Compliance cost

Tax authorities must explain their data demands

A recent tweet from a government public information account listed a set of measures to widen the tax base, leading to considerable interest and alarm among taxpayers. The aim of the new measures is to increase the scope of monitoring high-value transactions by the income-tax (I-T) department. Several such transactions were listed — for example, health insurance premium payments over Rs 20,000 and hotel payments more than the same amount. There was some initial concern that this would vastly increase the compliance burden on taxpayers, which probably led to the initial tweet on the subject being deleted. Since then the tax office has unofficially told the Press that there will be no change in I-T forms, but third parties would have to report such high-value transactions in a statement of financial transactions, or SFT. Banks and some other financial institutions have so far had to include in their SFTs occurrences such as large cash holds in savings bank accounts of a single client.

While it is welcome that the government has apparently decided not to directly burden taxpayers with further reporting, there are multiple questions that need to be asked in this context. For instance, is there a plan to extend the number of reporting entities? Will this mean that a hotel stay costing over Rs 20,000 can be done only with the recording and then onward submission of the PAN card — and, not so incidentally, a further increase in paperwork for the stressed hospitality industry? It is not just compliance requirements for individuals, but also for businesses that government must keep in mind. This is not the time to increase friction in the economy. The list of such transactions appears extremely arbitrary — and previous such reporting requirements have not helped.

More generally, the question of how this data will be used must be thoroughly and transparently discussed. The I-T department has long claimed that it will use “big data”, “machine learning”, “artificial intelligence” and other buzzwords to crack down on evasion. This was heard particularly often in the months after demonetisation, when the country was assured by officials that the data gathered in the post-demonetisation would lead to a vast increase in the tax base through world-class analysis. Apparently this promise was not fulfilled. Therefore, it is entirely fair to ask what the department’s competence in these cutting-edge fields is, where it is being acquired, and how it is being used. The matter of collecting data on a whim is also disturbing. While the department and government agencies in general certainly must seek access to data they feel will help them do their jobs better, it is also true that, as the ease of access to data about private transactions increases, there must be some constraints imposed on bureaucrats’ demands for that data. Recent reports, including by a committee led by Justice Srikrishna, have elucidated how data fiduciaries must behave with personal and transactional data. A similar requirement for government is long overdue. In spite of promises of “faceless” investigation of tax claims, there is little or no doubt that venality will persist in the system and find new ways to use these additional levers — unless checks and balances are built in from the start. If the taxmen want more data, they must explain why and what they will do with it, and where and how long they will keep it.