TAXMAN COMETH: Techie Tools Can Ferret Out Tax Scams

With the adoption of computer and other high-end technology, the tax department has not only managed to streamline and cleanse the process of tax payment and tax refund but also it has also been able to use it to detect and bring to book tax evasion and tax fraud. This process will get even more efficient with the increased use of new technologies

Science and technology create tools for economic development. The developed countries today are those countries that understood this fact earlier and went for innovation. Business houses use technology to enlarge their business and improve their products. Some unscrupulous business entities also use technological tools to hide their true income, so as to evade tax payment. The Income Tax department and other revenue enforcement agencies are also in the race to use technological tools to unearth tax evasion and to beat technology-savvy tax evaders. One recent case, disclosed by the Income Tax department, illustrates this fact

New Nabbing Tools

There was a case of sale of a very costly plot of land in Modinagar. The sale had taken place two years back and the issue involved was a tax on capital gains. The plot owner, who sold the plot, said that there was no taxable capital-gain as the plot was agricultural land and prior to the sale, agricultural activities were being carried out on that plot. He was relying upon the position of law that taxable capital-gain does not arise on the sale of agricultural land which is involved in agricultural activities prior to its sale.

It was very difficult for the tax officer to reject the plea taken by that person and levy capital-gains tax, as the matter related to the prevailing situation at the plot two years before, for which there was no evidence. The concerned tax officer was an IITian and he decided to use technology and fell back upon, no less than the satellite. He contacted the National Remote Sensing Agency (Hyderabad) for satellite images of that plot of land as they existed prior to its sale. The satellite images indicated that the plot sold was a commercial plot with no evidence of any agricultural activity. The evidence provided was clinching, and tax of Rs.15 crore was paid, being a capital-gains tax on the sale of a commercial plot. This was not an isolated case, as in a similar situation, the Gujarat Income Tax office had contacted ISRO for satellite imaging to nail a tax evader.

Special Help

In another instance, the services of Bhabha Atomic Research Centre (BARC), the premier research institution of the country was used by taxmen to unearth tax-evasion. It is common knowledge that income-tax search actions discover hidden gold, platinum and other such valuables and registered valuers are called for their valuation. In some cases, particularly in some very big cases, it has been found that the precious metals are kept in liquid form or as a solution in containers. Regular valuers are not capable of evaluating them. The metal department of BARC has this capability and hence their services have been used. The added advantage was the high credibility of BARC, and thus the evaluation done by them always proved very reliable evidence before the courts.

Equipment designed for surveillance normally used by intelligence agencies is now also entering the corridors of the tax department. This is very important as tax evaders are going global to hide their concealed wealth. With the passing of black money legislation, now it is possible for our entrapment agencies to go outside India and attach or even auction the foreign assets of tax evaders. To locate the hidden assets, electronic surveillance is very necessary, but this is done only after meeting the necessary regulations and seeking prior sanction from the prescribed authorities so as to stop its possible misuse against the general public.

Minning Data To Find Fraud

Tax evasion is likely to get more difficult, if not impossible. With the entry of Big Data Analytics in the Income Tax department, an investment of Rs.1000 crores in a program named ‘Project Insight’ has been made and the same is in operation since the middle of March this year. This program will track social networking profiles of people and keep a tab on the expenditure and payments of people by scrutinizing uploaded photographs and videos on social sites. Countries like Belgium, Canada and Australia are already doing this and we will be the fourth country in unearthing the relevant information by scientific analysis of social site information. This will help the taxman in creating a true profile of the person and the same can be compared with the income disclosed by that person in his Income Tax return. Scrutiny notices or investigation can follow, depending upon the size of the mismatch between his true profile and his profile as per his tax return.

The income tax investigation or investigation by ED or even CBI in the cases of tax fraud and economic offenses require a complete forensic trail investigation. The footprints of the transactions have to be traced so as to detect the real owner of black money amidst the cobwebs of fictitious entities. The intention of the tax evader is to hide his identity and accordingly a series of shell companies including offshore companies are created. It is never an easy job to map the transactions and fill the missing dots. It goes without saying that technological tools are used to succeed in this difficult mission. The erased data from computers and mobile phones have to be reconstructed with the latest tools. The use of ultraviolet lamp is very common to examine handwritten documents to identify the author of the writings in these documents, particularly when the documents are torn and notings are erased. The burden of proof is always on the department while linking the data with the alleged tax evader as per the Evidence Act. Scamsters get verdicts in their favour from the courts unless the department proves its case without any reasonable doubt.

"All scrutiny assessment will be done online and there will be no physical exposure of the taxpayer with the tax officer. Taxpayers will not even know who their assessing officers are, and vice-versa"

Streamlined Tax Process

Technological tools are not used only to punish tax evaders. They are also used to service the general taxpayer. Computerization of the department and online filing of returns of income are steps in this direction. Earlier, taxpayers used to have difficulty in getting the refunds and in many cases this delay used to be more than a year. With the online filing of returns, and the computerized processing of them at the Central Processing Centre (CPC), the getting of refunds have become simpler, automatic and normally within four months of filing the returns. The government has made the announcement that more investment is going to be made at the CPC for modern and updated hardware and that in a year’s time from now, refunds can be issued within days of filing the returns.

Another complaint of taxpayers was harassment by corrupt tax officers. This complaint will largely go away with effect from the current financial year as all scrutiny assessment will be done online and there will be no physical exposure of the taxpayer with the tax officer. Taxpayers will not even know who their assessing officers are, and vice-versa. Assessment orders will be passed by online questioning and online replies. The robust computerized system of the department will be in full play to help the average taxpayer.

From Chopdas To Computers

Technology entry into the tax department and other enforcement agencies is not being done in isolation but as a supplement to the book-keeping work of the business entities. I remember, the day I entered our training academy in 1976 after joining the IRS. One subject taught to us with practical training was reading the Chopdas written in Marwari or Gujarati (red registers, being books of accounts). With the passing of time, much before my retirement, I found the red Chopdas had yielded place to computerised book-keeping. Data entry operators replaced the traditional munims (accountants). Intelligent software is used to meet the needs of different types of business. With the changed situation of book-keeping, there is a changed syllabus in the IRS training college too, and new officers are given hands-on training. Officers are also sent for specialized training to esteemed software companies to learn about the possible misuse of the system by unscrupulous people to hide their income.

The tax department derives its existence from taxpayers. Tax collection is its main objective. Hence, it is good both for the taxpayers and tax department that they should be on the same page in using technological tools. This will guarantee transparency and also good understanding between taxpayers and tax collectors. With the same tools adapted by both the sides, it will be less time-taking for the tax department to verify the returns of income filed by taxpayers. The problem starts when people want to hide their income and pay no tax or less tax and then it becomes a cat-and-mouse story. Some unscrupulous people use tools to hide their accounts about which taxmen have no knowledge. The tax department cannot sit idle, and to unearth tax evasion, it also tries to modernize the system and the tools used, and thus the race for technological superiority.

Tax frauds are considered serious crimes in developed countries and the US IRS (Internal Revenue Service) is an organization that is dreaded for its technological competence. The Indian tax department is also in the process of a technology makeover to meet the challenges of economic fraud.

by S K Jha