Digital matching: Fool-proof proprietary software would nip tax evasion in the bud

July 29, 2020 5:00 AM

The right technology can help check tax evasion, more so with aggregation of GST assessee data and the data sharing agreement between CBDT and CBIC

The income-tax collection came down from Rs 11.32 lakh crore in FY 2018-19, to Rs 10.50 lakh crore in FY 2019-20, which was quite short of the budget estimate of Rs 13.22 lakh crore and the revised estimate of Rs 11.58 lakh crore.The income-tax collection came down from Rs 11.32 lakh crore in FY 2018-19, to Rs 10.50 lakh crore in FY 2019-20, which was quite short of the budget estimate of Rs 13.22 lakh crore and the revised estimate of Rs 11.58 lakh crore.


“Tax should be collected from people like a honey bee draws nectar from a flower, without harming it”, wrote Chanakya in Arthashastra, circa 300 BCE. CJI SA Bobde referred to this ancient wisdom at an event at the Income-tax Appellate Tribunal (ITAT) in January 2020, while noting that as on March 31, 2019, 3.41 lakh cases were pending before Commissioner (Appeals) and 92,205 before the ITAT, involving disputed tax of Rs 4.8 lakh crore.

The income-tax collection came down from Rs 11.32 lakh crore in FY 2018-19, to Rs 10.50 lakh crore in FY 2019-20, which was quite short of the budget estimate of Rs 13.22 lakh crore and the revised estimate of Rs 11.58 lakh crore. Significantly, at this time, uncollected arrears of more than Rs 12 lakh crore were available to the Income-Tax (I-T) department. Viewed in this perspective, the I-T department falls short of Chanakya’s ideal of collecting due taxes, but keeping taxpayers happy. On the contrary, it would appear that the department is antagonising taxpayers by raising infructuous demands, but is not able to collect the dues. The CAG had observed that 98% of the uncollected arrears were difficult to recover. It had also noted that uncollected arrears of I-T had been increasing steadily, doubling in five years, from Rs 5.75 lakh crore in 2013-14 to Rs 11.14 lakh crore in 2017-18.

Obviously, better scrutiny assessments would increase tax collection and reduce litigation because the assessee would not contest an order that is fair, well-reasoned and based on facts. It may be mentioned here that the contribution of the regular tax, to the direct tax kitty, is less than 7%—a fact noted by PM Modi while addressing chief commissioners of I-T in 2016. The poor quality of most assessment orders is responsible for this anomaly. But, the quality of assessment orders can be improved only if the assessing officer (AO) has access to evidence other than what the taxpayer provides him.

The I-T department would benefit immensely if it uses technology not merely to mimic archaic physical processes, but to devise newer processes that harness technology to utilise the great mass of financial data meaningfully. For example, digital matching of accounts of taxpayers, e.g., matching purchase by one taxpayer against the sale by another taxpayer or credit by one against another’s debit can be a highly effective tool to detect fraudulent transactions.

Digital matching would not be difficult. Taxpayers, whose account books are subject to audit under the I-T Act, i.e., assessees whose turnover exceeds Rs 2 crore, could be required to upload their books of account along with their returns of income. The software in the I-T computer system would then match the transactions of one taxpayer against another. For example, if A is showing a sale of Rs X to B, then B should show the purchase of Rs X from A. Transactions can be matched based on PAN and GST number. A similar methodology may be followed for matching financial transactions which would proceed on the assumption that credit by one party should match the debit by the other party. The software would flag mismatches above a certain level, which could then be scrutinised in detail by the AO. Related mismatch cases can be assigned to a single assessment unit where the AO can confront the taxpayers. The AO would determine the taxpayer’s income after considering the tax implication of the unexplained mismatches.

For digital matching, the I-T Department would have to prescribe a common software for all taxpayers. A common software for all taxpayers has many advantages. Cases selected for scrutiny could be digitally audited through a single computer programme. Such an audit would throw up internal anomalies in the taxpayers’ account, enabling the AO to make a meaningful scrutiny.

A fool-proof proprietary software would nip tax evasion in the bud. Currently, the books of account of most businesses are prepared at the end of the year by accountants, whose main job is to make the books look credible. The departmental software would discourage this practise because it would flag anomalies and interpolations, and indicate if the accounts had not been maintained contemporaneously. The latter part is important because the I-T Act attaches great sanctity to accounts maintained in the regular course of business. At the time when books of account were maintained physically, it was easy to determine if books had been maintained contemporaneously, but the lack of contemporaneity and interpolations of accounting entries are hard to prove when the taxpayer brings a computer print-out of his account books.

Departmental software would help honest taxpayers because the software would prepare books of accounts that reflect the true profit of their businesses, and at the same time, are acceptable to the I-T Department. At the end of the year, the software would prepare the balance sheet and the profit-and-loss accounts, as also, the taxpayer’s return of income—services for which the taxpayer has to pay his tax advisor.

The aggregation of data of all GST assessees on one platform, and the agreement on data sharing between CBDT and CBIC, has opened up a tremendous opportunity for both departments to check tax evasion. A seamless integration of the GST Network with the I-T computer system could be a future goal.

For the present, a meaningful scrutiny of returns is a goal that the I-T department can set for itself to augment the income-tax collection.

The author is Principal chief commissioner of I-T (Retd.). Views are personal

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