FEBRUARY 22, 2017

By Naresh Minocha, Consulting Editor

DEMONETIZATION has turned torchlight on the Finance Ministry's handicap in minimizing black money generation and in catching tax evaders.

The handicap is glaring in Ministry's ongoing process to hire three consultancy firms to analyze demonetization data for netting income tax evaders.

The private firms' work would thus overlap Operation Clean Money (OCM) launched by Income Tax Department (ITD) on 31st January. OCM was rolled out a month subsequent to Prime Minister Narendra Modi promise that he would give a 'clean country' after December 30, 2016.

The ground reality is that dream of 'clean country' and 'clean GDP' is far as the moon. Daily reports of post-demonetization seizure of black money and fake new notes are a telling commentary on the Dream.

Ironically, ITD's move to hire three consultancy services comes in the run-up to scheduled commissioning the first phase of its 3-phase computerization project named Insight in May 2017. The Project envisages strengthening and consolidating ITD's data warehousing and business intelligence (DW&BI) infrastructure and skills.

In July 2016, ITD stated Insight "would play a key role in widening of tax-base and data mining to track tax evaders."

It is not for the first that ITD has leaned on external expertise to utilize information technology to improve tax compliance and revenue receipts. It, for instance, had outsourced expertise for its business process engineering in 2005-06. And in 2008, it solicited offers for setting up an Integrated Taxpayer Data Management System (ITDMS).

ITD had then stated that it was looking for an integrated solution that will build a data bank of millions of records, trace relationship between the data and entities, track transactions of each of the entity.

In October 2016, Central Board of Direct Taxes'(CBDT's) Directorate of Risk Assessment started looking for "reputed organization having expertise in data analytics to provide skilled manpower, so as to assist it in its task of drawing actionable intelligence from various data sources" under one-year contract.

This brings us to question when ITD would develop in-house capability to write proprietary software for data mining and analytics.

Compare ITD with The US Internal Revenue Service (IRS), which conducts data mining by using its four proprietary software packages. US Treasury Department reports annually to the Congress the data mining activities of IRS and certain other entities under Federal Agency Data Mining Reporting Act of 2007.

Finance Ministry must give up its bumbling strategy on data mining & analytics as a first step towards tackling menace of black money. And simultaneously, it must launch credible Ease of Paying Taxes for the public & Ease of Computing Taxes for ITD staff.

India stands at 172nd rank among 190 economies in the 'Paying Taxes 2017', a joint study of PwC and the World Bank Group.

As for computing taxes, refer to Comptroller & Auditor General's (CAG's) reports on innumerable flaws in ITD's function highlighted over the years. CAG report, number 3 of 2016 on Direct Taxes, is replete with cases of arithmetical errors in calculation of corporate tax, under-assessment of income and erroneous consideration of tax benefits!

As put by the report, CAG highlighted "312 corporation tax cases, of which 292 cases involve undercharge of Rs 2,400.19 crore and 20 cases involve overcharge 34 of Rs 58.84 crore. These cases of incorrect assessment point towards weaknesses in the internal controls on the assessment process being exercised by the Income Tax Department."

In the era of Digital India and Skill India, it is indeed sad to hear CAG saying that "the accretion in pendency in replies to audit findings each year has resulted in pile-up of 50,005 cases involving revenue effect of Rs 62,415.2 crore as of 31 March 2015."

CAG's test audit showed that percentage of demand difficult to recover due to pending write-off / assessee not traceable/no asset and inadequate resources with the total arrears of tax demand substantially increased from Rs 34,962.26 crore (12.59 per cent) in FY 2012-13 to Rs 74,077.78 crore (22.60 per cent) in FY 2014-15."

Had Modi Government toiled to recover this amount, the nation would have been spared of demonetization-triggered miseries including 110-plus deaths.

Let us now revert to OCM and consultancy firms-aided strategy to get an idea of the underlying challenge in detecting and proving tax evasion from demonetization data analytics.

