Wednesday, Jan 19, 2022
Accounting and taxation

It's Easy To Net Tax Evaders

Assembling the data in financial deals of taxpayers through automation can unearth loads of black money

It's Easy To Net Tax Evaders
| Illustration: Arindam
It's Easy To Net Tax Evaders

A question then arises is: How could the IRS in the US calculate the total wealth of Opus Dei, whereas the tax authorities in India have no such data on Yadav?

The answer can be found in John Brooks’ Business Adventures, published in 1969. And he says: "In the fall of 1963 the IRS took a big step towards increasing the efficiency of its collections still further, and, by a feat worthy of the wolf in Little Riding Hood, it managed to present the step to the public as a grandmotherly move to help everybody out." The step was the establishment of a so-called national identity file, involving the assignment to every taxpayer of an account number (usually his social security number), and its intention was to practically eliminate the problem created by people who fail to declare their income from corporate dividends, interest on bank accounts or bonds—a form of evasion that was thought to have been costing the treasury hundreds of millions a year. But that is not all. When the number is entered in the proper place on a return, "this will make certain that you are given immediate credit for taxes reported and paid by you, and that any refund will be promptly recorded in your favor," commented the then commissioner of income-tax Caplin brightly on the front cover of the 1964 tax-return forms.

The IRS then began taking another giant step—the adoption of a system for automating a large part of the tax checking process in which seven regional computers would collect and collate data that would be fed into a master data-processing centre at Martinsburg, West Virginia. This installation, designed to make a quarter of a million number comparisons per second, began to be called the Martinsburg Monster even before it was in full operation. In 1965, between 4 and 5 million returns a year were given a complete audit, and all returns were checked for mathematical errors. Some of the mathematical work was done by computers and some by people. But by 1967, when the computer system was going full blast, all the mathematical work was done by the machine, thus freeing many IRS employees to subject even more returns to detail audits.

According to a publication authorised by IRS in 1963, though "the capacity and memory of the (computer) system will help tax payers who forget prior year credits or who do take full advantage of their rights under the laws." In short, it was going to be a friendly monster.

Thus, the US began the process of checking or auditing every taxpayer’s returns from 1963. The IRS assembled most of the data relating to all the financial transactions from banks, companies, private trade, stock market, etc. and cross checked it through its computer system, with the amounts shown by the taxpayers on their tax returns. If the tax payers did not declare their incomes fully, there was the punishment for evasion running to five years in prison per offence, in addition to extremely heavy financial penalties. In view of the deterrence so provided and the evasion of tax to be definitely quantified by the computer system in every case with tremendous speed, Caplin went about advising the taxpayers that they should go about voluntarily complying with the tax laws. The taxpayers found no alternatives but to respond by declaring all their income with no attempt to hide any portion and the compliance was almost complete. For the taxpayer the computer system became a friendly monster. The law so framed, Caplin said, "had a mystic quality because of the very high level of compliance—universal compliance with a law has not always been a sign that it was either intelligent or just looking over the sweep of years. I think we will come out well."

A similar law prevails in the UK, Canada, Germany, Australia and Asian countries like Japan, Malaysia, and Singapore. In all these countries, including the US, income tax accounts for 70-80% of the total tax revenues.

In India, on the other hand, there is no computer system in the IRS so that the data regarding the financial transactions of every taxpayer in the country can be checked with speed. The result is that the IRS today cannot give anything like the data given on the Opus Dei in the USA.

In India, the term "voluntary compliance" is freely used by the IRS and the politicians asking taxpayers to pay taxes on their own. But such a plea, in the absence of the computer system, has had no meaning and evasion goes on merrily. It is not that the IRS in India does not have computers, but such computers introduced in 1990 are used for calculation of tax and total income, preparation of departmental information and other such calculations within the income-tax department. No computer system has been developed as in the US to assemble the data of all the financial transactions of the country’s taxpayers.

All this, despite the fact that income-tax was introduced in India on February 18, 1860, by James Wilson, as the finance member of Lord Canning, the then Governor General-in-Council. But in 1963, when the US launched the computer system and came to achieve almost total compliance with tax laws, India was getting ready with two Voluntary Disclosure Schemes in 1965, which yielded income-tax of about Rs 50 crore, a small collection compared to the total income-tax mop-up that year.

After that various other schemes were launched—10 Voluntary Disclosure Schemes, demonetisations of currency notes of Rs 1,000 and above, a Special Bearer Bond Scheme. All these schemes yielded very little revenue as the tax payers abused all the schemes to convert black money into white by paying a nominal amount of tax.

The results achieved by Voluntary Disclosure Schemes of 1997, which fetched total taxes of about Rs 10,000 crore, are typically illustrative.

