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Big data and the taxman

CBDT has collected realms of data about taxpayers from various third party sources to find mismatches between IT returns and actual lifestyles to help identify non filers

Big Data and the taxman

For many years, Indians have played a cat and mouse game with the Income Tax Department. During every budget, the Finance Minister tweaks the finance bill to plug some loopholes that lead to tax avoidance, but before the year is out, avoiders have unearthed new loopholes to exploit in turn. And quite a few folks from the non salaried class completely skip filing returns by using jugaad methods to hide their actual income.

But 2016-17 has shown us that the Modi government is dead serious about cracking down on tax evasion. While demonetisation has not yielded a very rich haul for the government on black money, note ban represents only the tip of the iceberg on the Centre's tax clean up efforts. For years, the CBDT has collected realms of data about taxpayers from various third party sources to help identify non filers of tax returns and pin down the mismatches between IT returns and the actual lifestyle of citizens. Here are some instances. One, since 2005, agencies such as banks, mutual funds, companies, registrars of property and credit card companies have been reporting all the high value transactions by individuals in the form of annual information returns (AIRs). These cover cash deposits of over Rs 10 lakh, property transactions of over Rs 30 lakh, credit card payments and mutual fund investments of over Rs 2 lakh and so on.

Two, PAN has been made compulsory for nearly all big ticket transactions even when they don't involve hard cash. Today, selling or buying a car or two wheeler, making fixed deposits with banks or post offices, buying property worth over Rs 10 lakh and any transaction for over Rs 2 lakh in 'goods and services' requires one to cite a PAN details. In the absence of a PAN, one must provide some other ID proof. This information goes straight to the CBDT. Three, the scope for TDS and tax collection at source has been expanded so that even tax exempt citizens are forced to first pay tax and then apply for refund. This sets up a clear audit trail for the taxman to follow. Electronic filing of tax returns has been made mandatory for all high income taxpayers, too.

Until recently, the CBDT was not making very effective use of all this data. But its newly launched Big Data initiative, called Project Insight, is set to revolutionise tax collections. This project, launched in 2017, plans to enable IT officials to build a 360 degree profile of all potential taxpayers, using the above data points as well as your social media footprint. The recent Aadhaar linking of PAN and financial assets will also expedite this clean up.

What to do: You obviously have nothing to worry about from all this if you are a fully compliant taxpayer. But if you are not and try to skip some taxes on occasions by using common avoidance techniques, it is best that you stop such attempts and simply pay up your taxes. In fact, this may be be a great opportunity to simplify your portfolio by doing away with unnecessary complications like stashing your unaccounted income in cash/gold/property/luxury goods, holding investments in your relatives' names or owning multiple demat and bank accounts.

Overall, it makes a lot of sense to stop making unsuitable asset allocation choices (owning too much equity, shifting from FDs to equity) and buying low return products such as traditional insurance plans and capital gains bonds, just for tax breaks.