Opinion The taxman cometh

WITH a large portion of the currency returning to the banking system as cash deposits from citizens holding notes of Rs 500 and 1,000 denominations, the government has initiated its next step. It announced two big moves, both almost as a knee jerk reaction to the building scenario, and both fraught with many flaws. One, it amended the Income Tax Act to introduce another disclosure scheme allowing those with unaccountable money to pay 49.9 per cent tax, besides depositing 25 per cent of the unaccountable money for four years without any return, and thereby, opening a new window for them to come clean. Two, it simultaneously pushed the wheels of the juggernaut in the direction of a digital economy by incentivising use of credit and debit cards and online payment mechanisms, to reduce the economy’s dependence on cash.

The disclosure scheme notwithstanding, a humongous task lies ahead for the income tax department. Just like banks, which are not used to handling unending queues of customers to deposit or withdraw cash, the I-T department too is not quite geared to checking lakhs of unusual financial transactions. In this drive, the tax officers’ job starts after the bank employees’ ends. The department will have to sift through voluminous data of large deposits in Jan Dhan, savings and current accounts furnished to it by the banks. The biggest fear is the automatic alerts such big data analysis can trigger without distinguishing between the good and the bad. A housewife’s deposit of her long-preserved savings of a couple of lakhs of rupees will not be seen as different from that of a money launderer. The taxman’s hammer will fall on both with equal force. A barrage of income tax notices, summons and consequent scrutinies can potentially derail the prime minister’s “minimum government, maximum governance” mantra.

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The spectre of an inspector raj hovers around the corner. In a normal year, the tax department handles 3,20,000 scrutiny cases. This year and the next, even if red flags are raised on a minuscule one per cent of the total 40 crore bank accounts, the tax officials will have 40 lakh cases to look at. With just 4,000 officers available for scrutiny assessments as on date, the workload of each will increase at least 10 times. Whether the official will pursue all the large deposits is not the question. What should be a cause for worry is the potential of the tax officer, who has enormous discretionary powers at his disposal, to harass, especially the small and honest taxpayer. The collateral damage will reflect on India’s rank in the “ease of doing business” index.