OCM involves e-verification of large cash deposits made during 9th November to 30th December 2016 during the initial phase. ITD says it has used data analytics to compare demonetization data with information in its databases. ITD had sent e-mails and SMS to 18 lakh taxpayers, whose cash transactions do not appear to be in line with their respective tax payer's profile. They were asked to submit online response on the e-filing portal. A few lakh tax payers did not respond as on 12th February. ITD is following up such cases.

As put by ITD, "Data analytics will be used to select cases for verification, based on approved risk criteria. If the case is selected for verification, request for additional information and its response will also be communicated electronically. The information on the online portal will be dynamic getting updated on receipt of new information, response and data analytics."

The response of taxpayer will be assessed against available information. In case explanation of source of cash is found justified, the verification will be closed without any need to visit Income Tax Office. The verification will also be closed if the cash deposit is declared under Pradhan Mantri Garib Kalyan Yojna (PMGKY)."

The two Managed Service Providers (MSPs) for Data Analytics are expected to follow OCM-type approach.

The MSPs would independently perform the same task and their output would be compared by ITD. It will define the methodology for comparison of the accuracy of the analytical outputs of the two MSPs. The MSP which is found to have better accuracy of the analytical outputs of the two MSPs over the entire period will be paid an incentive.

According to tender document for MSPs, as a part of post-demonetization exercise, ITD needs to analyze instances of deposits and seek information to identify possible cases of tax evasion.

It adds: "Income Tax Department intends to enhance its capability to utilize large volumes of demonetization related data (e.g. Statement of Financial Transactions in Form 61A, non-PAN data in Form 61, Suspicious Transaction Reports, Cash Transaction Reports, Information Request etc.) by leveraging services of experts in data analytics and business process management."

ITD intends to use data analytics for matching and analysis of demonetization data with return/other information for effective segmentation, grouping and prioritization.

ITD has listed focus areas in utilization of demonetization related data. These include enable end-to-end e-verification to optimize ITD resources and reduce compliance cost for taxpayer; leverage services of experts in data analytics and business process management; promote voluntary filing in PMGKY using targeted campaign and create deterrence for high risk persons/groups not availing PMGKY.

As regards 3 rd consultancy firm, it would MSP for Business Process Management (BPM) in the demonetization big data domain. ITD says that the two MSPs for DA and BPM are required to coordinate to achieve the "desired outcomes".

BPM MSP's chief mandate is to design and operate business processes through a suitable IT-enabled mechanism to assist in improving tax payer response rates, response quality and bring all identified evasion cases to logical conclusion.

The final word on such cases is obviously reserved for the Supreme Court, assuming a few hundred accused tax evaders would fight for justice till the end of the road.

This leads us to wonder whether Modi Government would seek an independent review of entire demonetization exercise and its objectives. This is required to avoid ongoing build-up of black money, ease of printing fake notes, terror-financing and corruption.

Modi Government is happy with mere tinkering of existing Income Tax Act and the relevant rules. It has so far adopted ostrich-like stance towards Direct Taxes Code (DTC), which is key to simplifying taxes, boosting tax receipts and minimizing generation of black money.

DTC Bill 2010, which was introduced by UPA in Lok Sabha, lapsed in May 2014.

Modi Government has not revived the Bill. It has thus made a crucial component of ITD's Vision 2020 a non-starter.

According to 'Vision 2020 Strategic Plan 2011-15', DTC Bill is a landmark event in the history of 150 years of Income Tax in India, posing both challenges and opportunities.

It refers to the need to develop a new software application package for the new code, making it compatible with the legacy system. It admits that training the ITD personnel in the new system within the shortest possible time, will be a challenge. At the same time, DTC offers an opportunity for the ITD to move to a fully automated technology-driven system on a single technology platform right from inception for fully integrating people, process and technology.

Prepared in January 2011, Vision 2020 contains initiatives what the Department believes is possible for it to accomplish.

As put by the Document, "Vision is what vision does. Vision must be articulated, internalised and acted upon. At the end of it, the worth of the vision is in its executed reality."

Is Modiji interested in listening to such facts & willing to embark on mid-course correction?