The Income Tax Department is analysing spending pattern and expense-related data of those high net worth individuals (HNI) who may be paying less tax in proportion to their annual income, Moneycontrol has learnt from people familiar with the developments.
A senior I-T official told Moneycontrol citing government data that around 7-8 lakh individuals (including HUF and firms) earn over Rs 1 crore per annum, and yet their income is not being fully captured in tax returns. “Currently, over 3 lakh HNIs pay income tax for income over Rs 1 crore, but a larger number don’t,” the person said.
As per official data, during the assessment year 2023-24 (FY23), as many as 3.50 lakh income tax returns were filed by taxpayers with income above Rs 1 crore, out of the total filed ITR of 7.97 crore for the year. “the spending pattern tells us that many individuals are not reporting their income properly, and hence paying low tax,” another official said.
The I-T Department is now using technology to do a ‘360-degree profiling’ of such HNIs so their actual income is reported and taxed accordingly, the I-T official said. Authorities are likely monitoring high-value transactions of such taxpayers through TCS and TDS, monitoring foreign remittances, and examining GST data to correctly assess the HNIs’ income, said government sources.
Tax experts have said that governments worldwide are stepping up efforts to expand tax base, with a particular emphasis on high networth individuals (HNIs) who often have substantial wealth and income, but their tax contributions may not align with the earnings or spending.
“India is following suit and as part of this strategy, the government has introduced a Tax Collected at Source (TCS) on the purchase of luxury goods, such as expensive watches, sunglasses, handbags, shoes, and home theatre systems, priced above Rs 10 lakh. This measure is intended to help tax authorities track the spending habits of HNIs and promote a fairer, more efficient tax system,” an tax expert said.
Another tax expert said gathering information from financial institutions relating to Specified Financial Transaction (SFT), and collecting data under exchange of information mechanism with other countries can also be done by the authorities, to examine income of the HNIs.
“All these data can be processed though AI, and compared to tax returns filed. Based on these comparison, tax returns can be picked up for scrutiny,” said Sriram, adding that the analysis may not be 100% accurate, but it could up cases where the real income is greater than what is filed under ITRs.
Some business owners may create fake invoices or artificially inflate expenses, to suppress taxable profits, making it appear that they earn less than they actually do, and some file fake claims under various deduction provisions or the declaration of non-existent business, which helps taxpayers unlawfully reduce their tax liability, people familiar with the development told Moneycontrol.
Tracking the income received in cash – particularly in real estate, hospitality, and small-scale retail – continues to be a major challenge for authorities.
Another tax expert said authorities have over the years introduced a number of mechanisms designed to monitor high-value spending, and link it with reported income. These measures include furnishing of PAN details for high-value transactions, levying TCS on high-value vehicle purchases, luxury goods, foreign remittances, and imposing restrictions of large cash transactions such as those above Rs 2 lakh.
Under the Liberalised Remittance Scheme (LRS), foreign remittances made by residents are subject to TCS if they exceed certain thresholds. For instance, overseas tour packages attract TCS at specified rates, and foreign remittances above Rs 7 lakh for other purposes (such as education or investment) are also liable to TCS. “These provisions help the I-T Department monitor outbound money flows and assess if an individual’s spending abroad aligns with their income declarations,” he said.
