Introduction
Since the beginning of Modi’s term, the Government has tried the best to match its agenda to nail black money and tax evasion. Taxation rules have also drastically changed in the last few years to fuel the tax yielding process. While the Indian economy is among the fastest developing on the planet, revenues generated for Government are not keeping pace leading to a bulge in the budget deficit. With an attempt to build a transparent system of taxation and to generate revenues to finance government expenditure, multiple strategies and plans were formulated. In April 2016, a tax amnesty scheme was composed for voluntary revelation of undisclosed income and property for the Indian residents. In June 2016, Swiss Government assured to cooperate with Indian Government in bringing back the illicit funds stashed in Swiss Banks. In November 2016, Modi government demonetised the highest currency notes pushing the Indian economy to the edge of liquidity crisis but with intent to expand tax base and push digitalisation. In September 2017, Central Board of Direct Taxes signed two advance pricing agreements (APA) with an objective to avoid double taxation and ensure certainty in transfer pricing between enterprises.
Government gave a number of chances to tax evaders and money launderers to abide by the rules before taking any acute ste6p. The countrymen were urged to get rid of the baggage of not disclosing all the tax related information to the Government for once and for all. The most recent endeavour taken to fight tax fraud, evasion and avoidance was done in October 2017. The Government announced its collaboration with Larsen & Toubro Infotech (LTI) to use advance data analytic technology to build a network and boost voluntary tax compliance by collecting data from social media accounts of taxpayers. The clustered data will be further analysed and utilised for tax governance. In times to come, the pace and size of data collection, analysis and disclosure will only proliferate as it is the underpinning of the new age digital tax system. This digital deal will pin down the tax evaders and push the envelope to what may be a one of its kind public-private partnership. The transition to the new digital world and analytics technology is loaded with glitches as the tools and methods developed for it are at a nascent stage. However, with internet, social media and big data changing the picture so rapidly, tax system must come attune with it.
Government’s initiative to fight tax fraud and evasion
The 2016 Income Declaration Scheme[1] was a golden offer to every resident to come clean about their real income. It clearly laid down the process of determining fair market value of undisclosed assets and how unaccounted money will be taxed.[2] Reasonable discounts were assured on interest and penalties over the revealed income and assets. The Government extended the date for declaration till 30-9-2016 and marked it as the ultimatum beyond which serious steps would be taken against tax evaders. A scheme to disclose the foreign assets was also introduced. However, both the schemes did not turn out to be as successful as anticipated.
Later, in June 2016, Switzerland also assured to cooperate with the Indian tax authorities to address issue of black money stashed in Swiss Banks which should be accounted for tax purposes in India.[3] Both the countries have joined their hands to combat black money by sharing the responsibilities. However, no figure has been suggested on amount of money that can be expected to be recovered from Swiss Banks. In June 2017, Switzerland ratified Automatic exchange of information (AEOI) with more than 35 other jurisdictions including India.[4] AEOI is a global standard to reduce possibility for tax evasion as envisaged by Organisation for Economic Cooperation and Development (OECD). Exchange of information pertaining to tax among different jurisdiction is governed by Common Reporting Standards (CRS) as adopted by OECD Council in July 2014.[5] The AEOI must assure reciprocity and can be legally executed through a bilateral treaty or by means of the Multilateral Competent Authority Agreement (MCAA) between the participating countries. As participating jurisdictions, Switzerland and India can exchange financial data of suspected black money holders based on the MCAA from 2019. Swiss Federal Council is currently contemplating about the time, manner and process of exchange of data on automatic basis. This kind of global level playing is necessary to put up a strong fight against tax dodgers.
With a view to exchange data with different nations and to implement AEOI standards in India, requisite legislative changes have been made through Finance (No. 2) Act, 2014 (amendment in Section 285-BA of Income Tax Act, 1961).[6] Essential rules, amendments and guidelines are being framed for smooth execution of the new global tax standards. When AEOI is fully put into effect, it would empower India to get data from practically every nation on the planet including offshore tax havens and financial hubs. This would be a commendable way to counteract global tax avoidance and evasion and will help the Government in managing with many related issues also.
In November 2016, Modi’s administration demonetised the major currency and drew out 87% of cash in circulation. Even though, its objective was to promote digitalisation, curb black money and increase the tax base, it pushed the Indian economy to the rim of liquidity crisis. Recent reports from Income Tax Department have stated that there has been a growth in the number of tax payers in 2016-2017.[7] The reason for rise in tax base cannot be comprehended clearly until this shift sustains for some more years.
