View: Tax Department No Big Brother, Online Snooping Scare Unfounded

If the tax department raids a taxpayer, nothing is off limits, writes former IRS officer Ajay Mankotia.

Nothing is off-limits. Once privacy is breached, the taxpayer cannot demand or expect a redline which cannot be crossed. 

(Photo: Aroop Mishra/The Quint)

As privacy experts raise alarm over the new Income Tax Bill's purported potential to allow targeted snooping of taxpayers' digital assets, including their social media accounts, former IRS officer Ajay Mankotia argues that the bill only simplifies the existing law — and the fear of the tax department hacking into the online activities of taxpayers is unfounded. Read the 'counterview' here by the Internet Freedom Foundation's Apar Gupta and Medha Garg.

A person's home is their castle. But the law allows for the castle to be breached sometimes. The breach doesn’t happen on a whim, but after following proper protocols, laid down by law. 

Raids – the colloquial word used for the formal terminology 'search and seizure' used in the Income Tax Act – are few and far between.

They are not resorted to in the normal course of determining a taxpayer’s taxable income but invoked in extraordinary circumstances. Raids are the ultimate violation of privacy, and thus, are carried out only under special circumstances.

What are These Circumstances?

The tax department receives information about taxpayers from multiple sources in the normal course regarding sale or purchase of property, shares transactions, dividends, bank interest, foreign remittances, rent received, and others. These are listed in Form 26AS pertaining to the taxpayer, which can be checked for his information and verifying its accuracy. The tax department also receives information from foreign shores regarding foreign assets and bank accounts of Indian taxpayers.

The tax department can only carry out a raid if it has reason to believe – based on information in its possession – that a taxpayer is not or would not be responsive to tax notices or has some income or asset that has not been or would not be declared, and taxes resultantly evaded.

The information regarding tax evasion has to be credible and needs to be verified. After due diligence, the tax officer records his satisfaction that he has reason to believe that tax evasion exists, which thereafter needs to be approved by his seniors. Only then the green signal is given. 

Thus, a rigorous process is in place to ensure that lawful procedure is adhered to and only such cases that warrant a raid, as per law, are taken up for execution. Raids, unfortunate as they may be, are undertaken as a last resort to ferret out black money when other methods do not work. 

Raids Can be 'Traumatic' 

Privacy aside, a raid can be very traumatic. Nothing can be more agonising to the occupants of the house than an early morning knock on the front door, at an hour when the milkman and the newspaper delivery boy are on their rounds, when the house is stirring to wakefulness and the children waking up for school.

Even a hardened tax evader, who knows that one day he will be paid a visit, is not unaffected. 

During a raid, the tax team goes from room to room, conducting a detailed search for books, documents, vouchers, diaries, papers, gold, jewellery, valuables, computers, pen-drives, external hard drives, and other items. Almirahs, boxbeds, suitcases, cannisters, mattresses, furniture, bags, clothes — all go through a detailed inspection. Efforts are made to check for false ceilings, false compartments, false drawers. If a room, or cupboard, or suitcase is locked and keys are not available or not handed over, the lock can be broken.

The computers are also scrutinised. With the advent of technology, transactions are now recorded digitally and electronically and tax law permits the computers to be inspected to check for books, documents, vouchers, diaries, papers, and transactions. These may be stored on the computer, or on cloud storage space, and also on platforms/apps on the computer such as mails, WhatsApp, and social media sites. Since a phone these days is a computer (smaller and more portable), the phone is also scrutinised for mails, WhatsApp messages, and social media posts.

Nothing is off-limits. Once privacy is breached, the taxpayer cannot demand or expect a redline which cannot be crossed. 

A Necessary 'Evil'

These days, with the advent of technology and smart internet-based tools, tax evasion has become sophisticated. The tax evasion business is conducted on WhatsApp and similar messaging services which ensure privacy and security.

