The income tax department is sitting on voluminous data collected by banks and financial institutions after the demoneti- sation drive. Owing to the new reporting requirements, banks and post offices are required to report all cumulative cash deposits above Rs 2.5 lakh and one-time cash deposits of more than Rs 50,000, and accordingly it is estimated that banks and financial institutions will report around 40 lakh accounts.
In order to red-flag the tax evaders, the cash transaction data will be compared with information available in the income tax databases of the department to identify the transactions that are not in sync with the past tax records of the taxpayer. Owing to administrative constraints, it may not be easy for the tax department to analyse such humungous data and cross-check the same with the past records of the taxpayers to select the cases requiring further scrutiny. Tax authorities will appoint data processing and analytics agencies for this herculean task.
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If found out of order, the tax department would issue online notices to tax evaders to revert with an explanation substantiating the cash deposit transaction. Individuals have made huge cash deposits after demonetisation, claiming the same to be cash-in-hand in their books of accounts. Those claiming their income to be Rs 2.5 lakh in the past have made cash deposits of crores of rupees.
Make no mistake, these will not go unnoticed and the department has already initiated the process of scrutiny. Those depositing cash of more that Rs 1 crore are bound to be asked to explain the source. Also, such cases would be red-flagged for subsequent years to see if the income in the future is in sync with the cash deposited after demonetisation. Real estate developers, jewellers, doctors, luxury goods sellers, etc. are the prime focus of the tax authorities.
Extant provisions of IT law
This entire exercise is likely to face the hurdle of extant provisions of the tax law, which provides that the assessment of the current year shall be initiated in 2019. This may dilute the impact and the government may not be able to mop up the revenues it is expecting to generate from demonetisation.
A three-member committee has been set up by the Central Board of Direct Taxes to devise a mechanism to scrutinise these cases in a timely, effective and efficient manner, ensuring that the intent behind the move of demonetisation is not lost. Else, the black money hoarders would go scot-free, whitewashing all their black money (estimated to be R15.4 lakh crore) using banking channels, which is the last thing being expected.
We can expect Budget 2017 to make some legislative changes equipping the taxman to unearth black money immediately, without waiting for the time of tax assessment. Alternatively, we may see an instruction issued to the tax officers enabling them to deal with the tax evaders in a timely manner, without diluting the impact.
Tax evaders who thought that the game is over may witness a change in the rules of the game, enabling the taxman to come knocking at their doors for answers.
The writer is executive director, Nangia & Co.