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Will the country finally have an integrated tax surveillance system?

Topics CBDT | CBEC | Direct taxes

Is India moving towards an integrated tax surveillance system? Last week the two tax collection entities of the government, the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) issued a joint press release to say so. It said any information sitting on any of their data bases will be shared, even on a “spontaneous basis”. But after so many years of watching these two refusing to share the data telling even Parliament that it is not possible, tax payers who have gotten away by paying less may not be too worried. Valuable leads on under-payment of tax have often slipped between the two entities more eager to protect their own turfs.  

The two boards signed a Memorandum of Understanding (MoU) last week to “exchange with each other, on request and spontaneous basis, any information available in their respective databases which may have utility for the other organisation”. This itself is peculiar!

Why should two offices under the same department of the Government of India need to sign an MoU to share information between themselves? If one thought it was curious, to make it even more so, this is the second time such an MoU has been signed between these two offices to share data. No other organisations under the same department of the Indian government have ever signed an MoU between them, that too, twice. The first one was signed in 2015.  

Public sector companies sign annual MoUs with their respective ministries for deliverables like setting of profitability and other performance goals. State governments sign these documents with central ministries like those under the Uday scheme to improve the financial performance of electricity distribution companies; ministries sign those, like the one signed by health and Ayush ministries last year, for prevention of tuberculosis. Each of those offer a clear rationale. But an MoU between two entities under the same department is not only novel, it offers a window into why India’s central tax to GDP ratio has been bleak at just about 11 per cent. In FY20 it has dipped to 9.88 per cent.

The MoU is even more surprising since they already have an organisation set up between them to do the job. Both CBDT and CBIC are already stake holders in Central Economic Intelligence Bureau (CEIB) set up in 1985 to “play a lead role in exchange/providing information on economic offences to other partner /law enforcement agencies wherever there are implications perceived in areas related to them”. Shorn of tax department patois it is meant to use shared data to figure out tax evasion.

What had stopped the two tax collection departments from exchanging data on who is evading tax? There are no clear answers to those. The Parthasarathi Shome committee (formally, Tax Administration Reforms Commission) had suggested setting up of an integrated data sharing entity between CBDT and the Central Board of Excise and Customs as CBIC was then known, in May 2014. “The discussions for data sharing between CBDT and CBEC should be speeded up and sharing must begin quickly”, by setting up a special purpose vehicle. Yet in their action taken report to Parliament, CBDT noted it was “under implementation”, but CBIC said it was “not acceptable”.

Presciently the Shome committee had suggested a “process for a request based exchange of data and information…(with) collaborating organisations" including CEIB, RBI and Sebi to create a common catalogue of data and information. Again the two boards had differed.

As Rashmi Verma, who was additional secretary (revenue) in the finance ministry in the period between 2013 to 2016, says she is surprised why the two boards should at all need an MoU to work together. “I was in favour of 360 degree profiling of tax data, bringing in data from states too. We had begun a pilot project for it”.

A charitable explanation for the reluctance is that the information technology platforms of the two boards were not compatible. They had built up their IT system in bits and parts over the years responding to emerging demands. The Permanent Account Number (PAN) identifier for income tax assesses for instance was not compatible with the identifier used by the CBIC for a long time. But that itself was possibly an indication of how the two tax sleuths guarded their data than make it available to each other.

Privately, officers from both tax organs agree that by not reconciling corporation tax data with those of excise duty paid by companies, or export refunds claimed by units with their income tax dues the government is short changed. For instance, income tax data for FY18 shows only 166,860 Indian residents have claimed a gross annual total income of over Rs 1 crore. These are clearly huge under estimates.

In 2005, then finance minister P Chidambaram had tried to link high value expenditure data of individuals with the income tax returns to correct this anomaly. It hardly made any progress due to the reluctance of the two departments to share data among themselves.

The reluctance also scuttled another initiative. Large Taxpayer Units were set up in 2006 mimicking comparable practice in more than 50 countries. The units developed under IMF guidance were meant to provide a single window facility to taxpayers and achieve a greater degree of integration between direct and indirect tax administration through data sharing. No prizes for guessing, it went nowhere. Atul Gupta, senior director, Deloitte India said there was continued operation of two tax administration in silos even inside these LTUs though large industries need the integrated operation of such tax sharing units. “There was a need for a structured sharing of information with granularity. For instance does a manufacturing company’s electricity consumption fit well with its production figures?”

LTU were discontinued after the introduction of GST.

The differences between the two boards reached their peak in their response to the Shome committee recommendations. Unsaid in the differences has been the fear of a possible merger of the two cadres of officers. So anything in the nature of a collaboration has been scuttled because of this scare.

One data point will make this clear. In the eleven years since Chidambaram made his suggestion to combine tax data, CEIB has received a paltry set of 3910 pieces of annual data. The two boards generate over a few million data points every year. That number has suddenly shot up to 65,470 at the end of March, 2019 after “the directions of revenue secretary, an Information Sharing Protocol (ISP) was formalised in April 2018”. Incidentally the CEIB was thus able to issue its first ever annual report in 2018. It had precious little to report till then. Tax data from CBIC was concentrated in the directorate of revenue intelligence; CBDT too has its Directorate of Investigation and these are where the matters rest. Tax payers who showed say high sales in their shops but reported abysmally low personal income to the different arms of the revenue department consequently had precious little to worry.

The two tax agencies have now promised in their MoUs to set up a “data exchange steering group” which will meet periodically to review the data exchange status. It will catch tax payers who obfuscate data. Gupta said this was long overdue. “The level of evasion of taxes reflects the lack of collation of data between the two departments,” he added. A joint surveillance to block evasion will therefore first need lowering of mutual suspicion among the two boards.

Verma said it was strange that four years later, the tax bodies are still figuring out how to reach out to each other when they are housed in the same department of a ministry. The lack of even a customary response from even the industry chambers show they also think on the same lines. 
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