The promoters of a Jaipur-based financial broking firm didn’t see it coming.
Income tax officers searched their house and a private vault last week, leading to the recovery of Rs 3.5 crore in cash and documents showing previously un-taxed income of Rs 15 crore.
Neither did the promoter of a Gurgaon-based auto-component company. In the first week of October, tax officials unearthed Rs 8 crore in cash from the promoter’s home and 40 kg of gold and several diamonds from a private vault.
Both events had one thing in common— the mining of data on deposits, cash withdrawals and transaction details.
Next came months of surveillance of the suspects. In one case, a tax official worked at a suspect’s house as an odd-jobs man.
Leveraging data generated after demonetisation has served the department well, said an official at the tax department who asked not to be identified.
“We have been able to cut down the number of cases chosen for scrutiny drastically. Only less than 0.5% of tax returns filed in assessment year 2016-17 (relating to income of financial year 2015-16) have been chosen for scrutiny, compared to about 1% of returns in the previous years,” the official said.
After the high-value currency ban aimed at striking at the root of unaccounted for wealth, the Income Tax department stepped up its data mining exercise under what is called ‘Operation Clean Money’ in January.
The effort is to profile those who deposited high amounts of cash after demonetisation and match them against their tax record and lifestyle.
“Many partners in firms and directors on the boards of companies use luxury cars but disclose far less income than an ordinary government or private sector employee,” said the tax official quoted above.
“In such cases, everything from the car, the house, services of servants and the chauffer will be in the name of the company, which may well be sinking and therefore not be paying corporate tax. The partner or the director, at the same time, prospers.”
Experts agree the cash clampdown changed tax administration in India.
“This almost silent revolution has largely gone unnoticed but those tax payers who have experienced dealing with tax departments in the ‘pre - digital’ age have been pleasantly surprised by this transformation brought about by embrace of technology,” said Sudhir Kapadia of audit firm EY India.
Data mining is now increasingly done with help from private experts under an initiative called ‘Project Insight’, part of efforts of the government to weed corruption and unaccounted for wealth.
But not everyone is impressed. Opposition leaders, and even veteran BJP members such as former finance minister Yashwant Sinha, have said the tax investigations after demonetisation instilled fear in the minds of people.
It’s a charge dismissed by tax officials, who said data mining helps identify precise cases for investigation.
The roll out of the Goods and Services Tax from 1 July is also expected to bring more of the cash-driven informal economy into the formal economy, resulting in higher personal income tax filings.
According to Archit Gupta, chief executive of ClearTax, a taxpayer service firm, the real effects of GST on direct taxes will surface when income tax returns for financial year 2017-18 are submitted.
“We believe the government has displayed commitment in bringing out reforms to the benefit of taxpayers as well in reviewing them wherever they were challenging,” said Gupta.
Others warn that reformist measures tend to be intrusive in the beginning.
“Both demonetisation and Goods and Service Tax will certainly have positive impact on the economy in the long run as leakages will be tracked and traced,” said Abhishek A Rastogi, Partner, Khaitan & Co.