The Government has directed tax officials to leverage new provisions under the Companies Act to access data stored on offshore servers and digital platforms. According to internal instructions shared with Income Tax officials on Tuesday, these rules will allow investigators to extract information that is often kept outside the country.
Companies Must Maintain Daily Backups in India
Under the revised corporate law provisions, companies are now required to maintain a daily backup of books of accounts and related documents on servers located in India, even if such backups are stored abroad. If an overseas service provider hosts the data, companies must also disclose to the Registrar of Companies (ROC) the name and address of the person who controls those records.
This requirement gives tax authorities direct access to financial records within India, limiting the ability of businesses to shield information in foreign jurisdictions.
CBDT's New Digital Evidence Manual
The Central Board of Direct Taxes (CBDT) has incorporated these provisions into its revised digital evidence investigation manual, issued after a gap of nearly a decade. The manual advises tax officials to factor in the new rules on server locations and mandatory ROC disclosures when conducting searches.
With most large taxpayers now storing financial data electronically, the updated manual places special emphasis on tracking digital trails, server logs, user access records, emails, and data storage systems as part of evidence collection.
Link to New Tax Laws
Tax experts point out that these changes align with broader updates in tax enforcement. The upcoming Income Tax Act, 2025-effective from April 1, 2026 expands the scope of search and seizure powers.
- Section 247 authorises officers to enter and search any place suspected of storing relevant electronic data.
- It also empowers tax officials to formally question anyone who can access such data or systems.
- Unlike the current Section 132(4), which limits examination to those in physical possession of assets or documents, the new provision broadens the ambit to include electronic custodians.
AI Conversations and Virtual Assets in Focus
The manual also recognises AI-powered platforms, digital wallets and cryptocurrencies as new potential sources of evidence. "The acknowledgement of modern communication tools, including AI interactions, marks a forward-looking shift in tax investigations," a tax expert noted. This reflects the government's intent to sharpen its investigative framework in line with emerging technologies.
Preserving Offshore Data and Digital Forensics
In cases where forensic teams cannot immediately retrieve data from offshore servers, tax officers have been advised to preserve it until recovery is possible. The manual suggests using channels such as the G-8 24/7 Network of INTERPOL to ensure data is secured.
The guidelines also address common challenges faced during searches. For example, when taxpayers deny ownership of seized pen drives, forensic teams are instructed to use USB logs and device histories from laptops to prove prior usage, countering claims that such devices were planted.
Significance for Businesses
The new approach signals a paradigm shift in India's tax enforcement, with greater scrutiny of digital evidence, offshore records, and corporate disclosures. Experts warn businesses and multinationals to revisit their data storage policies, ensure compliance with ROC reporting requirements, and be prepared for deeper digital audits.
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