IT’s RAID SEASON

THE LONG ARM OF THE TAXMAN JUST GOT LONGER, AND MORE THAN 60,000 PEOPLE HAVE BEEN TAGGED FOR AUDITS AND INVESTIGATIONS POST DEMONETISATION

KKeshav Lal, a Kanpur-based additional commissioner of sales tax, probably did not expect the taxman to come knocking at his door. According to reports, income-tax (I-T) officials found Rs 10 crore in cash and 10 kg of gold during the raid. In a similar story, a general manager of the Uttar Pradesh Rajkiya Nirman Nigam in Dehradun was raided for “misusing his official position” and amassing untaxed wealth. In the past few months, the I-T department has carried out a series of raids like these, across the country. Perhaps for the first time in India’s economic history, there is a credible fear that the taxman could actually get you if you’re on the wrong side of the law—or even if they have ‘a reason to believe’ you are.

The department, once infamous for inefficiency and corruption, today finds itself at the centre of an ambitious government programme to rid the nation of black money. However, since arbitrary audits can lead to taxpayers getting intimidated—and give them an incentive to hide their wealth—the department has to find a way to hunt down actual evaders while making sure they do not wind up harassing honest taxpayers.

That said, there are reasons for a more proactive I-T department in India. Consider these points: India’s tax-to-GDP ratio, at 16.6 per cent, is lower than the emerging-market economy average of 21 per cent. Some 37 million Indians filed tax returns in 2015-2016. Of these, only 2.4 million declared an income of over Rs 10 lakh. Even so, an average of 2.5 million cars—including 35,000 luxury vehicles—are sold in India every year.

So far, the I-T department has identified more than 60,000 people who have been marked for detailed audits and investigations. To this end, the Finance Act, which was passed by the Lok Sabha on March 22, included a number of amendments to increase the taxman’s powers (see box: The Taxman’s

New Code). Among the new powers granted to I-T officers is the right to conduct searches and seizures of an assessee’s property without having to declare the reason for doing so and without being answerable to any authority lower than a high court.

These changes have evoked sharp—and panicked—reactions from many quarters. They have also led to an increase in raids. For instance, in the past two months, some 13 jewellery shops in New Delhi’s Greater Kailash market have been raided. These businesses allegedly came under the scanner for remaining open until midnight in the days immediately after demonetisation was announced on November 8, which was seen as an indication that they were helping those with sacks of unaccounted cash to turn their money ‘white’. Some came under the scanner simply for depositing more than Rs 10 lakh into their accounts after demonetisation. “These guys (I-T officials) harass you, they say ‘this is how much you deposited (post-demonetisation), and it is not your own money... now pay up’,” says a New Delhi-based jeweller.

According to some of the recently-raided jewellers, officials have been booking assessees under the Benami Transactions Act if they deny having made any illegal deposits. Under this act, it is the officer conducting the raid who decides if the explanation offered by the assessee is adequate. “Even if the raid reveals no evidence that the money deposited was unaccounted for, or even if the account books corroborate the amounts deposited, assessees are being forced to ‘own

up’,” says the jeweller quoted earlier. “These changes will only lead to more

goondagardi,” he laments. No surprise, then, that there is a frenzy of representations taking place at the Union finance ministry in North Block—from many different stakeholder groups—on possible misuses of the new law. Their worry is that the I-T department, already infamous for harassment, will become completely uninhibited in its depredations. ‘Tax terrorism’, as it is being called, is a huge concern for businesses, and there are those within the ministry who empathise. “We are aware that this is a genuine concern,” says a senior ministry official, speaking on condition of anonymity. “We are putting in place internal checks to ensure that such abuses of power do not happen.”

A Necessary Evil?

It had to be done, say senior officials at the finance ministry who are driving this change. These drastic amendments—in particular, the one doing away with an assessee’s right to know why they are being raided—was enacted to counter rulings by the Supreme Court. One case in particular—DGIT (Inv) vs Spacewood

Furnishings, in 2015—led to a ruling that assessees should be provided with the specific information that made the I-T department suspect them of tax evasion, at the beginning of assessment proceedings. This ruling was reiterated in 2016, with respect to another case. These two rulings led to some discomfort in I-T circles. Inevitably, they sought to restore their own discretionary powers regarding the disclosure of ‘reason to believe’ or ‘reason to suspect’.

The move to empower the tax administration also gels with the government’s stated agenda of doing away with black money. For its part, the tax administration is working towards putting as much information as possible into the public domain—naming and shaming tax dodgers is very much part of the strategy. Post demonetisation, data mining and analytic software has also been deployed to track the money trails of about 1.8 million people who are suspected of having deposited more into their accounts than their income should have allowed. Around Rs 4.5 lakh crore of deposits have been flagged.

So what, if any, checks and balances remain to restrain rogue taxmen from misusing the windfall of financial surveillance in the wake of demonetisation? According to senior ministry sources, the annual performance review of I-T officers has been tweaked to include details on how many orders they issued, if those orders could stand up to scrutiny and details on the due diligence done by the department with respect to those orders. Moreover, a collegium of three commissioners has been set up in each zone to deal with complaints. “A framework of accountability is in place, so we don’t have to worry about the misuse of powers,” says Hasmukh Adhia, revenue secretary, ministry of finance. “Anybody is free to send a complaint. We would like to know about the black sheep in the department. Even if there are complaints of rude behaviour, I will take action against them,” he adds.

For the government, tracking down the antecedents of these questionable deposits made post demonetisation is a long-term project. It has set itself a deadline of two years to complete the task. Even so, there are already positive signs. According to the Central Board of Direct Taxes (CBDT), there was a 21.7 per cent increase in returns received in FY ’17. Gross income tax collection grew 16 per cent, the highest in the past five years. The government is also planning to go after shell companies, and a taskforce at the Prime Minister’s Office is working on identifying the main promoters of these companies.

Clearly, India needs a stronger tax administration. Along with that, it also needs the administration to be as transparent as possible. There have to be effective checks and balances, because though progress has been made, there are still instances of bribes being demanded and harassment being used as a tool of intimidation by tax officials. “You cannot be a 1970-80s type of an officer and speak harshly [to citizens]. The language and statements should be in line with the new thinking,” says a former CBDT chairman. “We have to be a facilitator, and not an enforcement agency… because ultimately, you have to protect the tax-payer.”