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Taxmans reliance on third party may increase
June, 08th 2007

Three years ago, tax authorities considered a proposal to ask all car dealers to provide a list of their customers. The idea was to see if individuals who were buying cars were also paying their taxes. So car dealers were to be included in the list of agencies which would report high-value transactions of their clients.

Car dealers were fidgety as they felt that such a move could impact car sales. The proposal was finally dropped as policy managers reckoned that a lot of information would pour in and may not be used effectively to track evaders. But story did not end there.

Last year, investigation wing of the income tax department revived the proposal to track car purchases through the dealer network. The recommendation was to gather information only on mid-segment and luxury cars valued at over Rs 5 lakh. In technical parlance, this meant collecting information on an individuals financial transaction from a third party.

Currently seven agencies, including banks, registrar of properties, credit card companies, mutual funds and companies that have done IPOs, are listing out select financial transactions of their clients to tax authorities. They do so by filing annual information returns (AIRs).

The National Securities Depositories Ltd (NSDL) processes the AIR which is permanent account number (PAN) based and creates an individual transaction statement (ITS). This statement is matched with an individuals income tax returns. Any discrepancies between the value of investments in the ITS and the declaration made in the IT returns could imply possible tax evasion.

The finance minister has already indicated that more transactions will be added to the AIR list. Policy managers now say that due diligence needs to be exercised while selecting new transactions. At this juncture, taxmen are only looking at adding big-ticket financial transactions more specifically, investments.

The dominant view, for instance, is that car purchases should not be included in this list. Most people take a loan to finance car purchases and this data can be accessed easily. Besides, individuals have to quote their PAN at the time of registration. Again, the data on car purchases is available with the road transport authority. Gathering the same information from, say, a car dealer would mean duplication and create more confusion.

Should big spends such as purchase of high-value watches, jewellery, furniture and expenses on luxury cruises come under the AIR? In several cases, unaccounted money is used to fund these transactions. But there are practical problems in tracking these transactions through third parties. Any such move could even be counter-productive as it could trigger a rise in unaccounted cash purchases.

A transaction which could be considered in the AIR list is electricity bill payment: consumers running up huge electricity bills can be tracked through electricity boards. Tax authorities are also considering some changes in the monetary limits for reporting transactions in the existing list. There are demands in some quarters to have city-wise limits for realty deals instead of a uniform threshold of Rs 30 lakh and above.

But the fact is that, there is some pressure at this stage to expand the AIR list. This is partly because of the governments move to drop the cash-flow statement in the income tax returns this fiscal. The fund flow statement is a summary of income and receipts including gifts and loans, investments and expenses made during the year. If the investments indicated in this statement are lower than the total value of investments captured through the AIR, then tax authorities can pin down the taxpayer for having undisclosed income.

Now, taxpayers only need to indicate their high value investments in their tax returns. But this serves a limited purpose. The tax returns will not capture the source of funds used to finance big investments. In fact, there are fears that dropping the fund-flow statement could impact compliance.

Policymakers say that the second best choice is to gather more information on the taxpayer from third party sources before assessment. This could at least act as a psychological deterrent for tax evaders.

FOR MAX TAX

Currently, seven agencies, including banks, registrar of properties, credit card companies, mutual funds and companies that have done IPOs, are listing out select financial transactions of their clients to tax authorities. They do so by filing annual information returns

Any discrepancies between the value of investments in the ITS and the declaration made in the IT returns could imply possible tax evasion

A transaction which could be considered in the AIR list is electricity bill payment

Tax authorities are also considering some changes in the monetary limits for reporting transactions in the existing list.

 
 
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