When about 15 days remained for the closure of the scheme there was a terrific rush of disclosure returns. The officials who examined the returns found that the bulk of it contained disclosures of gold jewelry and silver, all of which was shown to have been purchased in 1962, the year in which the present Income-tax Act came into being, and the year in which gold and silver articles were of lowest values for any Disclosure Scheme. The taxpayers who did so obviously suffered tax of less than 0.1% on the amount disclosed, as it was obvious that the bulk of the jewelry disclosed was purchased in the late 90’s, when the values were much higher than in 1962. A grand scheme to defraud the revenue, which had gone round the country and when an alert was sounded to Delhi also mentioning such disclosures were supported by certain documents, the reply was that no amendment of the disclosure scheme was feasible or can be tried at that late stage.

Apart from this, by the time the 1997 Voluntary Disclosure Scheme was introduced, one of the parliamentary committees had observed that several big taxpayers had made successive disclosures in more than one scheme. But nothing was done in the scheme for 1997 to prevent this.

Yet another outcome of the Voluntary Disclosure Scheme 1997, according to a study, was that about 20% of the amount disclosed related to deposits in banks. By that time, most of the major banks had been nationalized and it was indeed very disturbing to find that taxpayers were still trying to hold their black money in bank deposits and it was also clear that no taxes had been paid on these moneys since the last disclosure in 1985. One cannot but say that had there been a computer system in the IRS in India as in the US by this time, taxes on such moneys would have been realized for the years prior to 1997.

There were also the following interesting discoveries of undisclosed bank deposits from 1970:

  1. Two deposits held by the promoter of one of the leading cine actresses for a total of Rs 40 lakh in two foreign banks in Chennai were traced through a search operation, in 1970.
  2. Deposits for Rs 50 lakh, secreted in bogus names by a leading Hindi film star and another actress from the Tamil Screen, papers of which were recovered from the person of a co-operative bank manager in Chennai around late 1980’s.
  3. Several co-operative banks searched have resulted in the discovery of fixed deposits in bogus names worth at least Rs 3 crore per bank.
  4. Several undisclosed accounts with huge transactions in the cases of stock market scamster Harshad Mehta, his close relatives and his companies were traced by the income-tax department with the help of Reserve Bank of India authorities. And on an analysis of these bank accounts, income-tax demand of Rs 11,000 crore was raised. The bank accounts traced were in different banks all over the country and related to the period of the stock scam from 1990 to 1992.
Apart from the bank deposits, tax evaders have been sinking their black moneys in certain other assets too.

There are vast investments of black moneys in shares and debentures, credit card deals, traveler’s cheques, mutual fund investments and primary bonds issued by the Reserve Bank. The data regarding all these investments can be easily brought on the computer system of the income-tax department. Several searches all over the country have shown vast unaccounted holdings of shares in companies. The Bombay Stock Exchange has super computer with complete data on daily transactions but the income-tax department has so far not made use of it. It has also not utilised the data lying in the computers of the organizations in charge of demat of shares.

Much more than the moneys sunk in shares is the moneys invested in real estate. Properties and land were being sold for only 20% of the real values and the balance of 80% given in cash since 1947. But later on, when the tax rates were lowered to 30% for individuals and 35% for companies, the black portion got reduced to 40%. It is difficult to trace such black transactions through the computer systems. But then if the data on all the property transactions, now on the computers maintained by property registration offices all over the country, is tapped and brought on the computers of the income-tax department, it would be found that many owners of property have not filed income-tax returns at all.

Indians today are the biggest hoarders of gold and diamond jewellery in the world. This is another asset in which tax-evaded money is being safely invested. In the search operations conducted by the income-tax department, huge unaccounted cash balances and gold and diamond jewellery have been found in the bank lockers maintained by taxpayers in bogus names too. At current market rates, purchases of gold and silver are estimated to reach about Rs 75,000 crore this year. It is clear from the developments mentioned in connection with the 1997 Voluntary Disclosure Scheme that most of the jewellery is purchased by taxpayers from their incomes not declared for taxation purposes. Gold and diamond sales figures, however, are not difficult to secure on the computers of the tax department. This trade, considering the effect of VDS 1997, should have been selected immediately thereafter for securing all the information about it for taxation purposes. It is, however, noticed that most of the jewellery merchants do not have bank transactions. Hence, it is necessary to introduce a law requiring them to transact only through cheques and issue computerized bills.

A considerable portion of the post office savings accounts in different forms too constitutes another huge pile of tax evaded moneys. And, this is easy to get on the tax department’s computers for verification with individual returns, as the data is available with the government itself.

Undisclosed stock-in-trade held by companies and traders, undisclosed business assets like lorries, cars and private assets, unaccounted cash holdings, ability to give extensive bribes to protect business and other interests and the ability to incur high expenditure— all these will vanish once a fear is created among taxpayers about the use of computerized data for taxation purposes.

