Income tax law is based on disclosing information to the State. Personal financial information. Bank account statements, investments, salary receipts, rent paid or received, medical expenses, money transferred to spouse, expenses of children, insurance premiums, political donations, charitable contributions to name a few. Each piece of information is necessary to ascertain the exact tax liability of a taxpayer. And it is statutory duty of a taxpayer to make accurate and timely disclosures.
If income tax administration is based on State compulsorily seeking detailed financial information from taxpayers, is it even possible to expect tax privacy? Yes. In fact, one could argue it is necessary to demand tax privacy. But what would tax privacy look like? What safeguards can be reasonably demanded and expected? There are no concrete answers and if I may dare suggest, no tentative answers either. Because the conversation around tax privacy in India has not even begun.
To Begin a Conversation …
Conduct an unscientific and random survey: ask your colleagues and friends if they are comfortable sharing their income tax returns with everyone? The dominant response will be no. Tax privacy in India starts and ends with a strong disagreement to make income tax returns public. Tax privacy in India hasn’t progressed beyond the notion of income tax returns. And even in this example, privacy exists in a rudimentary shape. The disinclination to share one’s income tax return with public at large isn’t entirely rooted in privacy, but a desire to avoid unnecessary scrutiny by social media and other ‘experts’, who may find numerous inconsistencies or point at insufficient income disclosures. And there lies the risk of reassessment notices, a trigger with which the Income Tax Department isn’t unfamiliar. And if you are even mildly popular, your income tax returns will be the fodder of endless gossip. Though you may not be object if your advance tax payments are conveniently disclosed to underline your success.
The broad expectation of an Indian taxpayer seems to be that the State can access all relevant financial information, but the details contained in income tax returns should not be disclosed to the public at large without previous consent of the taxpayer, if at all. But we seem to have accepted or at least resigned to the fact that there is no concrete limit on the State’s power to secure personal financial information. How else will the State assess your income tax liability is the retort?
An accurate response is that the State does not need unfettered access to your personal financial information to ascertain your income tax liability. State needs access to your ‘relevant’ personal financial information. Ordinarily, a taxpayer makes self-assessment – with help of a tax lawyer or an accountant – and discloses the relevant financial information. The State may, at times, demand additional information on the ground of ‘insufficient disclosure’ or to verify certain expenses. And it is at the juncture of disclosure and additional disclosure where privacy needs to be a shield for taxpayer, but it is conspicuous by its absence. The concept of tax privacy as a legal concept isn’t sufficiently articulated in India, especially to mediate the exchange of information and additional information between the State and taxpayers.
Disclosing Financial Information
Privacy is in the context of tax law, especially income tax law requires specific articulation. If I disclose to the State that I received a gift of immovable property from my parents, it is to ensure that an appropriate amount of tax is paid on the gift received. Hiding the transaction may allow me to escape the tax liability, in the short term or even forever, but it would be contravention of income tax law. But what if the State secures access to the transaction between me and my parents? If I did not disclose it voluntarily, maybe I boasted about acquiring a new immovable property on social media, and the State monitoring my virtual activity suddenly swung into action.
One pertinent question here is: can the State monitor my virtual activities in the hope of finding my ‘hidden’ sources of income or does it need prior permission before monitoring my activities? Privacy centric answer would lean in favor of the latter. The answer would suggest that the State needs to have a priori justification to monitor a taxpayer’s online activity. And such surveillance can only take place for a limited time and for specific activities. For example, tracking phone calls or movement without listening to the content of phone conversations. Our income tax laws are designed to grant the State power to intrude into taxpayer’s lives and the threshold to intrude into taxpayer’s life isn’t high.
