A changing role of Economic Intelligence Unit

(By Pramod Dumre, Deputy Commissioner, EIU)

All over the world tax departments are adopting concept of voluntary tax
compliance which is a trust based system. Under modern tax system, only limited
number of cases can be selected for audit or scrutiny because of scarce resources.
Thus the trust based compliance system requires regulation through a centralized
monitoring system to catch hold of those taxpayers who are misusing the system for
under-reporting of tax obligation or who are involving in tax frauds or who have
intelligently devised their compliances for tax avoidance. This allows appropriate
prioritization of audit and taxpayer service workload and enables the allocation of
resources to high-risk groups.
The main functions of modern tax administration is to manage tax compliance
(a) by detecting and preventing delinquent behavior and (b) by providing taxpayer
service and education in order to help taxpayers to discharge their tax obligations
with ease. Thus a concept of centralized Compliance Risk Management (CRM) is
being adopted by various tax departments.
CRM is an important element of effective and efficient management of
compliance. Just like a private business allocates its resources to areas that have the
most potential for generating profits, a modern tax administration uses methods that
focus on high-risk taxpayers to select cases for audits. This targeted approach is
likely to raise higher revenue and provide a stronger deterrence for non-compliance.
In the last 20 years, increased use of external information and automation
have allowed tax administrations to generate prefilled tax returns [for example, in
the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) , Spain, and
Chile], which are followed up with online notice of audits. The availability of validated
data should be taken into consideration when fine-tuning tax audit strategies and
risk-based approaches. A conference was held in Istanbul, Turkey, in December 2009,
for tax administrators in the European and Central Asian region to interact and
discuss the technical challenges involved in implementing risk-based audits with
their regional counterparts and international experts. The World Bank supervised this
project, in which many countries made presentations. This occasion was attended by
participants from 20 countries throughout Europe and Asia to share their own
experiences, learn from each other, and establish a foundation for future cooperation
and information sharing on the various systems being implemented in their
countries. Participants represented Armenia, Azerbaijan, Belarus, Bulgaria, Canada,
France, Georgia, Germany, India, Kazakhstan, the Kyrgyz Republic, Mongolia, the
Netherlands, Sweden, Tajikistan, Turkey, Ukraine, the United Kingdom, the United
States, and Uzbekistan. Participants shared experiences on how risk-based audit
systems improve the efficacy of revenue collection and use principles that can be
applied to all segments of taxpayers. These systems help tax administrators to
allocate resources and manage performance.
The effective and efficient implementation of Risk based audits and CRM
requires use of Business Intelligence tools. Business intelligence (BI) is an umbrella
concept that covers architectures, applications, databases, analytical tools and
methodologies used for decision support. Analyses of historical and current data,
situations and performances give decision makers valuable insight and enable them
to make more informed and better decisions. From a process point of view BI can be
seen as a transformation where data are first refined to information, then to
decisions, and finally to actions.
The architecture of BI has four main components: (1) data warehouse, with its
source data; (2) business analytics a collection of tools for manipulating, mining

