IT-ENABLED THIRD PARTY INFORMATION TO IMPROVE TAX COMPLIANCE

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1 IT-ENABLED THIRD PARTY INFORMATION TO IMPROVE TAX COMPLIANCE SANTIAGO, CHILE APRIL Rajul Awasthi Global Tax Simplification Team Investment Climate Department The World Bank Group

2 Strategic issues The building blocks The Indian experience The Italian experience

3 Promoting voluntary compliance Making it easier to comply Simplification of procedures / taxpayer interfaces Quality taxpayer services with IT enablement and assured service metric Strengthening enforcement Establishing compliance risk management system Identification of non-filers and stop-filers Risk based selection for audit; advanced auditing techniques Systems for investigation of organized tax frauds: computer forensics for handling digital evidence Data mining of own and third party sourced databases

4 Types of non-compliance Non-compliance can be on account of 1. Non filing of returns 2. Wrong or incomplete disclosures/claims 3. Aggressive tax planning 4. Organized tax frauds Risk based auditing addresses 2 and 3 A compliance risk management system, which includes information from third party sources, can address all these situations

5 Strategic issues The building blocks The Indian experience The Italian experience

6 What we need Enabling legal provisions Powers of tax authority to systematically and regularly collect information about taxpayers from third party sources Third party sources are typically banks, financial institutions, credit card companies, company registry, property registry IT infrastructure for creating intelligent databases Hardware and information technology infrastructure Data management software Human resource capabilities Skills needed to operate and use databases Training Retention

7 Strategic issues The building blocks The Indian experience The Italian experience

8 Statistical profile of India s tax base No. of taxpayers on 1 st April (in million) No. of returns filed (in million) No. of PAN holders (in million) No. of returns processed (in million) No. of refund checks issued (in million) Amount of refunds issued (in million Rs.) 12, ,870 No. of scrutiny assessments (in million) Net collection (in Rs. million ) 734,970 4,459,620 Cost of collection (as % of net collection)

9 Strategy to improve compliance Promote voluntary compliance Leverage technology Improving quality of taxpayer service Reduce cycle time for processing/issue of refunds Providing tools for transparent enforcement Shift to non-intrusive tools of investigation Set up intelligent databases of financial transactions information using tax ID (PAN) as the identifier Extract information available in the public domain

10 Creation of intelligent databases Taxpayer identification database: PAN Permanent Account Number Name, father s name, date of birth, address, legal status Nature of business, constitution of firm/company Mandatory requirement of quoting PAN on several financial transactions creates own PAN based information source Tax payment database: OLTAS (On line tax accounting system) From banks PAN, name, amount, date Tax deduction database: TDS (tax deducted at source) from tax deductors Returned/assessed incomes: from tax returns Mandatory e-filing of company and business returns Computerized processing of all returns

11 Creation of intelligent databases 2; and using existing ones Security transactions database: Security transactions tax from stock exchanges PAN, name, client code, nature/amount/date of transaction High value financial transactions database Annual information returns required to be filed by third parties electronically Cash deposits in banks (over Rs. 1 million); credit card payments (over Rs. 200,000); stock transactions, sale/purchase of properties Information on other transactions from mandatory PAN quoting External databases Import/export codes, customs Company registry database Commercial databases Suspicious Transactions Reports from Financial Intelligence Unit

12 Annual Information Returns introduced 2005 Required these third parties Banks Stock exchanges Reserve Bank of India (Central Bank) Mutual Funds Companies Credit card companies Registrars of property To electronically furnish data of specified high value financial transactions transacted by taxpayers To generate transaction statements for each taxpayer Correlate information on financial transactions with returned incomes/ assets/tax payments Convert information into actionable intelligence

13 Schematic diagram ITDMS (Income tax data management system) Director in companies Partner in firms PA Lineal ascendants / descendants Other matters of interest PA Get Identity particulars PA Particulars of siblings Start PAN or Name or Mobile AS Get income details PA Persons with common address? Get investments / OLTAS /TDS Get prepaid taxes AIR data CIB data STT Source: Presentation of S. S. Khan, ex-member, CBDT, CASS/ India September 2011/SSK

14 Summary statistics of data in Annual Information Returns in Transaction Number Amount (Rs. crore) Cash deposits exceeding Rs. 1 million in banks 116,62 214,645 Credit card payments over Rs. 200, ,562 4,398 Purchase of units of mutual funds over Rs. 200, , ,684 Purchase of bonds of companies over Rs.500,000 12,970 71,349 Purchase of shares of companies over Rs.100,000 47,011 42,329 Purchase of immoveable property over Rs. 3 million Sale of property immoveable over Rs. 3 million Purchase of RBI bonds over Rs. 500,000 34, ,769 TOTAL 891, ,089

15 Summary statistics of data in Annual Information Returns in , , F.Y. No. of AIRs No. of transaclons Value of TransacLons (Rs. Crore) ,162,593 1,679, ,287,322 2,702, ,655,007 5,312,116 1 crore = 10 million