For example, let me look at some provisions that have lately generated some concern. Currently, search and seizure operations are permitted under Sec 132, IT Act, 1961 if some designated officers such as the Principal Commissioner, Chief Commissioner or Principal Chief Commissioner have ‘reason to believe’ that certain documents, articles, gold, etc. that are relevant to proceedings under the IT Act, 1961 have not produced by the taxpayer. The search and seizure operations empower officers to enter any building, vessel, aircraft, etc. and search persons, seize book, articles, etc. Section 132(9B) also empowers the officers to provisionally attach property of the taxpayer. These are extensive powers that are at times used to browbeat political opponents or journalists that the State doesn’t particularly like. Does the Income Tax Bill, 2025 go a step forward and provide additional powers to the State? Yes.
Clause 247, Income Tax Bill, 2025 largely mirrors Section 132, IT Act, 1961, except the latter also provides the officers powers to override access codes to virtual digital space and any computer system where the codes are not available. It is the digital equivalent of powers to break lock to enter a locked building where the keys to the lock are unavailable. The threshold under Income Tax Bill, 2025 remains the same as under the IT Act, 1961. The authorized officer must have a ‘reason to believe’ that some document or information contained in an electronic media is not being disclosed by the taxpayer in relation to an income or property.
Reason to believe is the subjective opinion of the officer in question and as per courts, should be based on credible material. But there must be proximate relation between the material on which opinion is formed and the final opinion. However, the courts have repeatedly stated that it is a subjective standard, and they cannot substitute the officer’s view with their view. The threshold of ‘reason to believe’ thus doesn’t provide ample safeguards against intrusion of privacy by tax officers: physical and virtual.
The broad scope of search and seizure powers under the IT Act, 1961 and now Income Tax Bill, 2025 are rightly criticized for being overbroad. But the pushback is never rooted in protection of privacy. Or if it is, privacy is only in unarticulated subtext. Once officers are authorized to conduct a search and seizure operation under Section 132, they have the power to break locks, almirahs, seize documents, and search persons thereby impinging on business freedoms, bodily autonomy, and basic right to be ‘left alone’. While the State can justify that taxation is a sovereign right and search and seizure powers are ancillary to tax administration. But the articulation of privacy rights is missing in this argument and counter argument. To what extent can the State intrude into a person’s life to secure tax collection? When can the State violate physical autonomy of a taxpayer? On what grounds? We don’t know. Not yet.
Disclosing Additional Information
Privacy in the context of income tax law further suffers due to powers of the State to demand additional information under certain circumstances. Search and seizure operation is ideally conducted if the officer believes that the taxpayer has not voluntarily disclosed the information demanded by the State. But sometimes the additional information that is demanded from the taxpayer may put privacy in jeopardy. The additional information is usually sought when the income tax return of a taxpayer is selected for scrutiny or audit. In such cases, the officers demand additional information. For example, if I claim that I paid an ‘X’ amount as medical expenses for myself, then the State can question the validity of the claim. Or the amount. Disclosing additional information may risk disclosing my private medical information to the State. While the State may claim that not disclosing the entirety of medical expenses and the exact disease may jeopardize taxpayer’s claim for medical expenses and tax deduction. Where should we draw the line? Not sure, but the question is worth asking for now.
Carrying the Conversation Forward
There are three distinct strands of tax privacy that I wish to articulate in this preliminary article on tax privacy. I hope to delve deeper into each of these strands in the future, but the summation on each of these aspects of tax privacy is as follows.
To begin with, if a taxpayer consents to sharing personal financial information with the State, then it is not unreasonable to expect tax privacy. To begin with, State should only seek relevant information that is proximate to the purpose of ascertaining tax liability. It is unreasonable to assume that the State has a carte blanche to demand any financial information.
Equally, it is a valid expectation that the State shall only use the said information for purpose of computing and assessing tax liability. The ‘purpose limitation’ test as data protection law informs us. Privacy in this context is breached if the State uses the information for a purpose other than tax.
Finally, I wish to underline the once the State has secured certain information, keeping the information secure is also State obligation. However, this is only one aspect of privacy, and in fact, more an element of confidentiality and less of privacy. And yet we tend to focus unduly on the State not disclosing our income tax returns to the public, instead of questioning scope of its power to demand and collect information in the first place.