and analyzing the data in the data warehouse; (3) business performance
management methodology and applications for monitoring and analysing
organizational performance; and (4) user interface, such as a dashboard.
The Economic Intelligence Unit of MSTD has used above knowledge base
effectively for managing tax compliance by the use of automated systems to (1)
gather information from external agencies and match it with dealer data using PAN
as a unique taxpayer identification number, (2) undertake selective audits based on
risk analysis and (3) provide timely adequate information to support management
decision making and tax policy formulation.
The Maharashtra Sales Tax Department (MSTD) has innovatively used Business
Intelligence (BI) System not only for implementing concept of Computer assisted
audit technique (CAAT) in its internal process of auditing taxpayers details but also
for taking policy decisions based on reports of BI system. The recent activities being
done in EIU are as under.
1. Generation of cases for comprehensive audits where multiple verifiable risk
parameters are applicable.
2. Identification of Issue Based Audit cases where risk parameters are directly
actionable and results in recovery of taxes. The compliance can be through
direct web site compliance and closure of audit issues in complied cases are
without human intervention. This compliance system is called Computerized
Desk Audit (CDA).
3. The generation of Business Intelligence Models in Data Mining tool such as
prediction of non-genuine dealers, case selection for audit etc.
4. The prioritization of non-compliances such as ranking of return non-filers for
follow-up in the order of tax credits passed on to buyers.
5. The supply chain Analysis identifying the claims of bogus refund claimants in
circular trading and buffer suppliers.
6. The star rating of dealers for preferential treatment in provision of services.
7. The Decision Support System (DSS) for tax policy decisions such as What If
analysis for showing the impact of change in tax rate on revenue of
government.
8. The forecast analysis for revenue forecasting based on historical trends as well
as based on macro-economic factors.
9. The Outlier Analysis for identification of outlier taxpayers not disclosing tax
obligation commensurate with the prevailing trends in their sector.
10.EIU is now integrating all risk analyses into a 360 degree risk profile report for
each dealer.
Challenges
If we go through all above activities we observe that the strategy of MSTD has
been reactive. We are finding out the discrepancy after we get transactions data in
Form e-704 after about 9 months from the end of the year. The dealers as well as
officers of MSTD are engaged in resolving issues of past periods where there might
be inadvertent errors in uploading of data or the dealers were unaware about the
defaulting status of their suppliers. We can proactively prevent such occurrences of
tax evasion either 1. By providing validations at the time of upload of transaction data along
with Returns,

2. By providing real time information to dealer about status of their suppliers /

buyers, and
3. By auditing the dealers on real time on the basis of Data Mining modeling
and Predictive Analytics.
Two particularly prominent uses for data mining are identified for any tax
administration:
(1) Risk Rating: Tax administrations can build up truly risk-based workflows for
processing the registration, filing, reporting and payment transactions that the
taxpayers make or should make. A comprehensive risk rating, based on data
mining modeling, can be applied to each transaction so that all available relevant
data are utilised. As a result, high-risk transactions can be flagged for casespecific treatment while low-risk transactions can move on to automated routine
processing.
(2) Compliance Rating (Star Rating): Tax administrations can segment the
taxpayers and identify segment specific compliance profiles in terms of diverse
abilities and propensities to comply. This helps tax administrations better design
and target their services and compliance actions.
MSTD has already started capturing party-wise sales and purchase
transactions data along with returns and also the mismatches / un-matches are being
shown to the dealers on Mahavat portal after each return period. We have also
planned to implement CDA for direct web-site compliance for weeding out pending
audits up to the periods 2013-14. Thus we will be starting real time audits with effect
from 1st April 2015. We may proactively block upload of transactions where suppliers
status is not active or do not allow ITC where supplier is consistent non filer of
returns. In all these scenarios, the role of EIU can change from generating reactive
audit cases to proactive prevention or prediction of defaults or tax evasion at the
time of reporting by taxpayers. To achieve this objective EIU and Mahavikas divisions
are required to work in close coordination because absence of any validation at the
time of upload of any data by the dealers leads to generation of an audit parameter.
E.g. while upload of purchase annexure we should not allow any ITC on purchases
from suppliers whos TINs are not available in our database.
Future EIU Analysis
1. We started capturing annexures along with returns during 2014-015, but we
are not validating Supplier TIN status while upload of data. MSTD is making
available on portal some parameters of non-admissible ITC after each return
period, but there is no compliance mechanism for the dealer.
Such
compliance mechanism will only be available when we implement SAP
Automation system within one year. We have purchased SAP Tax and Revenue
Management (TRM) which is a COTS product along with their other supporting
modules like CRM (Customer Relationship Management), ICM (Integrated
Cases Management), etc. If we use the capability of SAP tools then while
accepting returns along with sales and purchase transactions we can ensure
proper allowance of input tax credits and monitor the credit flow effectively by
showing the Computerized Desk Audit results for every return period.

