 crore e-way bills (as on March 7, 2021) - set up Business Intelligence and Fraud Analytics (BIFA) in partnership with Infosys. BIFA uses this and data from other sources such as Customs and CBDT to come up with usable intelligence for tax officers. Explaining BIFA in a letter to principal chief commissioners and chief commissioners of the CGST zone in September last year, GST Commissioner Sanjay Mangal said the tool has been designed to help officers detect, unearth and investigate cases of potential tax evasion and frauds by using data analytics, ratio analysis, trend analysis and network analysis.

Not surprisingly, data analytics, Artificial Intelligence and Machine Learning were behind the recent revenue department and DGGI crackdown on fake invoicing and input tax credit. GST authorities booked about 3,500 cases, unearthed 10,400 fake GSTIN entities and recovered Rs 1,200 crore.

In another initiative, the indirect tax department is creating profiles of tax-payers through ADVAIT (Advanced Analytics in Indirect Taxation), a tool which uses invoice-level data from GSTN and information from MoUs signed by CBIC. In February, 2021, CBIC signed an MoU with the Ministry of Corporate Affairs (MCA) for exchange of data. According to a press release issued by the MCA, the two will get access to each other's databases, which include details of import-export transactions and consolidated financial statements of companies registered in the country. In July 2020, CBIC had signed a similar MoU with CBDT.

DGGI and Central GST Commissionerates have so far arrested 357 people, including 12 chartered accountants, one company secretary and an advocate in the ongoing drive against GST invoice frauds since mid-November 2020. The arrested include operators of fake entities and their beneficiaries. The crackdown is a result of an August 2020 letter from additional director general, DGARM, to GST field officers that there were 802 taxpayers in FY19, FY20 and FY21 who, according to the supply chain analysis by the department, were likely involved in availing fraudulent input tax credit against GST paid on export of goods and services. The analytics arm of CBIC identified these cases after noticing that some of the entities have filed a significant number of shipping bills through risky Customs Brokers whose database the department has.

The crackdown found some large entities claiming input tax credit against fake invoices. Recently, GST officials in Delhi unearthed a massive network of fictitious firms created by two ex-employees of Essel (Zee) Group. These firms allegedly helped Essel Group avail around Rs 400 crore input tax credit by issuing fake bills. The drive even landed at the doors of Larsen & Toubro. DGGI arrested two brothers, Ankur and Mukul Mittal, for providing fake invoices through various firms - floated/managed either directly or through "convenient" people - without any corresponding supply of goods and services. According to DGGI, the petitioner and his brother Ankur Mittal created around 400 such fake firms and issued invoices. Among those who allegedly claimed input tax credit against fake bills issued by these firms included companies such as L&T. DGGI sources say these fake entities were unearthed following data-sharing along BIFA and NETRA tools. NETRA, or Network Exploration Tool for Revenue Augmentation, is a tool used for network analysis of risky suppliers developed by DGRAM, the data analysis arm of CBIC. In an internal letter in December 2020, CBIC Chairman Ajit Kumar said NETRA empowered field officers to "conduct precise strikes against tax evaders, with great success".

(Un)ease of doing business

The crackdown, however, has its flipside. The tax department has no way to figure out where the outreach to find tax evaders turns into an over-reach by corrupt department officials using the opportunity to slap random notices, extort money and threaten taxpayers and exploit it to their advantage.

All this is raising concerns of regulatory overreach. Vivek Jalan, a Kolkata-based chartered accountant, says inspections, search and seizures have become the new normal. Worse, taxpayers are asked to submit bulk documents on the same day as the inspection/ search, he says. "In case the taxpayer is not able to do so, he is required to deposit an arbitrary amount," he says.

Experts say if tax authorities have intelligence about tax evasion, why do they need to go for search and seizure? Why can't they simply confront tax evaders with proof and ask them to explain? Kamal Agarwal, Partner and Governing Council member of SARC & Associates, says: "If you are using AI and have data, you issue a notice based on the data. Why are you using search and seizure as a tool to harass people? Send notices if you have data/ information (of tax evasion), and ask them to explain the anomaly. If they cannot explain, then raise the (tax) demand."

Technology has given tax authorities superlative powers, causing enormous unease among taxpayers. With greater access to data and information, while the tax administration has become more effective, it has led to harassment of taxpayers and substantially higher compliance burden (with tax officials seeking all kinds of data and information). "The government is on steroids when it comes to use of technology - especially tax authorities. While it is good for the government, it is creating an unprecedented compliance burden," says a tax expert on condition of anonymity. For instance, far from reducing processes, Budget'21 added new ones: businesses with annual turnover of Rs 10 crore or more will have to deduct TDS on purchase of goods exceeding Rs 50 lakh in a financial year. The TDS would be 0.1 per cent of the sum exceeding Rs 50 lakh.

"In the compliance portal, they are using advanced analytics at the backend and publishing high-value transactions which require explanation. You have to respond to queries that could be related to your data or that of your customers or vendors. So, it's not like you have done something wrong and have to explain. Sometimes they ask you to verify information/data about your vendors or customers," says Rahul Patni, Partner, Tax, EY India, with reference to the I-T Department's Project Insight.

Patni points out that under a new provision, if a company is making a payment to any vendor, it is its responsibility to check if the vendor has a valid PAN and has filed returns in the last two years. If not, it will have to deduct higher TDS. "This is an unprecedented burden for a company since, at times, companies have tens of thousands of vendors on its database. To do something like this is not easy," he says.

There has been a rise in harassment cases by DGGI. In some cases, GST officers have used violence against taxpayers. Recently, Praveen Khandelwal, National Secretary General, Confederation of All India Traders (CAIT), sent a letter to Finance Minister Nirmala Sitharaman pointing out harassment and violence by GST officials against traders in Gujarat. "We invoke your kind and immediate attention to an ugly incident of physical assault and mental torture of traders of Vapi in Gujarat by high officials of the GST Department which needs strong condemnation. We urge you to take immediate cognisance of this grave matter and order a thorough probe of the unwarranted and undue harassment and physical violence with traders and their mental torture," Khandelwal said.

CAIT had even called for a Bharat Bandh against harassment of traders by GST officials. Gujarat and Telangana high courts have taken cognisance of such matters and asked DGGI officials to refrain from using coercive methods against taxpayers.

Armed with technology, Indian tax authorities are clearly smarter than before with data analytics tools and technologies like AI/ML at their disposal. But the over-reach has also left taxpayers high and dry. Finding the right balance between tracking evasion and over-reach and harassment remains an unaddressed challenge.