Taxpayers cite high compliance burden despite anti-evasion efforts by tax dept

Effective april 22, 2025, the purchase of certain ultra luxury and premium products worth Rs 10 lakh or more would attract a 1% tax collected at source (TCS). These include wrist watches, handbags, sunglasses, shoes, sportswear, art objects (including paintings and sculptures), yachts, home theatre systems and horses for racing or polo. This is the latest in a series of steps by the Central Board of Direct Taxes (CBDT) over the past few years to get information about spending patterns to see if taxpayers are paying up in line with their incomes. Consider this. The government had, in the Union Budget 2024-25, introduced a 1% TCS on sale of motor vehicles priced Rs 10 lakh or more as well as other goods the central government may specify later. Similarly, it has levied TCS on purchase of foreign tour packages, money transfers or purchases through debit, forex or international cards and foreign remittances above Rs 10 lakh, except for the purpose of education. These are in addition to the tax deducted at source (TDS) on several transactions, not only on salary, interest income and rent but also on windfalls such as winnings from online games, betting, lottery and crossword puzzles. Officials and experts say the aim is not just revenue generation but monitoring of transactions. They look at various expenditure by taxpayers to understand if they are in sync with reported earnings and income tax returns. After all, most such provisions fetch less than Rs 1,000 crore in revenue per year. The TCS on ultra luxury goods, for example, is expected to bring in just Rs 200-250 crore in a fiscal year. The trend towards the formalisation of the economy and the rapid pace of economic expansion have increased incomes and, as a result, high-value purchases. At the same time, the informal economy, still 45-50% of the GDP, and the high use of cash have led to concerns about under-reporting of income. Despite a population of 1.4 billion, a little over 90 million people in India filed income tax returns in 2024-25. In December 2024, Minister of State for Finance Pankaj Chaudhary informed the Rajya Sabha that just 6.68% (eight million) Indians filed income tax returns in FY24. No wonder the government is taking steps to boost tax compliance and collections. In fact, the CBDT has been priding itself for shifting from aggressive to more taxpayer-friendly methods that are non-intrusive and, by and large, do not involve a direct face-off with taxpayers. CBDT Chairman Ravi Agrawal has also highlighted that the department has moved from being an adversarial entity to one that operates more on trust. The Rise Of Big Data While India Inc has been going to town about its use of big data and data analytics, the income tax department has, over the years, quietly set up a massive database with comprehensive information on individuals sourced through various agencies. Known as Project Insight, which started way back in 2016, it has an integrated data warehousing and business intelligence platform that uses data analytics and mining to create a 360-degree profile of taxpayers and identify non-filers. The CBDT has, over the years, expanded Project Insight into Project Insight 2.0 with new functionalities such as the Income Tax Transaction Analysis Centre (INTRAC) and the Compliance Management Centralised Processing Centre (CMCPC). While the INTRAC leverages data analytics and performs tasks related to data integration, data processing, data quality monitoring, data warehousing, master data management, data analytics, web and text mining, alert generation, compliance management, enterprise reporting and research support, the CMCPC uses campaign management approach (SMS, reminders, outbound calls, letters) to support voluntary compliance and resolution of compliance issues. Gokul Chaudhri, President, Tax, Deloitte South Asia, says at the centre of Project Insight is a powerful system that brings together data from multiple sources and uses analytics to spot discrepancies. “The core purpose is to widen the tax base and discourage underreporting,” he says. The linking of PAN and Aadhaar has also helped the department understand the genuineness of transactions, while the use of databases from various sources has brought it a wealth of information about taxpayers. For instance, the tax department taps into GST returns, bank transactions, mutual fund payments and even social networking sites to profile taxpayers’ spending habits. Not just that, the department is also looking at big-ticket cash splurges, be it for weddings, shopping, foreign travel or even IVF treatments. The CBDT is also rolling out Digital Intelligence and Analytics Labs in various parts of the country for forensic analysis of data. Kuldip Kumar and Tanu Gupta, Partners, Mainstay Tax Advisors, say it has been quite some time since the government started collecting data on financial transactions through tax returns, Annual Information Returns and TDS and TCS returns. Now, linking of these transactions with PAN and Aadhaar has significantly improved the accuracy of the data, they say, adding that the government has also invested heavily in modern technologies and automated processes, which have enhanced its data analytics capabilities and plugged revenue leakages. India now has information exchange agreements with over 170 countries, which has strengthened the government’s ability to detect unreported overseas income and assets, they point out. In recent years, the tax authorities have contacted several taxpayers with foreign income and assets to reconcile its information with the tax returns filed by them. Meanwhile, to help taxpayers, the CBDT has taken initiatives such as the Annual Information Statement (AIS) and the Taxpayer Information Summary (TIS) that give a complete statement of financial transactions in a reporting year. This allows them to verify the accuracy of the information and flag any discrepancy. Linking of transactions with PAN and Aadhaar has significantly improved the accuracy of data -TANU GUPTA,PARTNER, MAINSTAY TAX ADVISORS The CBDT has also introduced a new form, 26AS, which has information about deduction or collection of tax at source, specified financial transactions, and tax demands, payments and refunds. It has also brought in pre-filled income tax returns (ITRs) for individual taxpayers as well as a provision for filing an updated return by