A worker holds his Goods and Services Tax papers in his store at a wholesale market in the Old Delhi area of Delhi, India (Photographer: Anindito Mukherjee/Bloomberg)  

Arbind Modi Sees GST Transforming Direct Tax Enforcement

Interview with Arbind Modi - Special Secretary and Member (Legislation), Central Board of Direct Taxes.

Globally, governments are now leveraging technology for a more efficient and effective tax administration and India is no exception. According to you, what are the important initiatives the Ministry of Finance (MoF) has taken in recent times in this direction?

In recent times, the MoF has taken a leap toward digitised tax administration, which has been an ongoing process for almost 25 years. There has been a consensus across different governments about the necessity and the need to modernize the tax administration through massive induction of technology.

If I have to actually trace out the developments in recent times, and I take the last 10–12 years, then the first important event was Vijay Kelkar’s report, which reviewed the computerisation status of the tax administration, somewhere around 2002, and recommended a very comprehensive program.

One of the key things that were recommended was the outsourcing of some of the non-core activities of the tax administration.

The outsourcing was in the nature of a public-private partnership, which was unique in itself if you compare it with the rest of the world. Otherwise, traditionally, with tax functions being sovereign, no part of the activity was ever conceived as or thought of being outsourced. For the first time, we focused on some non-core activities like PAN allotment, database management tax payment information to be received by NSDL and third party information database to be collected through a statutory mechanism but stored and collected by the NSDL. So, outsourcing helped us in accelerating computerisation even though we had low in-house capacity.

That was the starting point, when all those recommendations were endorsed by the then-Indian government under Atal Bihari Vajpayee and Finance Minister Jaswant Singh. In 2003, we outsourced the allotment of PAN to UTI. The other major initiative in the same year was computerisation of manual information collection. AIR was introduced in 2004, which has then become computerized. In 2006, e-filing was introduced. In 2009, the centralized processing center in Bengaluru was set up for processing of tax returns and issue of refunds etc. directly from the Center. Payment of taxes through electronic mode was also introduced somewhere around 2007–08. After 2009, we set up the centralized processing center for processing TDS returns.

Then the big jump we undertook was sometime in 2015, by creating a 360-degree profiling of taxpayers to deal with tax evasion, both for the purpose of the widening of taxpayers and deepening of the tax base.

During the past 2–3 years we have also taken several initiatives for reaching out to taxpayers – for example, we have launched the Aaykar-Setu, which is a mobile-based app for easy access to several taxpayer services, forms etc.

In the past 2–3 years, there has been a massive push in digitally resolving tax grievances, for example, the CPGRAM of the Prime Minister, where tax-related grievances can be uploaded by citizens. If there are any grievances remaining unattended beyond 30 days, the department is taken to task. e-Nivaran is another online grievance portal.

So, in the past three years, there has been an extensive push to deal with tax evasion and also extend taxpayer services by leveraging technology.

Along with the 360-degree profiling of taxpayers, income and transaction reporting and the matching of the data to drive compliance and collection have been the key focus areas. What steps has the Income Tax Department taken for developing a robust data warehouse?

A big push in terms of developing a robust data warehouse was given somewhere in early 2015 when we introduced Project Insight. EY is one of the consultants for that project. The objective is to amalgamate the various information that comes into a single database.

Today, we have a fragmented database with respect to the various sources of information we receive.

This fragmented database has actually restricted our ability to do effective data mining and risk management. As a result, what was conceived was to amalgamate these several databases to a single database and create a 360-degree profile of the taxpayer, which will obviously help us to sharpen our risk management and also help us to widen and deepen the tax base.

With the GST implementation, how does the game change for data analytics?

There will be several gains in terms of direct tax enforcement because of the introduction of the GST. The first is that we will see real-time data. Under the GST, we will have monthly returns coming in and will, therefore, have access to the GST data subject to some protocols being established between the two departments. We will thereby be able to have information about sale and purchases on virtually a real-time basis.

Even though the returns will be filed a year later, we will have access to that information almost at the end of every month.

This will also enable us to do contemporary data mining and take immediate actions in terms of advance tax monitoring, TDS monitoring etc.

The second big gain is that because of the monthly returns, it will block manipulation of turnover expenses at the year-end. This is because when you file monthly returns, you commit your sales figures. Due to input tax credit, to a large extent even your expenses will be frozen. So, year-end manipulation will become restricted. Even if it is not eliminated, it will be substantially reduced.

Another gain for direct taxes will be better compliance due to a self-checking mechanism of input tax credit under the GST. This self-checking mechanism will ensure compliance with the GST, and better compliance with GST means better reporting for income tax purposes because sales, purchases will get recorded and therefore there will be better compliance on the income tax side also.

Lastly, there is a lot of evasion because of bogus transactions with unregistered dealers.

Now, the GST data will help us get a sense of the level of transactions with these unregistered dealers. Those who are registered will get input tax credit. To the extent that there is no input tax credit, most of the transactions we can assume to be with unregistered dealers. And all transactions with unregistered dealers carry a very high risk of manipulation. So, our risk management will become that much sharper.

Overall, if you add up all these gains, we should pull forward and see improvement in the compliance in direct taxes too. Whether it is immediate or kicks off in a year remains to be seen.

For technology to have a non-intrusive and targeted enforcement, what do you see going forward in this direction?

