Income Tax Department sent Notices to around 8000 Taxpayers

The income tax department in India has issued notices to over 8,000 individuals who have made big gifts to charity trusts, suspecting them of tax evasion. According to officials, data analytics indicated that these taxpayers were making gifts that were disproportionate to their income and expenditure.

Apart from companies, others who have received notices include salaried and self-employed individuals. The IT department is also investigating independent tax specialists who assisted with these activities.

“In all 8,000 odd cases,” a tax official claimed, “the donation was exactly the amount required to lower the tax slab or get a full exemption and was paid in cash. Also, an exceptionally high amount was paid to tax professionals, even by a straight salaried person.”

The notices were distributed across three weeks, from mid-March to early April, covering the financial years from 2017-18 to 2020-21. More announcements are expected in the coming weeks.

The amount given to charitable trusts by firms, especially small ones, was out of step with income, according to regulators.

They claim that in these transactions, monetary contributions are returned to the taxpayer together with a donation receipt after a commission is deducted, assisting the assessee in evading tax.

The department is also on the lookout for charitable trusts that give bogus bills to taxpayers. While no action has been taken against them thus far, they may lose their tax-exempt status if misbehaviour is discovered.

Using data analytics

Contributions to certain funds and charitable organisations are tax deductible under Section 80G of the Income Tax Act. Depending on the nature of the institution, a deduction of 50-100% of the donation may be authorised. Such donations are likewise subject to income-based restrictions.

According to the source cited above, data analytics is being used to track exploitation of specific deductions under the former income tax regime, particularly Section 80G, together with 80 GGC and 80GGB, which permit taxpayers to income tax deductions for donations to charitable trusts and political parties.

The income tax department is investigating donations to dormant political parties separately and has already issued several letters.

According to budget data, firms foregone 1,430 crore in tax in FY22 due to Section 80G contributions.

Individuals and Hindu Undivided Families (HUFs) forewent Rs.1,729 in money from Section 80G donations in FY22, up from Rs.1,541 the previous year.

While such evasion was previously conceivable, tax experts believe that tight compliance and synchronised data collecting by the tax agency will make it difficult, with measures such as prohibiting cash donations exceeding 2,000.

“Furthermore, in order to bring more transparency and ensure that the deduction under Section 80G claimed by taxpayers is true and correct, the government prescribed certain forms via Form 10BD and 10BE to be furnished by charitable trusts and institutions on or before May 31, immediately following the financial year in which the donation is received,” Sanjoli Maheshwari, director, tax, Nangia Andersen India said.

As a result, the deductions will be accessible only after verification of the donations from the aforementioned forms.