The government is planning to widen the scope of the statement of financial transactions (SFT). It is an initiative under which various institutions report specified transactions to the tax department. For example, when someone travels abroad, the airline could report the name, PAN and other details of the flier to the tax authorities. Tinesh Bhasin spoke to experts to understand the impact of the widening of SFT on taxpayers, how the government will use the data, whether it would infringe the privacy of individuals and if there could be an increase in the compliance burden on taxpayers.
Compliance burden may increase if data mismatches
Gathering more information and data analytics is one of the ways to identify new taxpayers. Given this, the government could expand the scope of SFT. However, it may be rethinking on the thresholds for reporting (a tweet on SFT was deleted recently).
The tax department has created a robust IT infrastructure to carry out 360 degrees financial profiling of taxpayers. If the income mentioned matches the information on spending gathered by the tax department, the taxpayers may not receive any notice. But the department could investigate mismatches via automated processes. In such a case compliance burden may increase.
There should be a balance between the revenue potential of such measures and compliance burden and data privacy. Data privacy is a concern, but the law provides statutory protection from disclosure of data to other agencies. Respecting the privacy and maintaining confidentiality are among the taxpayers’ rights incorporated in the new taxpayer’s charter.
Data collection may impinge on the privacy of taxpayers
It is the policymaker’s responsibility to maintain a balance between gathering legitimate information versus intrusive and exploratory data gathering, which may impinge on the privacy of a taxpayer.
The hi-end technology tools will equip the tax authorities to better track non-compliance and tax evaders, for example, by identifying unusual or large transactions, which may not match with the profiles of the taxpayers.
In the initial period, more data and analysis may lead to an increase in enquiries. This might be equally necessary to validate the taxpayers’ returns. We hope that as the tools and analytics gain sophistication and maturity, hardships regarding these enquiries will come down.
An honest taxpayer should not be worried about the extent of information the government collects. The government norms and transparency should give him the necessary comfort and confidence that his information will be safe, and he won’t face any unnecessary enquiries.
Citizens may face hardship if govt keeps thresholds low
It’s not surprising that the tweet on widening the tax base via expansion of the scope of SFT was deleted. The centre had recently announced major tax reforms in terms of faceless assessments, issuing taxpayers charter with legal sanctity and a commitment to build trust with the taxpayers.
The government needs to review the threshold limits before going ahead with any such measures as some were ridiculously low. If they are notified as mentioned in the tweet, it would cover a large section of the population. The third parties transacting with such taxpayers would see increased compliance burden of reporting SFTs.
The whole income tax system, which is already in transition mode due to the introduction of faceless assessments with effect from 13 August, would be further burdened due to excessive transactions being reported under SFT if the scope is expanded. It would also increase hardships for tax filers and taxpayers, and certainly not contribute to bridging the trust deficit which the government is striving for.
Government’s objective must be to cover the ultra-rich only
Although widening of SFT is an excellent initiative, the government’s objective must be to cover only ultra-rich by setting higher monetary limits.
Data analysis, both by experts and artificial intelligence, should be based on the consumption pattern and the income disclosure. Tax authorities hopefully will not send notices based on a single criterion but will analyze the details for a broader analysis of income submitted for taxation.
While honest taxpayers have nothing to worry about the demand, the moot point remains on the compliance burden (due to tax notices). It is hoped that the government will further rationalize the monetary limits for different criterion so that the compliance burden is reduced significantly.
The initiative may act as a deterrent to avoid tax evasion, and the taxpayers may offer higher income to tax, thereby leading to better collections. The government must decide an appropriate time for implementation as any untimely illegitimate tax burden will lead to unnecessary stress.