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How income tax department monitors your money
November, 02nd 2016

A common misconception is that the tax department cannot monitor everyone and you may escape the tax department’s radar. However, shock sets in when the income tax department issues you a notice for scrutiny. At that time the question that comes to one’s mind is how is the income tax department monitoring our money?

To monitor income, the government collects details of your financial transactions which are linked to Permanent Account Number (PAN), a ten-digit alphanumeric number issued by the tax department. The information collected through the PAN is electronically matched to the information filed in the income tax return and queries are raised in case of any discrepancies.

Collection of data from vendor

The first source of information on income for the tax department is TDS/ TCS. Whenever any person receives any income above specified limits, the payer of such income is obliged to deduct taxes at source (TDS/ TCS) and deposit such taxes to the government treasury on behalf of the recipient.

For example, TDS at the rate of 1% is required to be deducted and deposited by a buyer of a property over R50 lakh. This is just another way of tracing large ticket transactions.
Information filed by third parties

As per Section 285BA of the Income Tax Act, 1961, specified entities like banks, nidhi companies, mutual funds, credit card companies, etc., are required to furnish a statement of financial transaction above certain thresholds containing details of the persons undertaking such transactions. This statement of financial transaction is filed online

which gives details like who has opened a demat account, made cash payments over R2 lakh, purchased any foreign currency, acquired units in a mutual fund, to name a few.

As per the recommendations made by the Special Investigation Team (SIT) on black money, CBDT has amended the existing rules to mandate quoting of PAN on a variety of transactions, especially targeting those made in cash.

Tracing social media footprint

Income tax officials are using social media to ascertain the lifestyle and thus, the real income of an individual. Though CBDT has not issued any official directive to vet social media post, income tax officials are keeping a tab on posts such as photographs of overseas vacations or purchase of a new car.

Often postings of social media could be misleading and not the complete truth. There is no filtration or verification process to authenticate the information on social media and accordingly, income tax officials cannot conduct search and seizure based on posts on social media. However, social media may be useful to the tax department once discrepancies are identified to unveil the truth.

Tracing of income has become easier for the government with the help of technology. Though the results of discrepancies identified by the system may not always be correct, they act as whistle blowers to help identify cases that need to be scrutinised.

The writer is partner, Nangia & Co. With inputs from Neetu Brahma, manager, Nangia & Co.

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