Cash sales, property transactions partly in cheque partly in cash, money laundering, hawala transactions, over/under invoicing of international trade, betting, bribery—the list is endless. Nobody keeps hard copies of such tax evasions. Similarly, emails may also be used for such purposes. Social media sites can shed light on lifestyle, travel, weddings, and parties, which in turn can help investigators determine whether a person has declared everything properly.  

At the conclusion of the raid, money and valuables which have not been declared to the tax department are seized. The valuables are returned later after taxes are determined and paid. 

Books are also seized as are such other documents, diaries, papers, pen drives, external hard drives which are germane to the determination of tax liability. Those that are not relevant are not seized. The computer hard disk and the phones are also seized. Copies of all such physical seizures, copy of the computer hard drive, and the phone (after copies are made of its contents) are given to the taxpayer later. The electronic record derived from the computer/phone, subject to safeguards, is used as evidence in tax proceedings. 

What happens if the taxpayer does not share the passwords of electronic records, digital storage drives, emails, social media handles, cloud storage space, and communication platforms? In that event, the tax officer can override the access code of the computer system. If this were not done, the raid would be futile and the tax evader would get away, scot-free. But non-cooperation is a rare phenomenon—and most taxpayers cooperate fully. 

In a survey, which can only take place in an office or factory, not the residence, no seizures are allowed and only copies of books and documents, and of electronic/digital record on the computer/computer peripherals/phone can be taken. 

Privacy Concerns with New IT Act

The tax department sets great store in ensuring privacy of the taxpayer. The same is enshrined in the Taxpayer’s Charter which is part of the tax law. The relevant provision states—Maintain Confidentiality: The department shall not disclose any information provided by taxpayer to the department unless authorised by law. Hence, no third party would have any knowledge of the tax affairs of the taxpayer. For example, any tax evasion based on WhatsApp messaging would only remain in the realm of the tax department.

However, if the taxpayer were to contest the tax order, then the details would come to light because legal judgments outside the tax department (the tax tribunal, the High Court, or the Supreme Court) are in the public domain.

These days, the media is awash with news that the new Income Tax Bill 2025, clause 247 specifically, provides powers to the tax authorities to snoop on the social media accounts and online activities of taxpayers by overriding the access code of computer system or virtual digital space.

Virtual digital space has been defined as “any digital realm that allows users to interact, communicate and perform activities” through computer technology. Some examples are gaming platforms, social media platforms (Facebook, Twitter, and Instagram), virtual meeting platforms (Zoom, Microsoft Teams) and online marketplaces (Amazon, eBay).

This is not true. The new Income Tax Bill 2025 only simplifies, consolidates, updates and sheds what’s redundant in the existing tax law to ensure continuity with efficiency. It does not introduce new policy or taxes. The existing tax law already allows what the new bill is claimed to be empowered with (when it comes into effect).

No new powers have been given to the tax department in the new tax bill.  The status quo continues with more clarity in the provision to bring in transparency and certainty. 

Moreover, there appears to be a fear that in the normal course of the assessments, the tax officer can hack into the online activities of the taxpayers. This is again not true.

Gaining ingress into virtual digital spaces are only permissible during raids and surveys, and that too if the taxpayer refuses to part with the passwords, leaving the tax department no option but to resort to override.

This is similar to the lock of the almirah being broken during the raid if the key is not available. 

To summarise:

• The existing tax law allows scrutiny of the computer systems and phones including mails, messaging services, social media sites, but only during a raid or survey, not during assessment or any other proceedings

• No new powers have been given to the tax officer in this respect in the new Income Tax Bill 2025

• Raids take place infrequently 

• The coercive power to gain entry into the computer systems including mails, messaging services, social media sites are only invoked if the taxpayer refuses to part with the passwords, but generally the taxpayers cooperate

• Only the relevant information germane to the tax assessment is used 

• Information is not misused

• Privacy is maintained by the tax department 

There have been many instances where the tax department is more sinned against than sinning. This is one such instance. The English rock band The Police sang, "Every move you make...every step you take…I’ll be watching you”.

We aren’t there as yet. 

(Ajay Mankotia is a former IRS Officer and presently runs a Tax and Legal Advisory. This is an opinion piece. All views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)