16 Summary statistics of data in Annual Information Returns in TransacLon type TXN CODE TRANSACTION COUNT AMOUNT OF TRANSACTION (Value in nos.) (Value in Rs. Cr) Cash deposits 1 1,614, ,388 Credit card 2 972,233 38,373 Mutual Fund 3 1,464,354 7,900,370 Bonds / debentures 4 61, ,971 Shares 5 393, ,079 Immovable property purchase 6 204, ,106 Immovable property sale 7 202, ,105 RBI Bonds 8 19, ,774 TOTAL 4,932,463 9,966,164 1 crore = 10 million

17 Impact Increase in income tax collections Growth rate jumped up from average 24.3 per cent (from to ) to 39.3 per cent in (a year after implementation of third party information) Even on this high base, growth in sustained at 36.6 per cent Increase in number of taxpayers registered and filing returns From 21 million in 2002 to 31.2 million by 2012

18 Strategic issues The building blocks The Indian experience The Italian experience

19 New law introduced in 2004 in Italy Law n. 311/2004: The law has been adapted in order to extend the power of the tax authority to all financial operators (not only banks) and all contracts and operations (not only accounts); and to Allow tax officials to receive data concerning contracts and operations realized by individuals and companies with all kinds of financial operators (banks, post-offices, holdings, trust companies, brokerage companies, etc.); and Introduce new data transmission modalities and a new IT system allowing data transmission through a certified system and in a secure network Implemented in 2006

20 Objectives of the new law The objectives of this tool are following: to improve the efficacy and the quality of financial audits; to increase the number of financial audits, as they are considered more effective than other audit instruments; to speed up the financial audit process, through the elimination of paper flow and the standardization of the requests of the Tax Agency and the replies of the financial operators; to include the internal audit process concerning financial audits in the IT system

21 Benefits This law allowed the tax agency to obtain: wide and complete information regarding each subject examined; standardized information on contracts and operations, fixed by law in accordance to the bank and financial law; information on connections between different subjects, with particularly important effects in the field of anti-fraud activity; possibility to process incoming data, in order to expedite the analysis of results and the connection between different operations and different subjects; speed up the process, starting from the authorization to the final analysis of results and consequent increase in the number of financial audits; probable deterrent effect due to the announcement of this new instrument coming into force.

22 The financial contracts and operations database The Financial Contracts and Operations Database is populated by the information concerning contracts and contractors that each financial operator is obliged to transmit monthly and on-line to the Revenue Agency This database can be opened exclusively through the IT tool provided Inaccessible to tax officials unless they have obtained the necessary authorization to the financial audit. Once the tax official gets the authorization, the system automatically and immediately provides all relevant information Both the financial contracts and operations database and the general IT audit procedure are shared for different purposes by other institutions - Guardia di Finanza, Customs Agency, Public Prosecutor s office, Italian Exchange Bureau Also useful for anti-money laundering and criminal investigations

23 And from December 2011, some more information submission Financial institutions must report, by April 30, 2012 operational data regarding VAT amounting to 3,600 euros or more made from July 6 to December 31, 2011 through credit cards, debit or prepaid cards (electronic money).and some other requirements.

24 Impact tax authority Impact of the innovation on the functioning of tax officials has been considerable Allowed tax officials to obtain on-line all financial data regarding subjects controlled and subjects connected, only through a simple on-line query. All paper flow, both for getting authorization by the and for contacting each operator, has been eliminated The Financial contracts and operations database implemented in the IT tool has allowed further acceleration of the control activity, giving an immediate list of operators to be involved in the audit. Another big advantage: getting on-line replies in XML format, allowing easy data processing, effective analysis of results, and time savings

25 Impact audits and revenues The Revenue Agency carried out 5135 assessments in 2007 following financial audits (in comparison with 1875 in 2006), with an increase of 174%. The relevant tax amount assessed in 2007 was 503 million euro with an increase of 124% in comparison with 2006* Direct tax collection growth From average of 13.3 per cent of GDP ( ), direct tax- GDP jumped up to 14.4 per cent in 2006 (first year of implementation) to 15.2 per cent in 2007** Even during the slowdown years of , the average tax- GDP ratio for direct taxes did not decline much, averaging 14.9 per cent** *Source: OECD/Italian Revenue **Source: IMF

26 Impact The Economist, January 3, 2008: Vincenzo Visco, deputy finance minister in Romano Prodi's centre-left government in charge of collecting taxes, had a splendid Government revenues soared by some 25 billion ($35 billion), after a jump of 36 billion in Part of the rise was due to GDP growth; part to measures taken by the previous government of Silvio Berlusconi. But an official report to parliament last October attributes almost two-fifths of the revenue rise to improved tax collection..he has pushed through legislation to allow the finance police and civilian inspectors to crossreference data from different sources, including bank accounts. People now know we know, he says ominously. Last year, it was reckoned, more than half the improved tax compliance was voluntary. *Source: CIAT **Source: IMF

27 Thanks for your attention!