As the volume of transactions has increased over the years, it is impossible to do tax enforcement without technology. To be effective in terms of enforcement, it is necessary we use technology. Given this backdrop, we have taken steps over the years. The first step was to completely digitise the collection of information, both from the taxpayer in terms of facilitating e-filing of tax returns and from all other functions. Also, all the forms under the direct tax law have been digitised. That enables us to collect large volumes of information without going through the process of manual data entry and checking. E-filing of information also ensures accuracy of information, so there is no manual checking required.

We have also entirely digitised third-party information reporting.

Statement of financial transaction (SFT) and TDS returns are all digitised. So, the entire gamut of information collection both from the taxpayer and the third party is now completely digital, including payment.

The next stage after collection is collation. Now the collation part is what we are looking at through Project Insight, where we create a 360-degree profile of the taxpayer. Through these individual profiles, we can evaluate whether a person is a potential taxpayer or not, and if the person is a taxpayer what should be his or her income and what is the kind of income he or she is reporting. I think we will roll out that project in a month or two. So you have collection, you have collation and you have dissemination. Dissemination obviously becomes that much simpler when you create a 360-degree profiling as it will all be linked to a person. Each person carries an identity in terms of PAN and Aadhaar. Since Aadhaar covers more than 80 percent of the population, all economic transactions will carry some number, either a PAN or Aadhaar, which should allow us to collate and disseminate information to the right officers for analysis.

The fourth part of this whole enforcement is analysis of the data. Here also, the integral component of Project Insight is data analytics, which helps in identifying non-filers, stockpilers and tax evasion. Finally, we have also introduced e-assessment. Therefore, the information collection, collation and dissemination, analysis, collection of cases for audit on the basis of the analysis, and the audit itself are meant to be performed electronically through e-assessment. This has already been rolled out in many cities and at this point in time, it is almost voluntary and we are looking at ways to accelerate this whole program of e-assessment.

So, end-to-end digitisation will take place in terms of data collection, collation and use of data and assessment or audit.

With so much of data collection and analytics, one concern the industry has is about data confidentiality and more so when there is so much focus on the exchange of information, where data is also being gathered from treaty countries. What is it that the department is doing to maintain data confidentiality and give the taxpayers assurance on this?

One should know that the law prohibits sharing or disclosing confidential information, except in specified cases for the purposes of tax enforcement. Despite the legal prohibition, it appears that there is some concern. Let me assure you that this concern is ill-founded because of the simple fact that in spite of our collecting large volumes of data, there has been no instance of data leakage so far. I think the concern is more hypothetical than genuine.

In fact, even under pressure from activists to disclose data or confidential information, the Government of the day refused to do so and fortunately, the courts have also in a way endorsed that position. This implies that the courts are also conscious of the fact that this information needs to be protected.

All the institutions — the legislature (which has framed the law), the judiciary and the executor — are conscious that the tax data and information, whether collected locally or from other countries, needs to be protected. I do not think citizens or any other entity that does business in India or with India or with taxpayers or administrations in India, need to worry about it. We stand behind the legal position that tax administrations will do everything to abide by the law.

With regard to Operation Clean Money, what was the role of technology in its effective implementation?

Operation Clean Money, as far as the IT department was concerned, was entirely technology driven, except that where responses were not received (people not explaining the source of their cash deposits), we thought it appropriate to undertake verification, which naturally had to be through physical checks. Otherwise, it was entirely digital – the data was received electronically, the data mining was done, the interface between the depositors and the department was through the portal, the responses were to be filed on the portal, the analysis was done electronically and risk management was also done electronically.

I am not aware of a single incident of leakage or abuse of data. The department deserves all the kudos for handling this large volume of data on a real-time basis, in a very professional manner. This has also given us the confidence that going forward we can handle real-time data and it could not have got bigger.

Can technology help in improving the overall tax policy design?

Undoubtedly, more information flowing in through a digitised manner has helped in the designing of the tax policy. We have been able to exhaustively identify those who benefit from the incentives and also estimate the revenue foregone due to these tax incentives. In fact, we have been publishing these statements regularly now, almost on an annual basis for the past 10 years. We now have more comprehensive information about tax incentives, so we can obviously do better analysis and see how and whether they need to remain in the statue or not. We are able to identify the beneficiaries and also see whether the beneficiaries are those that the law intended to benefit.

Any message that you would like to convey on the technology and tax administration? Or any international experience or lessons that we can draw from?

The first is that technology is an integral part of tax administration in India. I do not think anybody can now say that the Indian tax administration is archaic. I believe that India is using more technology than most other countries. Almost all end-to-end processes are digital. Also, now our e-filing is almost 98 percent plus, which is higher than in many of the advanced countries. Most of our tax payment is also electronic now.

The second is that I want to reassure all taxpayers, whether in India or outside India, that maintaining confidentiality of taxpayer information is a very important objective for us. And in this regard, all the three branches — the legislature, the executive and the judiciary — are on the same page.

The third is that we are absolutely committed to minimising, if not eliminating, interface with taxpayers. These will be the three guiding principles for tax administration in the future.

What are the challenges you see in this entire digitisation of the tax function?

The challenge for us now is how we effectively leverage the vast volume of information we are collecting. Also, in the next couple of years, as this data mining work picks up and we are going through a process of learning, some innocent taxpayers may also be put under the compliance burden, partly because of legacy issues and partly because data mining identifies them as suspects. In the immediate or near term, any of these innocent people could feel aggrieved.

So, the challenge is to ensure that the innocent are protected in the process of data mining of the large volume of information. If we can, through data mining, identify only the guilty, then there is no problem. Also, cybersecurity is a constant challenge. I would like to assure that we have taken every possible step to ensure there is no cyber threat to the data.

This interview was originally published in the EY India Tax Insights Magazine.