Collect tax but don’t terrorise taxpayers

Collect tax but don’t terrorise taxpayers

The income-tax department has reportedly asked more than 18 lakh people to give information on the source of deposits, post demonetisation, of Rs 500 and Rs 1,000 notes. Posting polite letters of inquiry, based on information shared by banks, might seem innocuous — to a new arrival from Mars.
To those used to the ways of the I-T department, it is an ominous missive, whose follow-through, if not necessarily its denouement, could prove harrowing. Apparently, formal notices will follow for those who have no convincing explanations.
Instead of scoring a large self-goal by way of needless unpopularity, the government could wait for people to disclose the source of their cash deposits when they file their income-tax returns later this year.
So, the tax return form should be redesigned to accommodate a special schedule for disclosures on cash deposits made between November 8 and December 30 last year. Preliminary government data shows an average deposit size of .`5.03 lakh in 1.09 crore accounts. About five crore tax returns are filed, but less than 1% are taken up for scrutiny.
Given that demonetisation was a one-off exercise, the tax department can always take up more cases for computer-assisted scrutiny this year. Action must be taken to fight tax evasion, indisputably. But strong-arm measures will be counterproductive, and the need is for the department to minimise interface with the taxpayer.
A modern tax administration calls for intelligent use of technology and use of big data to track evaders. Already, the annual information returns, filed by third parties that include banks, take the department half the way there. The department should walk the remaining distance, not force potential taxpayers to run scared.