On November 9, a day after Prime Minister Narendra Modi announced the withdrawal of Rs 500 and Rs 1,000 currency notes, the government said those whose deposits did not match their income would face a 200% penalty. All accounts that receive deposits of over Rs 2.5 lakhs between November 9 and December 31 will be investigated, it added.
But the income tax department, on which falls this herculean task, is pessimistic about whether such a massive investigation is even possible, especially given its manpower crunch.
Only 51.6 million people – or a mere 4% of the population – filed income tax returns in 2014-2015. In comparison, in the United States, 45% of its population of 375 million declared their income.
Of the declarations made by those 51.6 million, nearly 30% are “no income” declarations. Moreover, according to senior officials in the income tax department, only 1% of total declarations are fully scrutinised.
In other words, in a country of 1.25 crore people, the actual number of cases that come under scrutiny is just 3.5 lakh.
The selection of accounts for scrutiny is random, through an algorithm called the Computer Aided Scrutiny Selection. This algorithm has been developed by feeding certain risk factors that could point to tax evasion. There are also a small number of manual selections to fulfill statutory needs when specific kinds of declarations are made.
But investigating even such a relatively small number of accounts is not easy. The scrutiny of accounts is such a complicated process that the department takes two years to complete the cases it has selected in a single financial year.
The shortage of manpower in the department is a factor in the slow process. According to KKN Kutty, president of the Central Government Employees Federation, the income tax department has a sanctioned strength of 72,000 and a 30% vacancy at the moment.
The demonetisation move means that the income tax department will have to scrutinise a large number of accounts. The process would involve issuing notices, analysing the replies in each case and then recommending action. This burden is over and above the department’s usual workload as a result of people filing their income tax returns at the end of the financial year in March.
“We are hoping that officials will not be given a deadline to finish the scrutiny of bank accounts,” said Kutty.
A senior tax official said that while the government wanted all accounts with deposits of Rs 2.5 lakh and above between November 9 and December 31 to be investigated, in implementation, this might not be the case. Usually, the department goes after high-value declarations and does not bother those with low incomes. In the case of post-demonetisation deposits too, the department might prioritise high-value deposits. “In any case, our task looks Himalayan, given the existing infrastructure,” the official added.