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TII SPECIAL
Data Analytics Emerges as Unique Glue for Plugging Revenue Leakages
By Naresh Minocha
Apr 02, 2018

Naresh Minocha, a veteran journalist, specializes in governance, polity, macro-economic issues, telecom, energy, chemicals and agriculture. He has been working as Consulting Editor with taxindiaonline.com since 2004. He writes and speaks with authority on any issue he picks up. In-depth research is his passion. In his over 37-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. He continues to enjoy endless, learning journey that he started during his university days in the seventies. He believes his quest to be a ‘Know-All' is boundless.

DATA Analytics (DA) is making headlines for varied reasons. They range from misuse of social media's big data to influence voters/consumers to catching tax deviants for boosting revenue to fund growth.

Governments including tax administrations across the world are at different stages of unraveling the potential of data analytics in boosting revenue.

As put by McKinsey, "Digitization creates a massive trail of data that can support more-effective revenue and payment programs. There is an emerging consensus globally that governments can and should use this data to reduce revenue leakage, subject to strong privacy constraints prescribed by policy makers”.

In a report titled ‘The trillion-dollar prize: Plugging government revenue leaks with advanced analytics', McKinsey notes that about 20% of government revenues worldwide, or about $5 trillion goes missing every year.

It believes that Governments can plug 20% of these leakages through application of big data analytics and related efforts over several years. This, thus, constitutes a trillion-dollar opportunity globally to ramp up tax revenue.

India, which is new as compared to the West in the Big Data game, is harvesting preliminary successes in both direct and indirect taxes domain.

India's Central Board of Excise and Customs (CBEC) and a joint venture named Goods and Service Tax Network (GSTN) have applied DA to nascent tax GST, which is levied jointly both Central and State Governments.

At a meeting held on 10th March 2018, CBEC and GSTN told GST Council that analytics showed variance between the amount of Integrated GST &a transition levy named Compensation Cess paid by importers at Customs ports and input tax credit of the same claimed. The exercise also showed major data gaps between self-declared liability in FORM GSTR-1 and FORM GSTR-3B.

The council asked tax administrations to analyze data further and take requisite action accordingly.

More about India tax administrations exploits in data mining later in this column.

At global level, DA continues to hog limelight.

Earlier, this month, International Monetary Fund (IMF) for the first time endorsed a policy paper on New Strategy for Data and Statistics in the Digital Age.

The strategy encompasses six priorities: (i) agility in the identification of data needs; (ii) building the global data commons—an integrated network of member country websites publishing data essential for surveillance on a pre-announced schedule; (iii) supporting the use of Big Data and other innovations; (iv) securing seamless access and sharing of data within the Fund; (v) promoting the production of data that are comparable across countries; and (vi) addressing weaknesses in official data.

World Customs Organization (WCO) is yet another organization that is focusing on DA at the global level.

WCO organized a workshop during January 2018 to "discuss ways in which Customs could take greater advantage of the use of data analytics in Customs as an extremely powerful tool for improving the way Customs administrations work, at both the operational and strategic levels ”.

A WCO release says: "There is evidence that the massive amount of data generated by Customs is currently underused. Enhancing Customs' ability to perform increasingly sophisticated analytics using the available data will become even more crucial in all future policy-making processes ”.

As usual, Organisation for Economic Co-operation and Development (OECD) continues to push exploration of new frontiers in advanced DA. OECD's interim report on ‘ Tax Challenges Arising from Digitalisation' has thus hinted at the prospects of a new multilateral data exchange agreement .

The report was presented to G20's Finance Ministers and Central Governors at their two-day meeting which concluded on 20th March 2018 at Buenos Aires.

According to the Interim Report, "Such an agreement, along the lines of the Common Reporting Standard, might require all platforms carrying out particular type of activity to provide information in a standardised format on platform users,

transactions and income to the tax authority in their jurisdiction of residence for exchange, through appropriate legal gateways, to the jurisdiction of tax residence

of the user”.

It notes that a growing number of tax administrations are increasingly using algorithms to review the broad range of data to which they now have access in order to more effectively define risks. These new processes are replacing some audit actions, including audit selection and other verifications checks previously performed by people. These developments are allowing tax administrations to increase the number of such verification checks which can be performed, shifting from a small percentage of returns to cover much larger proportions, in turn increasing the amount of tax revenue which is appropriately raised.