2. The issue of invoice matching can be resolved by implementing mandatory einvoicing. The countries where there was matching of sellers and buyers
invoices for allowing tax credits are now shifting to the concept of mandatory
e-Invoicing. The countries like South Africa, Brazil, Taiwan, Hong Kong,
Singapore, Australia, and New Zealand are some of the countries where tax
credits are validated with sellers invoices but they are now shifting to einvoicing to get real-time validation of ITC. The country like China has
implemented GTP Golden Tax Project using IT system to curb VAT evasion by
matching tax credits. SAP has now acquired Ariba, a company which provides
connected solutions that enable unparalleled collaboration and business
performance within and between enterprises including generation of electronic
invoices. If we implement mandatory e-invoicing using SAP tools like that from
Ariba for B2B transactions then matching of transactions will not be required
for confirming ITC.
3. At present we are analyzing data after about a year. Now as we are getting
transactions data along with return we can generate Risk Rating for all the
functions on monthly basis. Thus real time risk ratings can be generated on
SAP Business Intelligence and Business Objects (BIBO) Tool for Registration risk
in case of fraudulent dealer, Return non filer risk where buyers are claiming
ITC or Bogus refund risk due buffer transactions etc. as now all the data of
Portal and Transactions are available on SAP BI server.
4. The EIU Power Users will be given special privileged accesses on SAP BIBO for
analyzing data on real time basis. There will be a New EIU Module on SAP
through which there will be exchange of data between SAS and SAP servers.
Through Integrated Case Management tool EIU will monitor the progress of
actionable cases and also feedback of each Risk parameter will be
automatically captured where there is any action taken by any functional
officer. The cases will be distributed through SAP ICM and after action through
CRM Module, feedback will be captured.
5. The 360 Degree Risk Profile of Dealers along with Star rating for in-time
compliances will be available to each functional officer with respect to his
function.
6. Under the new SAP System we will be capturing HSN codes along with an
annual return and Form e-704. Thus it will now be possible to effectively carry
out commodity analysis particularly Tax Rate misclassification analysis.
7. If we use the Data Mining tools properly then the Pattern Analysis and
predictive analysis is possible for identifying year-on-year trends as undera. The dealers who are habitual short filers can be predicted to be short
filers
b. The dealers who are habitual non-filers can be predicted to be non-filers
c. The dealers who are habitual suppressors can be predicted
d. The pattern of tax receipts location-wise can also be studied.
e. The gap analysis in terms of sector-wise revenue can be studied on
historical trends.
Data mining can provide novel and effective ways for tax administrations to
develop their information systems and thereby reduce the information asymmetry
vis--vis taxpayers. This is mainly due to being able to combine data from various

sources and consolidate plentiful variables into easy-to-interpret, actionable

classifications and predictions. Being better informed, tax administrations can
improve their control measures and the hit rate of detecting fraud and errors.
Irelands initiative of developing audit target selection, for instance, provides
support to this assumption In addition to the direct benefit of the smarter controls in
actually catching the fraudsters, there is also the potential indirect benefit of less
attempted fraud, owing to raising public awareness of the tax administrations better
controls. Taxpayers are likely to align their behaviour in line with the applicable tax
laws and regulations after realizing that the tax administration cannot be deceived.
The USAs initiative to use card payment data to improve small businesses
transparency is an example where Data mining, with its clustering techniques, can
help tax administrations segment their heterogeneous taxpayer bases into
sufficiently uniform subpopulations whose needs, behaviour and attitudes can be
discovered, understood and responded to. Australias and Denmarks initiatives to
determine the collection actions with the use of analytics, as well as Australias
notion of developing the overall service orientation give support to this assumption.
Data mining, most notably with its social network analysis techniques, can
help tax administrations get hold of the ever growing complexity of business
relationships, ownership structures and other types of linkages and dependencies
among and across taxpayers. The Link Visualization Analysis or Network diagram is
used to find the relationships in a cluster of taxpayers. EIU has used this technique to
identify Circular trading Refund frauds. The examples progressing towards this
direction are in at least the Australian, Irish and Swedish tax administrations. Thus in
future the use Data mining and predictive analytics would increase in EIU Analysis.