Paying your taxes honestly? How GST data may be used to track tax evaders

With GST, it may now be tough to evade the taxman. Finance secretary Hasmukh Adhia said on Tuesday that goods and services tax (GST) will "change the game" for those who avoid paying taxes.

When GST was introduced it was hailed as a game-changing tax reform. Do you know what is game changing?  "It is an innovation which can spoil the games people were playing to avoid paying taxes," he said.

According to people familiar with the development, the government may use data obtained through GST filing to track those who are escaping income-tax.

The government is setting up a mechanism wherein data obtained through GST reporting could be correlated with the income-tax filings. According to Economics Times, the project is still in the initial stage.

Through the mechanism, big data analytics would go through all the data and raise red flags.

Currently, the GSTN and tax department already have the data to carry out the risk analysis where outliers in terms of the industry average of tax payments are scrutinised and those not paying or under-reporting company revenues could be questioned,” Jaskiran Bhatia, partner, tax technology and analytics, Deloitte India told ET.

How can the taxman track tax evaders?

To understand how the taxman will be able to track tax evaders, let us take a look at how corporates avoid paying tax.

Take the example of a unit manufacturing a specialised chemical used in the pharmaceutical industry. The promoters of the company have a turnover of about Rs 30 crore annually for the past few years, but they were paying corporate tax only on about Rs 4 crore.

Now, discrepancy would be questioned

However, now it is important to link GST return with the financials submitted to the income-tax office. Any discrepancy would be questioned by the income-tax office.

Some other methods of tax evasion are

Stay small, insignificant: Tax experts said that smaller companies with a size of Rs 50 crore or below are more difficult to track. Hence, they stay small and redirect revenues into personal accounts.

Cash transactions: Cash does not leave a trail behind. Hence, companies have been found to deal heavily in tax so that they can avoid taxes.

Back-date transactions: One of the most common methods used to avoid paying taxes is to backdate the transaction to a particular day which is convenient to both the payer and the claimant.

Inter-state movement: Companies use this technique to move goods from one state to another state. Once the vendor in the state which receives the good claims input credit the vendor in the state who sells it vanishes.

Changing product category: One of the mechanisms which some companies use to avoid paying taxes or cut down on tax is to change the category of product that they manufacture. Several products including puja products, khadi, agricultural equipment, earthen pots and local handicrafts are exempt from taxation.

The rollout of GST has been seen as a measure to plug loopholes and ensure that businesses across the country start paying taxes. Using high-end return filing and matching system, the new tax regime makes it tough for tax evaders. Introduction of GST is also seen as the government's overall strategy to nab evaders.

The tax department has commenced raids across the country, starting with the biggest income-tax evaders, on those creating and owning benami properties.

The tax department is already analysing a maze of data including phone records, credit cards and PAN details, tax returns and even social media platforms of the tax payers.