Creation of TIN and the leap in Indias direct tax collections
December, 04th 2015
Taxpayers used to file annual returns to the Income-Tax Department in physical form, attaching a lot of supporting documents. Both the taxpayer and the Department had to deal with mountains of paper.
In 2003, the Finance Ministry discussed the creation of a Tax Information Network or TIN, which a Task Force on Direct Taxes headed by the former finance secretary, Vijay Kelkar, had recommended. In those days, taxpayers filed annual returns to the Income-Tax Department in physical form, attaching a lot of supporting documents. Both the taxpayer and the Department had to deal with mountains of paper. Under discussion was a world-class Tax Information Network with a digitised process that would facilitate easier and smoother tax payments and refunds and collection of information from bank branches across the country — widening India’s tax base and boosting government revenues.
The Revenue Department had its issues. The project was to be undertaken on a build-operate-transfer basis, and to the taxman, allowing an agency outside the government to handle information on taxpayers was like ceding a sovereign function. Senior officials of the Revenue Department told Finance Minister Jaswant Singh that staffers would begin an agitation.
Singh told them that the truly sovereign functions such as policy and enforcement would remain with them — and that only the back-end, the drudgery of sifting through piles of paper, would be moved out. He also told them that the staff could protest, but the project would still be launched.
Three firms promoted by state-owned entities — UTI’s information technology arm, CSDL and NSDL — were called, and the contract was given to NSDL, the depository which, by then, was already handling lakhs of daily transactions related to stocks in a paperless or dematerialised form. Roping in a state-backed firm, it was reasoned, would ensure confidentiality and ease several worries.
For NSDL, taking on a public policy project meant high capital investment early on, prospects of earning a return way off, and a risk of losing money if the government abandoned the project midway. NSDL CEO C B Bhave had to persuade the board of the depository — while also working out a revenue model that would find government approval and compensate for the investment in software, hardware and infrastructure. The government agreed to pay NSDL on a ‘per transaction’ basis, and the project was kicked off. After the UPA came to power, Finance Minister P Chidambaram adopted the same approach as his predecessor, ensuring continuity for the project.
An empowered committee comprising top government and RBI officials, as well as private sector experts such as Infosys CFO T V Mohandas Pai, worked on the project along with tax officials. They procured online information on tax collections from 11,000 bank branches across the country along the same lines as stock transactions — that is, two days after the transaction. Soon, corporates had to mandatorily file their returns online, which was gradually extended to individuals too. With a system that matched the tax deducted and returns filed, many disputes were eliminated, and the tax department had information on several kinds of transactions that had thus far gone unreported.
Between 2004-05 and 2008-09, GDP growth averaged 8% and tax collections grew 30% year on year — a result of not just robust economic growth but also better compliance through the modern Tax Information Network. Direct tax collections crossed Rs 1 lakh crore in 2003-04, and Rs 2.3 lakh crore by 2006-07. By the following year, net direct tax collections were more than indirect tax collections — another measure of success.
As that happened, huge reconcilation problems of the past — matching actual collections with figures reported by banks — dropped to a low of Rs 120 crore. The direct tax to GDP ratio, which was 3.81% in 2003-04, rose to 6.67% by 2007-08. Govind Rao, a former director of NIPFP, has estimated that the increase of 150-200 basis points in tax collections was also due to compliance brought by the new system. But it wasn’t all smooth sailing. Infosys, which got the contract to carry out the project in Bangalore, faced a challenge on the systems front as the scope of the project went beyond what was stated in the tender — and perhaps lost in terms of investment. However, as the tax department, driven by senior officials such as S S Khan and Arbind Modi, the RBI, which nudged banks to put in place a system to collect information on payments in real time, and central and state governments came together, things fell into place.
Today, the facility can process 3.5 lakh to 4 lakh assessments daily. Mohandas Pai, who stepped down from the empowered committee after Infosys got the contract, reckons today that thanks to the Tax Information Network, as collections rose, frauds decreased and savings increased on account of lower interests with faster refunds, the cumulative benefit to the government over the last decade or so could be as high as Rs 40,000 crore to Rs 50,000 crore. According to him, this is India’s most successful e-governance project.
Today, the Finance Minister and senior Revenue Department officials receive daily updates on their computers on a bunch of direct tax data — including rich data or analytics — to help them in policymaking and to boost collections. But India still needs to build a similar top quality centralised database for its indirect tax network and for India Post, which has deposits of over Rs 7 lakh crore and lakhs of account holders.