Third-party information as a tax tool
Estimated reading time: 3 Minutes
“In this world nothing can be said to be certain, except death and taxes”, said Benjamin Franklin. Taxes have always been frowned upon and tax collectors have been vilified and despised, except probably by Christ (and since he came for the scum of the earth, this is the exception that proves the rule).
Tax management systems across the world have woken up to the immense potential of harnessing third party information to arrest evasion. Government departments like land registration, licensing authorities, motor vehicle department, insurance agencies, banks, and sellers of gold, silver, foreign currency and other personal effects possess information that is vital to the tax department in verifying the correctness of income tax returns filed by payers. This system of tracking tax evasion through third party information is an alternative plan of the tax administration, should the taxpayer choose not to disclose relevant information to the revenue authorities. Third party information tools can therefore act as back-up for the tax administration to ensure that people pay their due taxes.
Most of the OECD countries utilise third party information to aid tax management. Turkey employs a tax identification number that is connected to banks and land registry that feeds the tax department with necessary information. Kenya has started tapping into third party information with its latest Finance Bill. India’s Income Tax Act casts responsibility on third parties like banks, insurance agencies and private sellers to glean purchases worth $1000 and report them to the tax department for audit and verification. Aiding this exercise is the mandatory use of PAN (Permanent Account Number), an alpha-numeric code of ten characters that is unique to each entity, be it individual, company, firm or private trusts.
The success in using third party information hinges on the effective management of information bytes, which is best done through digital tools. A common economic metric like the PAN in India, Tax Reference Number in South Africa, Tax File Number and Business Number in Australia, etc. allow to capture information, cross verify and even pre-populate tax returns (where tax returns get filled automatically due to data capture from banks and other agencies). Many countries have economic councils and inter-department committees comprising of income tax, customs, police, enforcement directorate, etc. that share data periodically. There are standardised instructions laid down by most governments on how to share information and the details of procedures to be followed upon receipt of information.
Third party information harvesting requires a high level of interaction and co-ordination among various government agencies. Protocols and information sharing interfaces would also mean that sharing of financial intelligence between departments is made easier. This means that departments will no longer work in silos.
Mining of third party information bases for potential tax evasion has its share of critics too. There are serious concerns over State agencies collecting and holding information from other parties, in particular around the risk of invasion of privacy. However, a plain reading of the International Covenant on Civil and Political Rights makes it clear that data collection unlike surveillance, censorship or communication interception do not fall in the same category. Revenue departments are usually governed by information protocols that are accessible only to specific officers and upon need-based requests. Hence the chances of misuse are remote, as proven by the experience in many countries where the system is in place.
Another key concern is the lack of manpower to handle the information load in most revenue agencies. The investigation and chasing of tax evaders can be a time consuming affair, since many layers have to be peeled off to get to the true nature of an economic transaction. Most countries function with skeletal manpower as a result of the downsizing of government machinery. The solution then is the increased use of ICT tools in revenue management. Most countries have full-fledged informatics/information technology ministries that can develop information-sharing software and pre-population of tax return.
Efficient revenue management is the foundation of good governance. The way the State taxes its people speaks much for the quality of governance in the country. Time has come to realise that there can be no taxation without either representation or information.
Susan Thomas is an alumna of the Blavatnik School of Government (MPP Class of 2015). She works with the Government of India as Additional Commissioner of Income Tax and this piece is a summary of the policy proposal she developed for Uganda as part of her MPP summer project.
Tax management systems across the world have woken up to the immense potential of harnessing third party information to arrest evasion. Government departments like land registration, licensing authorities, motor vehicle department, insurance agencies, banks, and sellers of gold, silver, foreign currency and other personal effects possess information that is vital to the tax department in verifying the correctness of income tax returns filed by payers. This system of tracking tax evasion through third party information is an alternative plan of the tax administration, should the taxpayer choose not to disclose relevant information to the revenue authorities. Third party information tools can therefore act as back-up for the tax administration to ensure that people pay their due taxes.
Most of the OECD countries utilise third party information to aid tax management. Turkey employs a tax identification number that is connected to banks and land registry that feeds the tax department with necessary information. Kenya has started tapping into third party information with its latest Finance Bill. India’s Income Tax Act casts responsibility on third parties like banks, insurance agencies and private sellers to glean purchases worth $1000 and report them to the tax department for audit and verification. Aiding this exercise is the mandatory use of PAN (Permanent Account Number), an alpha-numeric code of ten characters that is unique to each entity, be it individual, company, firm or private trusts.
The success in using third party information hinges on the effective management of information bytes, which is best done through digital tools. A common economic metric like the PAN in India, Tax Reference Number in South Africa, Tax File Number and Business Number in Australia, etc. allow to capture information, cross verify and even pre-populate tax returns (where tax returns get filled automatically due to data capture from banks and other agencies). Many countries have economic councils and inter-department committees comprising of income tax, customs, police, enforcement directorate, etc. that share data periodically. There are standardised instructions laid down by most governments on how to share information and the details of procedures to be followed upon receipt of information.
Third party information harvesting requires a high level of interaction and co-ordination among various government agencies. Protocols and information sharing interfaces would also mean that sharing of financial intelligence between departments is made easier. This means that departments will no longer work in silos.
Mining of third party information bases for potential tax evasion has its share of critics too. There are serious concerns over State agencies collecting and holding information from other parties, in particular around the risk of invasion of privacy. However, a plain reading of the International Covenant on Civil and Political Rights makes it clear that data collection unlike surveillance, censorship or communication interception do not fall in the same category. Revenue departments are usually governed by information protocols that are accessible only to specific officers and upon need-based requests. Hence the chances of misuse are remote, as proven by the experience in many countries where the system is in place.
Another key concern is the lack of manpower to handle the information load in most revenue agencies. The investigation and chasing of tax evaders can be a time consuming affair, since many layers have to be peeled off to get to the true nature of an economic transaction. Most countries function with skeletal manpower as a result of the downsizing of government machinery. The solution then is the increased use of ICT tools in revenue management. Most countries have full-fledged informatics/information technology ministries that can develop information-sharing software and pre-population of tax return.
Efficient revenue management is the foundation of good governance. The way the State taxes its people speaks much for the quality of governance in the country. Time has come to realise that there can be no taxation without either representation or information.
Susan Thomas is an alumna of the Blavatnik School of Government (MPP Class of 2015). She works with the Government of India as Additional Commissioner of Income Tax and this piece is a summary of the policy proposal she developed for Uganda as part of her MPP summer project.