In June 2017, RBI’s annual report[8] stated that 99% of banned notes were exchanged for new currency which nullified the purpose of taking the high value currency notes out of circulation. The impact of such a move has surfaced to have contributed nothing towards fighting black money and tax frauds. Post demonetisation, about 37,000 shell companies and 3,00,000 firms that were under the radar have been suspected to be indulged in tax evasions and illegal transactions.[9] But no stringent action against the suspicious dealings of black money hoarders and tax defaulters has been taken.
In September 2017, Central Board of Direct Taxes (CBDT) signed two advance pricing agreements (APA) with Indian taxpayers relating to automobile and healthcare consulting sectors.[10] It is done with the objective of reducing litigation, avoiding double taxation and ensuring certainty in transfer pricing. For a maximum period of five consecutive years, APA endeavours to specify methods of prices which will help to determine the arm’s length price (ALP) on international transactions in advance. The concept of APA phased out through the Finance Act, 2012 under which competent taxing authority would negotiate about how much profit will be taxable in their respective countries to avoid the drawbacks of transfer pricing within an enterprise. To bring tax certainty within India, Government signed 5 unilateral APAs with multinational enterprises for the covered international transaction. The agreement was relating to different sectors such as telecommunications, financial services, pharmaceuticals, etc. and has brought more revenue to tax authorities in India.[11] However, all of this was just the beginning to a journey towards sweeping tax reforms.
Using data analytics to ensure tax compliance
In comparison to our counterparts, India has the lowest tax to GDP ratios and to fix that, Government endeavours to utilise the digital technology to shore up tax collections. In October 2017, the Government proposed to collect information pertaining to income not only from traditional sources such as Banks but also from social media websites. They would amass and monitor the data posted on the social media to match it with resident’s spending pattern and income statements. Without raiding offices and houses, the officials would be able to spot the people who are not paying adequate taxes.
Developed by LTI and set up over more than seven years at a cost of around 10 billion rupees ($156 million), “Project Insight” will supplement the world’s biggest biometric identity database and policy-makers to get more individuals to pay up. It is a computerisation of all databases having immense coordinating and extensive searching capacities. The project includes making a “semantic web” where website pages are organised and labelled in such a way that it can be directly read by computers. It would create a systematic web on a taxable person with the purpose of accumulating data on all his financial activities.[12]
In this multiyear public-private partnership (PPP), LTI would operate on a build-own-operate-transfer (BOOT) model. This would imply that while it will run the project and make revenues during the agreement period, it will eventually transfer the digital system to the Government. Though, the time span of the contract has not been determined yet. The contract includes sharing of high cost resources, operations, hardware optimisation and planning from both ends. LTI has been investing constantly on developing advanced digital technologies and with the change in working model, the digital space will only get better.
The contract will roll out in phases. At first, all existing information including credit card expenditures, property and shares investment, cash inflows and outflows, deposits, etc. will be relocated to the new framework and a central team will use postal or e-mail communication to nudge assesses to file tax statements and make income declarations. There would be no physical interaction here. In the second stage which will roll out in December 2017, data analytics will be put to use to mine, clean and process the data. A separate spending profile will be created for each individual and inquiries will be more focused on the data procured. In the last stage, which will go live around May 2018, the information collected from this system will be propelled to anticipate future defaults and risks. Until a final system is decided upon, changes in a series of phases are expected. This will allow the change costs to be spread out chronologically and as a result any problems discovered will be limited in their impact. However, the scope of the project may be questioned on the grounds of privacy after the Supreme Court has ruled it to be our fundamental right.
Use of taxation technology in the international counterparts
The OECD contemplated 21 nations[13] that utilise technology to identify tax avoidance and evasion and observed that while these tools ensure tax compliance and boost income, they must be supported by policy measures and taxpayers deliberation. Nations including Belgium, Canada and Australia are utilising big data to uncover tax avoidance that may have gone unrevealed due to various reasons. Belgium is using web scrapping to extract digital data of the current taxpayers to create a huge database. After collecting data from internet scrapping and other analytical tools, the regulatory authorities conduct some standard checks to review the compiled information. Austria also monitors tax compliance by the use of web data extraction from various open source websites. Similarly, Japan collates all the data about suspected individuals and companies from different websites and compares it with the data available with the revenue agency. These technology tools have solved the problem of under-reporting of income and also created a deterrent effect necessary for continued compliance.[14]
India’s ambitious endeavours are similar to United Kingdom’s project “Connect”, which is evaluated to cost approximately 100 million pounds. Connect has proved to be one of the best big data projects owing to its three distinct features: uniform data collection, analysis and well-organised storage system. Since its commencement in 2010, it has curbed the loss of 4.1 billion pounds ($5.4 billion) in income as per December report of Institute of Financial Accountants.[15] Keeping a check on the day-to-day activities of assesses will include tracking on online transactions, travel information, etc. Investigation can be further made quickly by any authority. For instance, someone owns expensive cars and uploads information about the same on his social media account. But if the financial statements reported by him exhibit a low income, then Her Majesty’s Revenue and Customs (HMRC) will look into the affairs of such a taxpayer. HMRC also has the power to request a third party such as insurance companies, doctors, hospitals, etc. to find out about the affairs of a taxpayer. This technology would be an additional tool in the hands of administrators to be utilised for tax forecasting as well. These analytics could demonstrate how much business has drooped in a specific town following a particular event, which would enable authorities to better survey the requirements and anticipate local incomes and plan accounts.