Benami investments are typical of the Indian economy. Even big companies have indulged in this area to bring total secrecy to their undisclosed assets. All such investments will come on the computers of the income-tax department, but the information will be confined to the names of benamis and assets held by each of them and the benamidars will have to be traced by sometimes, extensive studies by teams of revenue officers.

The International Monetary Fund reported in 1985 that India has the largest account holdings in the Swiss Bank Accounts in Asia. Thus, India was ahead of the developed countries of Asia in terms of Swiss Bank accounts holdings because of its proliferating black economy. Just Prior to the introduction of the disclosure scheme in 1997, Business India, a trade magazine reported the Swiss Bank accounts to be at Rs 500,000 croes. But the Reserve Bank of India had given the figure at Rs. 830,000 crores for 1992 for all accounts held abroad by Indians.

Against this estimate, the revenue from income-tax and corporation tax, both collected by the income-tax department as per the Budget estimate for 2006-2007 is Rs 210,419 crores. The fiscal deficit for 2006-2007 is estimated at Rs 148,686 crore, which represents total expenditure by the Centre minus total revenue receipts. Swiss bank accounts are totally shrouded in secrecy and hence no information will be available to the computer system of the income-tax department. But it is well known that the top companies of the country, the very top industrialists and businessmen and some prominent persons hold Swiss accounts, which have originated from the conversion of large black money holdings generated in the country into foreign currencies and deposited in the Swiss Bank accounts, underinvoicing of exports, deposit of secret commissions and other receipts abroad, etc. The moneys in Swiss Bank accounts have been utilized by some of the top companies to import huge machineries at vastly underinvoiced prices, to meet stay and other expenses on luxuries during foreign trips, payment of secret trade commissions in foreign currency, unaccounted funds in Indian currency paid by big industrialists to those contesting general elections, against Swiss account holdings of the persons taking Indian currency, and conversion of Swiss account holdings into shares and debentures issued by companies to their benamis.

Big taxpayers have been maintaining foreign currency accounts in several developed countries and the modus operandi is the same as in the case of Swiss accounts though such accounts are free from the veil of secrecy. Evidence regarding such accounts has come to the notice of the tax authorities in posts and courier receipts intercepted in search operations when original bank papers had been received and the taxpayers totally owned up that such bank deposits are from secret unaccounted funds. Here is an area, where the government should think of setting up a strong revenue intelligence system as in the US, which along with the computer system is able to track most of the tax evasion.

The ability to accumulate black wealth was first tasted by businessmen in India during the Second World War and was found useful for avoiding and escaping high rates of tax during the times the income-tax rates were usurious and very high. During this period, compliance with tax laws came down, and all schemes to unearth black money failed. Noticing this phenomenon, the maximum income-tax rates were reduced to 30% in the case of individuals and 35% in the case of companies and about 10 years have passed since the reduction was effected. It was expected that this was enough to stop tax evasion altogether. But such expectation was belied and evasion continued at the same level as earlier. The Supreme Court directed the Centre after the closure of voluntary income disclosure scheme in 1997 not to have any such scheme hereafter and stated that investigation by the income-tax department should be the basis of unearthing tax evasion.

Thus, it becomes necessary to look at the other side of the picture, namely, the extent of tax evasion and its effect on the state of government treasury. Many estimates of black money have been made but in the absence of full and accurate facts, all the figures given remain inaccurate. So an attempt was made to determine the extent of tax evasion in the Mumbai income-tax charge, which collected about 35% of the total income-tax collections of the country and 43% of the corporate tax collections in 1998-99. The survey revealed that none of the taxpayers concerned declared for taxation purpose anything more than 25% of their true incomes after 1999. All the estimates of black money made so far, were not as high as the figure, which would correspond to 75% of true income. The figure so arrived at was given to the press, specifying the basis on which it was arrived at. Not a single protest was received from any taxpayer. The figure was thereafter cited some more times and even then no protest was received. There is therefore every reason to believe the estimate.

The estimate of 25% of the real incomes, however, applies to individual taxpayers. The evasion appears to be very much higher in the case of companies. There are companies with a sizable portion of their capitals held by benamis created by the promoters of the companies. There are also companies with their entire capital claimed to have come from the countries regarded as tax havens. There are private limited companies with such tax evasion devices in their accounts. All these companies are yet to be investigated and asked to pay the tax. The computer system to be evolved with a National Data Bank of Information is bound to throw up the required data, and study teams appointed for investigating the data, together with an effective intelligence set up, evolved to unmask evasion and increase tax collections is a must.

The companies to be investigated have practiced huge tax evasion. The tax evasion goes beyond six years, the time limit provided under the Income-Tax Act u/s 147. As company taxation is a core area, and involves those with the bulk of wealth of the nation, to tax them properly is a matter of priority. Hence, after the setting up of the computer system, at least for companies, there should not be any time limit for opening of assessments u/s 147.


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