Note Ban logic: Clean Money, return of the raid brigade

Investigators searched 1,000 so-called groups in 2016-17 and managed to seize about Rs 1 crore on an average from each of them. Illustrations : Ajay Mohanty
One of the first justifications given by Prime Minister Narendra Modi for knocking 86 per cent of the Indian currency out of circulation last year was curbing the dominance of black or unaccounted money in the economy. While the return of a significant amount of money into the banking system might have raised doubts over the black money motive, there seems to be growing enthusiasm among income-tax investigators to raid those suspected of possessing unaccounted money. However, the rise in the number of raids hasn’t seen a corresponding increase in the money seized.


Tax investigators searched over a thousand so-called ‘groups’ in 2016-17 and managed to seize about Rs 1 crore on an average from each of them. The number of groups raided rose almost 84 per cent since the Modi government assumed power in 2014. During the raids, almost Rs 19,000 crore was either detected by tax investigators or admitted by those being raided during questioning.

There also seems to have been an enhanced surveillance push and tax crackdown since demonetisation. According to the Ministry of Finance, 56 people have been put under Central Bureau of Investigation or Enforcement Department probe. More than 6,400 people who were surveyed admitted to holding unaccounted wealth worth about Rs 7,000 crore. Half a million cases have been earmarked for further verification by the tax department. About 850,000 people have been classified as high-risk individuals.


All of this has been carried out under the ambit of ‘Operation Clean Money’ launched in December last year. Two yet unknown companies were given the contract in March 2017 to mine millions of bits of information on the nature of deposits made after the currency ban. What gives this a tinge of surveillance is the fact that the job of these two contractors wasn’t just limited to analysing data regarding deposits of currency into bank accounts from the morning of November 9, 2016. One of the tasks set forth in the request for proposal was to “conduct fund tracking on transactional data for high-risk cases if no response was received from the depositor.”


According to the department, almost 1.8 million people across India were asked to explain the source of their deposits.
What looks intriguing is the fact that the two contractors were mandated to submit, among other things, a psychological profile of all those who were sent communications by the tax department. According to the department, almost 1.8 million people across India were asked to explain the source of their deposits following the currency ban. These people were to be ranked into four categories on a compliance behaviour scale – disengaged, resisters, triers and supporters. ‘Disengaged’ people were defined as those “who have decided not to comply. People with this attitude either deliberately evade their responsibility or choose to opt out.”  ‘Resisters’ were those “who don’t want to comply but who will if they can be persuaded that their concerns are being addressed.” The ‘triers’ were those “who are willing to comply but have difficulty in doing so, and don’t always succeed.” On the other hand, ‘supporters’ were defined as those who “demonstrate a willingness to do the right thing and make a conscious commitment to support the system.”


These people were to be further plotted on a knowledge scale — a person with low ‘awareness level’ was classified as one having “less knowledge of tax laws” . In addition, an indicative report of the authenticity of contact details provided by the people to whom communications were sent was also to be prepared. It is unclear how the tax department or the contractors are undertaking the process of tracking down a person’s contact details without a helping hand from UIDAI.


This psychological profiling has been supplemented with a complete money profile of the person, including his past transactions. Each economic profile of the individual in the form of a report is being assigned a serial number. These have details such as his mobile number, residential address, home bank branch information, details of the branch in which the money was deposited, among other things.


The finger of suspicion on an individual has been raised after validating two other aspects of his financial behaviour. One of them was to get information about the amount of money credited into his account between April 1 and November 8, 2016. This was provided by banks from account statements issued to their customers. The contractors were expected to requisition past transaction data from banks, especially with regard to people who did not respond to communications from income-tax authorities. This was to be compared with the amount of money credited into the same account by the same person from November 9 to December 30, 2016. According to the departments’ proposal, the people who were to be profiled would be those who deposited more than Rs 12.5 lakh in a current account between November 8 and December 30, 2016. For those with other forms of bank accounts, such as a savings bank account, the limit was fixed at Rs 2.5 lakh.


Tax surveillance currently happens most of the time in India under various rules. The Financial Intelligence Unit (FIU), which operates under the Ministry of Finance, receives Suspicious Transaction Reports (STRs) in addition to Cash Transaction Reports (CTRs) in cases where more than Rs 10 lakh has been transacted every month in an account. But these reports do not contain psychological profiling of individuals as is being conducted under ‘Operation Clean Money.’


Such profiling is consistent with the Modi government’s intentions to empower tax investigators. In his 2017-18 budget speech, Finance Minister Arun Jaitley had proposed to “authorise the joint director, deputy director or the assistant director of income-tax to call for information for the purpose of any enquiry without seeking approval of the higher authority.”


The nature of such profiling also means that tax authorities would not only have a list of tax offenders, but also a list of ‘high-risk’ people who are not tax offenders but could turn into tax offenders in the future. This profiling push can partly be explained by the fact that demonetisation hasn’t accelerated the increase in the tax base of the country. According to the Central Board of Direct Taxes, in the November-March period of 2015-16, almost 40 million more people filed income-tax returns over the same period the previous year. In 2016-17, after demonetisation, the increase in the number of people who filed tax returns in the same period was around 3.3 million. 


With the income-tax department armed with financial and psychological profiles of select individuals, the government could well be banking on a never tested data mining-fuelled brand of tax surveillance that aims to get more Indians to pay tax.