In a country like India, where the registered taxpayers are 2.79 crores in number[16], a system that can manage large information is much needed. Use of Information and Communication Technology (ICT) by countries like Australia, Japan, and Singapore, etc.[17] has proved to be of vital importance to manage large databases pertaining to taxpayers. This technology can be applied in Indian scenario to combine social media services and to make online tax filing and payment process trouble free. It can also assist in administration of taxes, from account management to tax collection, internal management processes, consultation and verification. Introducing such a technology can also promote virtual interaction between taxpayers and revenue authorities and bring down the administrative as well as compliance cost borne by respective parties. This would decrease the chances of errors and will help the taxpayers to fulfil their tax obligations with an ease.
Conclusion and recommendations
With the increase in private sector participation, LTI has been in the vanguard of development with the Indian Government. With this partnership, it continues to be at the forefront of change. This innovative and radical step towards sustainable tax system will make acquisition, combining, and storage of taxation data easier. The tax database management system will also assist in faster processing, quick refunds and security. Once the undeclared income is brought back to the mainstream economy, it will generate revenue to finance government expenditure and eventually, there is a possibility that everything will go digital for tax system.
Recently in August 2017, the Government laid down the deadline to link PAN cards with biometric identifier, Aadhaar. With all the anti-evasion measures taken by tax administrators, there seems no solace for tax evaders in years to come. Further, this collaboration with Larsen & Toubro heralds a great step to stay abreast with the changing tax systems. However, introducing digital tools can push the cost on taxpayers which will make it an unwelcoming solution. But in the long run it can prove to be a cost-effective method for collection of State revenue efficiently and reducing tax avoidance and fraud. Therefore, effective use of technology tools must be encouraged by Government in the wake of changing times. Besides digital tools, policy instruments can also help to plug the loopholes in the taxation system. Legislative changes are necessary to streamline domestic legal framework with changing international tax collection regime. Simultaneously, tax regulatory authorities must introduce the new age tools and technology by way of rules, guidelines and directions. An active dialogue must be initiated among all the stakeholders such as legislators, taxing authorities, taxpayers, private sectors, enforcement authorities, etc.
Automation technologies can be used by Government to remind taxpayers about when they have to file tax returns, payment obligations, etc. This will prompt the taxpayers to fulfil their obligations and ensure higher rate of tax compliance. A pilot approach can also be adopted by the revenue authorities in which a technology solution can be implemented for an introductory test period in a specific area or business segment which is at high danger of tax avoidance and fraud. This can be useful in recognising any execution issues or unexpected reasonable inquiries. Once execution issues have been settled, the technology solution can be actualised more broadly in industry segments or areas which are the next priority in terms of risk. Further, cloud-based solutions can be adopted to manage, store and secure enormous data on taxpayers. To effectively manage cost, risk and data, use of blockchain technology can also be put in place.
Revenue authorities around the globe are progressively depending on digital technology solutions to collect, compile, analyse, administer and regulate the taxpayer’s information. Regulatory authorities of many countries are developing advanced technology tools and solutions to garner the revenue locked up and to add more citizens in the income tax net of their respective countries. Mining data from different traditional and non-traditional sources and then juxtaposing it with each other can enable to increase revenue recovery in form of tax collections, target compliance initiative and enhance general proficiency. Developing and utilising technological solutions promises to detect and fix the tax fraud, avoidance and crimes. However, there is no single fix to all the tax problems and therefore, working towards a win-win solution for both tax administrators and taxpayers becomes fundamental.
* Vth year student, BA LLB, Amity Law School, Amity University, Rajasthan, e-mail: mailraavimehta@gmail.com.
