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February 18, 2021

IT department deploying investigation units in hunt for small tax evaders

by CA Shivam Jaiswal in Income Tax

IT department deploying investigation units in hunt for small tax evaders

One of the important wings of the Income Tax (IT) Department is the Investigation Wing. It may also be called the enforcement machinery of the department. The machinery works towards the broad objective of combating tax evasion. The mandate for the investigation wing is to gather intelligence and thereafter carry out enquiries, surveys and searches for detecting tax evasion and unearthing concealment of income and wealth. Basically, the emphasis in the investigation wing is on catching the evaders for creating deterrence against tax evasion. There has been a surge in reopening of returns of small-time tax evaders, with income tax authorities deploying investigation units to search and survey suspect cases of tax evasion of up to Rs 50 lakh.

For which years is the IT Department opening cases?

  • Cases are being reopened for assessment years 2015-16, 2016-17 and 2017-18 as no action will be possible beyond March 31 for these three years.
  • Changes proposed in the budget confined reopening of tax assessment to three years from the earlier six years.
  • However, assessment can be re-opened for up to 10 years if there is concrete evidence of concealed income of Rs 50 lakh and above.
  • The amendments are yet to be notified.

What amendments were brought in by Budget 2021 pertaining to investigation under Income Tax?

In the budget, finance minister Nirmala Sitharaman had proposed “to completely remove discretion in reopening and henceforth reopening shall be made only in cases flagged by the system on the basis of data analytics, objection of CAG and in search and survey cases”.

The central government reduced the timeline for reopening tax cases to three years from six years. It demonstrates the intent to reduce litigation and uncertainty for taxpayers. 

In serious tax evasion cases as well, only where Rs 50 lakh or more has been concealed, the assessment can be reopened up to 10 years and that too after the consent of principal chief commissioner.

New proposed amendment is a cause of worry for IT Authorities

  • Authorities in the finance ministry are worried about losing significant revenue coming from search and seizure cases on account of the new ‘amnesty’ granted to those evading tax up to Rs 50 lakh.
  • Tax officials stated that the burden of reopening smaller tax evasion cases may lead to lack of focus on bigger evasions.
  • Instructions have been issued to in investigation units across the country to collate and disseminate all information related to suspect tax evasion cases flagged by assessing officers, particularly those getting time barred by March 31.
  • Central authorities have sought a compliance report by March 2 where data of reopening of cases of small-time evaders are to be furnished by field formations.

Investigation units have also been looking at all suspicious transactions data shared by the Financial Intelligence Unit, besides ongoing investigation into the Panama and Paradise papers leak and HSBC list of Indians having deposits in Swiss accounts.

Switzerland’s Federal Tax Administration (FTA) sent information on around 3.1 million financial accounts to the partner states and received information on around 8,15,000 financial accounts from them. It is feared many Indians might have closed their accounts after a global crackdown on black money led to Switzerland buckling under international pressure to open its banking sector for scrutiny to clear the long-held perception of Swiss banks being safe haven for undisclosed funds.

Currently, around 8,500 reporting financial institutions (banks, trusts, insurers, etc) are registered with FTA. These institutions collected the data and transferred it to FTA. The count has increased from about 7,500 last year. The exchanged information will allow tax authorities to verify whether taxpayers have correctly declared their financial accounts in their tax returns. The data received by India can be quite useful for establishing a strong prosecution case against those who have any unaccounted wealth, as it provides entire details of deposits and transfers as well as of all earnings, including through investments in securities and other assets. The next exchange would take place in September 2021.

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