voluntarily admitting omissions or mistakes and paying the additional tax if applicable. It has also launched an e-verification scheme allowing taxpayers to disclose unreported or under-reported income in the updated ITR. Thanks to data analytics, taxpayers receive notifications via SMS or email regarding financial transactions. This has improved compliance. For instance, if you have claimed HRA exemption and pay rent of over Rs 50,000 per month without deducting TDS, the income tax department is likely to send you a reminder message. Similarly, in case of a mismatch between capital gains transactions and TDSTCS data, the taxpayer will get a message. The use of computer assisted scrutiny, algorithms and data analytics helps the department weed out inconsistencies in returns, seek explanations from taxpayers through notices and choose cases for further scrutiny. Amit Maheshwari, Tax Partner, AKM Global, says integration of Artificial Intelligence has further enhanced efficiency. “The department’s dedicated analytics team utilises AI tools to swiftly detect inconsistencies in returns, enabling real-time notifications to taxpayers,” he says. There are several instances of data analytics coming to the department’s aid. Last year, it detected a large number of cases where house rent allowance was claimed using bogus or unauthorised permanent account numbers. The trigger for the investigation was one case. A detailed investigation found thousands of such cases. Similarly, a compliance drive launched last November helped the CBDT recover over Rs 29,000 crore as undisclosed income from foreign assets from over 30,000 people. As part of the campaign, the income tax department sent notices through emails and SMSes to 19,501 taxpayers who had high foreign account balances or significant foreign interest or dividend income. The initiatives have led to a sharp rise in the number of income tax filers as well as income tax collections over the years. The number of income tax return filers is expected to cross 100 million this fiscal. Further, despite significant tax cuts in Budget 2025-26, income tax collections are expected to rise 16% to Rs 14.38 lakh crore this fiscal. The CBDT did not respond to a detailed email query by BT on use of data analytics and mining. The department’s dedicated analytics team utilises AI tools to swiftly detect inconsistencies -AMIT MAHESHWARI,TAX PARTNER, AKM GLOBAL What Next Tax administrators across the world, including the US, the UK, Singapore and Australia, are using data analytics. Experts say India has been late to the party, though the tax department is now steadily expanding the use of AI and machine learning along with data mining and analytics. Sandeep Jhunjhunwala, M&amp;A Tax Partner at Nangia Andersen, says while developed nations such as the US, the UK and Australia have long employed AI and data analytics to identify underreported income, flag dubious deductions and automate selection of cases for audit, India has rapidly advanced in this space with its own ambitious initiatives. “The Income Tax Department uses AI to monitor digital transactions in real time from UPI payments and credit card usage to e-wallet transfers, cross-referencing them with reported income to detect anomalies. AI-driven algorithms flag high-value or suspicious activities such as large donations, property deals or significant credit card expenditures,” he says. For developing nations, India’s model, built on digitisation and AI-powered analytics, offers a compelling road map for smart and equitable tax governance, he says. Chaudhri of Deloitte says authorities around the world use a range of data matching methodologies and analytics to drive compliance and detect evasion. “For instance, the Australian Tax Office has a rich history of using sophisticated analytics to compare taxpayers’ data with other taxpayers in similar circumstances. That tends to place a lot more onus on taxpayers making highly accurate self-declaration and self-assessment of their taxable income,” he says. The income tax department in India is set to further scale up the use of non-intrusive methods. This is especially crucial given the steep direct tax collection target of Rs 25.2 lakh crore for FY26 despite the Budget giving sops of Rs 1 lakh crore to individual taxpayers. The CBDT’s central action plan for 2025-26 has elaborated ways to further widen the tax net through measures such as close monitoring of advance-tax payers, checking bogus claims for exemptions and deductions and watching out for suspicious high-value cash transactions. Official sources say data analytics and mining techniques will be used to keep track of these transactions. The new Income Tax Bill has also introduced the concept of virtual digital spaces; tax authorities can gain access to these spaces during search and seizure operations. But while these measures have simplified tax administration, one of the key concerns is data privacy as well as the cost of compliance for measures such as TCS. The government’s decision to introduce a 20% TCS on international credit card spends under the Liberalised Remittance Scheme has also triggered a lot of heartache. Similarly, questions have also arisen over the TCS on luxury items over Rs 10 lakh with many noting that such products are hardly ever purchased through cash and so have an electronic trail. In fact, the Internet Freedom Foundation had written to the chairperson and other members of the Select Committee of the Lok Sabha that is examining the Income Tax Bill, 2025, seeking a review of the provisions around virtual digital spaces and putting in place safeguards. Maheshwari of AKM Global says while these advancements by the income tax department promote compliance, they also raise concerns about privacy. “Measures such as social media profiling, accessing WhatsApp chats, and examining mobile phone data may be perceived as intrusive, potentially affecting individual privacy,” he says, underlining that a balance between tax enforcement and protection of privacy remains a critical challenge overall. For now, the jury’s still out on how to achieve a fine balance! @surabhi_prasad

COMPANIES

NEWS

Taxpayers cite high compliance burden despite anti-evasion efforts by tax dept

The income tax department has enhanced its ability to monitor and profile taxpayers in a bid to prevent tax evasion and widen the tax base. But Taxpayers complain of high compliance burden and misuse of powers.