Tax authorities are also overseeing induction of new technology to tackle the under-reporting of sales or the over-reporting of deductions through false invoicing. To check use of technologies such as sales suppression software and digital tools that create forgeries, tax administrations have introduced requirements for data recording software. It records and secures sales data immediately at the time of a transaction,and in some cases transmits it in the real time to the tax authorities.

The introduction of a requirement to use such electronic data recording technology has seen VAT revenue increase by up to 20% in certain countries, and has also led to criminal charges for tax evasion.

A notable case in point is Canada's Qubec province. It has recovered more than Canadian $ 1.2 billion from tax evaders after introduction of data recording technology in the restaurant industry. The Interim Report has projected increase in this revenue recovery to enhance to $2.1 billion by 2018-19.

The emergence of success stories in DA has enhanced the interest of global consultants, software developers and other information technology-enabled service providers in taxation domain.

"Data is the foundation upon which this new digital tax world is being built, and the quality of the outcomes that result will depend on the quality of the data that goes in. To match what governments are doing and stay one step ahead, tax departments must look at the tax function through the lens of big data and data analytics ,” says EY's paper titled ‘How data analytics is transforming tax administration 'published in Oct 2016 issue of its ‘Global Tax Policy and Controversy Briefing'.

The briefing adds: "The tax department has an opportunity to deliver value in this new era of digital tax by embracing enterprise initiatives and transformations that facilitate enhanced data management ”.

McKinsey has articulated succinctly the big-ticket opportunities that beckon tax administrations. It says: "Our research suggests that in larger, developed economies, these capabilities have the potential to increase total government revenues by 1 to 3 percent. In less-formal, developing economies, the opportunity is much larger, as much as 10 percent or more. To put this number in context, worldwide government deficits are expected to be 2.6 percent of estimated GDP in 2021. Improving revenue collections by just 1 percent of GDP would eliminate over one-third of the deficit, equipping leaders to make and implement better policy choices”.

Reverting back to Indian tax authorities growing reliance on DA, Income Tax Department (ITD) is busy catching tax evaders on the basis of analysis of big data collected through banking, high-value cash transactions and property deals that happened when the Government demonetized its high-denomination currency notes during last quarter of 2016.

This exercise is in addition to its data warehousing & business intelligence project named Insight. The project was to be rolled out in three phases with first phase launch in May 2017. The last one heard about it was in September 2017 when it was stated that it would be launched shortly.

CBEC formed Directorate General of Analytics and Risk Management in July 2017 to give focused push to DA. One would have to wait for CAG report on status and achievements of DA functions carried out by CBEC and ITD.

In any case, Indian tax administrations would be under additional pressure to make efficient use of data analytics as Comptroller & Auditor General (CAG) itself is using data analytics to improve its audit jobs. Detection of revenue leakages by CAG are thus expected to prod ITD and CBEC to revisit the application of data mining techniques.

Reliance on Big Data and exchange of data among different online platforms, however, bristles with issues such as privacy breach, cyber-attacks and wrong pursuit of cases due to flaws in DA application.

These issues are also engaging the attention of stakeholders. United States Internal Revenue Service (IRS), for instance,has to mandatorily comply with privacy norms. It, thus, prepares an elaborate statement on how its Big Data Analytics (BDA) project is complying with Privacy Provisions of the E-Government Act of 2002.

Similarly, WCO has dealt with risks posed by growing dependence on Big data.

In a research paper titled ‘Implications of Big Data for Customs -How It Can Support Risk Management Capabilities' published in March 2017, WCO points out that Big data is not a static concept. It has ever-evolving applications.

WC believes that Big Data has a potential to produce a sea change in how Customs field officers perform their duties. Big data can affect how organizations allocate resources internally to support their tasks.

The Paper cautions: "There is nonetheless a concern about what could happen if a Customs administration blindly pursues the incorporation of the data being collected externally into its day-to-day operation without examining the veracity of those data. A false sense of security and threats caused by improper/imprecise assessment of risks will almost invariably result in decreased Customs capacity in intelligence-led enforcement ”.

It adds: "Last but not least, Customs could compromise the security of its information management system that should affect every facet of the service, as the network is built up with outside entities ”.

Even OECD has acknowledged the need for avoiding irrational exuberance on DA.

"'Big data' does not automatically translate into ‘Big Improvements'," says Preface to OECD's report on Advanced Analytics for Better Tax Administration published in May 2016.

 
 
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