Right to Privacy for Taxpayers in India

The financial year in India begins from 1st April and ends on 31st March. The Income Tax Act (ITA) has set a mechanism through which taxpayers must declare all their income, pay the necessary tax dues and file for returns on the tax paid. It is mandatory for all taxpayers to do so within the prescribed time, as failing to do so may incur penalties, fines and, in some cases, imprisonment.

The tax authorities electronically review the tax paid by everyone to ensure they have cleared all their dues in accordance with the tax rules and regulations set by the government. When conducting such reviews, they may do so for:

• Limited Scrutiny: where the review is limited to specific issues/reasons.
• Detailed Scrutiny: where a detailed review of issues involved shall be conducted.

Such scrutinization procedures are quasi-judicial proceedings.

In cases where a tax return has not been filed, tax authorities shall make an assessment to the best of their judgement and calculate the sum payable by taxpayers.

While tax authorities usually conduct such reviews in the form of a personal appearance of the taxpayer or through authorized representatives appointed by the taxpayer, they have now started conducting the assessment electronically as well.

When tax returns are chosen for limited scrutiny, the review is usually completed expeditiously in a limited number of hearings. However, if chosen for detailed scrutiny, the completion time is 12-months from the end of the tax return filing year.

Indirect tax compliances are on a self-assessment basis in India. The tax department inspects a taxpayer when a proper officer (someone not below the rank of Deputy Commissioner) has reason to believe that the taxpayer has withheld any payments or evaded any tax payments. The decision to conduct such assessments are based on a risk profiling of the taxpayer, where their past tax history, current tax disputes, any high incomes, and other aspects are reviewed. The authorities conduct the review in the form of a personal appearance by the taxpayer or the appointed authorized representative of the taxpayer.

Types of Taxpayers

All taxpayers that must pay tax under the ITA must also file a tax return every year. The tax filing requirements may vary based upon the type of taxpayer, their gross income, gross turnover, and filing status. People who’s gross total income is lower than the prescribed tax slabs are exempted from filing a tax return. Irrespective of the residential status, all taxpayers must file a tax return. Even if the taxable income is nil, they must file tax returns and get refund of the tax withheld.

While individual and salaried taxpayers are not required to file a comprehensive tax return, corporate taxpayers must file a detailed and comprehensive return annually. Taxpayers with a turnover that exceeds INR 1 crore are required to obtain a tax-audit report from a Chartered Accountant (CA).

When the turnover is up to INR 2 crore, the non-corporate taxpayer may opt for payment of the tax on a presumptive basis and avoid the need for a tax audit.

Similarly, if a taxpayer undertakes a specified transaction with any associated party, it needs to be certified by a CA to be at a good price from a transfer pricing perspective.

• Tax authorities inspect the tax returns of different individuals based on complexity and risk profiling of the individual within the prescribed tax slabs. The ITA has provisions to extend the review period in cases that include transfer pricing. For some special cases, the authorities may order an audit to be conducted by a CA alongside a review.

When it comes to a business entity and an individual, there is no actual difference in the tax reporting requirements.
Under the GST law, an INR 2 crore limit in aggregate turnover has been set for a person or business entity for them to become liable for registration and tax payment if they are engaged in supply of both goods and services or services alone.

A person or entity only involved in supply of goods has a threshold of INR 40 lakhs in aggregate turnover to become liable for registration and tax payments. For some special-category states, this limit has been reduced to INR 10 lakhs in lieu of their economy and business generated. Apart from them, all other taxpayers must file their returns in a similar fashion.

Requesting Information

• Under the provisions of the ITA, during the detailed assessment, tax authorities may ask the individual to provide them with documents like account books, financial records, vouchers, invoices, agreements, bank statements, and any other document that may be important as per the tax officer.
• In case of individual taxpayers, tax authorities may interview either the individual or their appointed representative. In case of a company or firm, authorities may interview the employee representing the organization or a representative appointed by them.
• No restrictions have been placed for interviewing a taxpayer or a representative appointed by them.
• As per Goods and Service Tax (GST) laws, certain documents must be maintained by all taxpayers to justify tax return claims. They may ask for the such records during the review process and the taxpayer being reviewed is obligated to provide the same. The documents asked for may include transaction-related documents, bills, vouchers, trial balances, annual financial accounts, agreements, records, and account books.
• If the authorities have reasons to believe the taxpayer has not complied to the rules and regulations, they have the power to issue a Show Cause Notice.

Non-Disclosure of Information by Taxpayer

• Under the provisions of the ITA, if the taxpayer willfully fails to share the necessary documents, the tax authorities may fine a penalty of INR 10,000 for each instance of failure. Depending upon the different aspects of the case, authorities may choose to prosecute the taxpayer, which could lead to punishment in the form of imprisonment for up to one year and a fine as well.
• Depending upon the facts of the case and certain conditions, non-compliance of taxpayers may lead to search and seizure operations by the authorities.
• If an individual fails to cooperate with tax authorities and provide the necessary facilities required for inspection, they shall be punishable with rigorous imprisonment for up to two years and a fine as well.
• Tax authorities may summon the taxpayer to provide any document or information. The authorities may conduct search operations at the taxpayer’s premises to get crucial details or documents.
• If the required information is not provided to them, tax authorities may proceed to estimate the taxpayer’s taxable turnover as per their best judgement. In such cases, the assessment is based upon the details and documents available along with the past tax history of the individual.
• Under GST provisions, a penalty not more than INR 5,000 shall be levied if the taxpayer fails to provide the details and documents required.

Remedy to Taxpayers

Although the tax authorities can only request for certain documents like account books, records and history of the taxpayer, at times, the department may demand details that do not fall under the ambit of the scrutinization being conducted. This can cause significant harm and distress to the taxpayer and even lead to certain consequences that they might have to deal with.

It should be noted that there are no clear provisions stated in the Income Tax Act that address such issues faced by the taxpayers. However, such individuals can file a writ petition in the High Court against such unfair requests of the tax authorities.

In the case of S.R. Batliboi & Co. vs Department of Income (Delhi High Court), the income tax department conducted search & seizure of EMAAR-MGF, in whose premises S.R. Batliboi & Co. were present as auditors. The authorities seized laptops of two employees and demanded that all the data in the laptops, which included information of other parties as well, be made available to them for scrutinization. The High Court stated that during the search conducted by tax authorities, they cannot force auditors to share details of other parties stored in their computers.

Similarly, the Division Bench of the Delhi High Court, in case of N.K. Textiles Mills vs. CIT, stated that it was ‘necessary and essential for these officers to take into custody only such books as were considered relevant to or useful for the proceedings in question. It was not open to them to indiscriminately, arbitrarily and without any regard for relevancy or usefulness, seize all the books and documents which were lying in the premises.’ It further opined that ‘if they did so, the seizure would be beyond the scope of authorization.’

Conclusion

It is imperative for taxpaying individuals and entities to comply with the tax authorities and provide the certain documents, if requested. However, if the request does not fall under the ambit of the rules and regulations, they may legally challenge the request by filing a writ petition in the High Court.