[1] 183, The Finance Act, 2016 (Chapter IX), The Income Declaration Scheme, 2016, issued by Income Tax Department, Government of India, available at <https://www.incometaxindia.gov.in/Documents/IDS-2016/102120000000059020_38.htm>.
[2] The Income Declaration Scheme Rules, 2016, Notification issued by Ministry of Finance (Department of Revenue, Government of India), 19-5-2016, available at <http://www.incometaxindia.gov.in/communications/notification/notification33_2016.pdf>.
[3] Automatic exchange of information (AEOI), Swiss Federal Council, Federal Department of Finance, status as at September, 2017, available at <https://www.efd.admin.ch/efd/en/home /themen/wirtschaft–waehrung–finanzplatz/finanzmarktpolitik/automatic-exchange-of-information–aeoi-/fb-AIA.html>.
[4] Switzerland Agrees to Share Black Money Data with India, BloombergQuint, Press Trust of India News, 16-6-2017, available at <https://www.bloombergquint.com/law-and-policy/2017/06/16/black-money-switzerland-ratifies-automatic-information-sharing-with-india>.
[5] OECD (2014), Standard for Automatic Exchange of Financial Account Information in Tax Matters, OECD Publishing, Paris, available at <http://dx.doi.org/10.1787/9789264216525-en>.
[6] India joins the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Information (AEOI), Press Information Bureau, Government of India, Ministry of Finance, 3-6-2015, available at <http://pib.nic.in/newsite/PrintRelease.aspx?relid=122256>.
[7] Has demonetisation really boosted income tax collections?, Roshan Kishore, Livemint, 24-5-2017, available at <http://www.livemint.com/Politics/C4Q8mpskSbfEzmG8ZWBY9H/Can-we-measure-demonetisations-impact-on-income-tax-collect.html>.
[8] Annual Report 2016-2017, Reserve Bank of India, August 2017, available at <https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/RBIAR201617_FE1DA2F97D61249B1B21C4EA66250841F.PDF>.
[9]Cancelled registration of 100,000 firms post demonetisation: Modi, Deccan Chronicle, 3-7-2017, available at <http://www.deccanchronicle.com/business/economy/030717/modi-cancelled-registration-of-100000-firms-post-demonetisation.html>.
[10] Indian Advance Pricing Agreement regime moves forward with signing of two APAs by CBDT in September 2017, Press Release, Central Board of Direct Taxes, Department of Revenue (Ministry of Finance), 6-10-2017, available at <https://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/660/Press-Release-Indian-Advance-Pricing-Agreement-9-10-2017.pdf>.
[11] CBDT Signs Four Unilateral Advance Pricing Agreements pertaining to various sectors of the economy including Pharmaceuticals, Information Technology and Construction, Press Information Bureau, Ministry of Finance, Government of India, 23-11-2016, available at <http://pib.nic.in/newsite/PrintRelease.aspx?relid=154182>.
[12] L&T Infotech bags $100 mn contract to help pin down tax evaders, Press Trust of India, Economic Times, 1-10-2017, available at <https://economictimes.indiatimes.com/tech/ites/lt-infotech-bags-100-mn-contract-to-help-pin-down-tax-evaders/articleshow/60900040.cms>.
[13] Technology Tools to Tackle Tax Evasion and Tax Fraud, OECD, 31-3-2017, available at <http://www.oecd.org/tax/crime/technology-tools-to-tackle-tax-evasion-and-tax-fraud.pdf>.
[14] Holiday Posts on Instagram are Tipping off India’s Taxman, Bloomberg, Shruti Srivastava, 28-7-2017, available at <https://www.bloomberg.com/news/articles/2017-07-27/instagram-posts-will-soon-help-sniff-out-tax-evaders-in-india>.
[15] The all seeing eye — An HMRC success story?, HMRC Administration, Institute of Financial Accountants, December 2016, available at <https://www.ifa.org.uk/media/653935/Tax-HMRC-Connect-system.pdf>.
[16] Clarification regarding number of Taxpayers added after Demonetisation, Press Release, Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, August 2017, available at <http://incometaxindia.gov.in/Lists/Press%20Releases/Attachments/651/Press-Release–Clarification-regarding-number-of-Taxpayers-18-08-2017.pdf>.
[17] A Comparative Analysis of Tax Administration in Asia and the Pacific, Asian Development Bank, Electronic Taxpayer Services, April 2014, p. 42, available at <https://www.adb.org/sites/default/files/publication/41792/tax-administration-asia-pacific.pdf>.