Mountain Of DeMo Data Has Yielded A Molehill In Terms Of Tax. Is Raid Raj The Only Way out?

Is the post-DeMo tax hunt yielding a mouse?

Granted. India’s tax evaders did not keep their money outside the banking system post-demonetisation (DeMo) to avoid scrutiny. A few days ago, the Reserve Bank of India (RBI) made it clear that 99 per cent of the demonetised Rs 500 and Rs 1,000 notes came back to the banking system between 8 November and 31 December 2016, leaving less than Rs 16,000 crore of potential black money out. Some of this money could merely be money one had forgotten about, or left behind in some locker or cupboard.

However, the one thing the government has in plenty is data. The question is what will this data achieve by way of higher income disclosures and tax collections?

As things stand, a mountain of data has yielded a molehill, though this is admittedly too early to claim that the campaign against tax evasion was a failure.

Consider where we have progressed between February, when Finance Minister Arun Jaitley first gave information on post-DeMo bank deposits, and now.

In his budget speech, Jaitley said that between Rs 2 lakh and Rs 80 lakh was deposited in more than 1.09 crore accounts, and the average deposit size was just above Rs 5 lakh. Deposits of more than Rs 80 lakh were made in another Rs 1.48 lakh accounts, where the average deposit size was Rs 3.31 crore.

Broadly speaking, the 1.09 crore accounts with average deposit size of Rs 5 lakh probably represents cash held by low-level evaders, including middle-class families, professionals and small businesses. The larger average in the second group probably includes businesses that do lots of deals in cash – which may not all be black money. Between the two groups, nearly Rs 10.37 lakh crore of cash deposits needed explanations to the taxman.

Last week, the Finance Ministry put out another set of figures, indicating how it was proceeding with suspected cases of tax evasion. It said it had started the scrutiny of 18 lakh accounts and created a web-based interface through which the account-holders could explain where they got the money from. About half these 18 lakh account-holders sent replies, involving cash deposits of Rs 2.89 lakh crore.

Put simply, from the Rs 10.37 lakh crore that the Finance Minister indicated in his budget speech as high cash deposits, scrutiny is now down to Rs 2.89 lakh crore, and this represents half of the 18 lakh accounts with unexplained deposits. This means around 28 per cent of the accounts that saw high inflows are now under detailed scrutiny.

But the Finance Ministry also gave some more details about Operation Clean Money. In a press note, it was said that “advance data analytics tools were deployed which further identified 5.56 lakh new cases and about 1 lakh of those cases in which either partial or no response was received in the earlier phase. Besides, about 200 high-risk clusters of persons were identified for appropriate action. The Income Tax Department conducted searches on various entities, leading to seizure of cash and admission of undisclosed income. Since November 2016 and until the end of May 2017, a total of Rs 17,526 crore has been found as undisclosed income and Rs 1,003 crore has been seized. The investigation/scrutiny is going on.”

So, from over Rs 10.37 lakh crore of suspicious accounts to Rs 2.89 lakh crore of deposits that merited detailed scrutiny, to detection of Rs 17,526 crore of undisclosed income, to a seizure of Rs 1,003 crore, we have come a long way downhill.

If we assume that this was the easy part of the tax collection trek, since it was done largely through data analytics, one wonders if the remaining cases will need harder scrutiny, and more coercive techniques to squeeze out cash.

The problem with scrutinising such large numbers is that it is not possible for a few thousand tax officers to accept or reject the explanations made through an online interface. At some point, the details of the replies will have to be read and decisions taken on whether to physically call some of them, or those who have not replied at all. Another alternative is to send summary tax demand notices to those who made very large deposits, and gave no explanation, in the hope that they will pay up. Many will choose to go to court.

The only way so many people can be brought to book, assuming they evaded taxes, is to start another raid raj. But when lakhs of people are involved, it is entirely possible that some tax officials will try to offer deals to close cases without further scrutiny. In other words, raid raj could increase corruption among tax officials.

Is there a way to avoid this so that more taxes can be collected without harassment? One way out could be to announce yet another micro amnesty scheme where people who made deposits upto, say, Rs 5 lakh and who have no explanation for it, can pay a moderate tax of 20 per cent, or even 10 per cent, and agree to keep the balance money with the government as a zero-interest deposit for three years. For those depositing higher amounts, the tax rate could be higher, at say, 30 per cent.

There is, however, one problem: it would be unfair to people who paid 45 per cent tax under last year’s income declaration scheme, or those who paid 50 per cent under the Pradhan Mantri Garib Kalyan Yojana.

Maybe, some limited raid raj seems unavoidable.

(A part of this article was first published in DB Post)