Apart from the bad name that the increased number of high-pitched assessments are giving the country and the taxman, the government needs to seriously relook whether such tactics even make sense given how long the cases remain stuck in the appeals process and given how the taxman classifies these as “demands difficult to recover”. According to the latest CAG report on direct taxation, the amount locked in appeal cases has been ballooning. At the very first level of Commissioner Income Tax (CIT) Appeals, about 75% of appeals remain pending—as a result, these grew from 2.3 lakh in 2011-12 to 2.6 lakh in 2015-16, and the amount involved from R2.4 lakh crore to R5.2 lakh crore; and this despite the Central Board of Direct Taxes (CBDT) talking about new plans to reduce the pendency of cases almost every year. With the amount pending in the income tax appellate tribunals and various courts rising from R1.9 lakh crore in 2014-15 to R3 lakh crore in 2015-16, the amount stuck in the entire appeals process rose from R5.7 lakh crore in 2014-15 to R8.2 lakh crore in 2015-16; to put this in perspective, all direct tax collections totalled R7.4 lakh crore in 2015-16. If this wasn’t bad enough, according to the CAG report, much of this is from firms that are under liquidation or don’t have enough funds or the cases are stuck in court, as a result of which, the “demand difficult to recover … accounted for 97.3 per cent of the total arrear of demand in FY 2015-16”.
In which case, it would appear the income tax department is wasting considerable time and manpower in handling litigation and arrears. Indeed, with the 447 searches and 4,428 surveys in 2015-16 together yielding potential undisclosed income of just R21,000 crore, the obvious question is whether such operations that result in talk of ‘raid raj’ are even worth the effort—while the government claims much better results in the post-demonetisation searches/surveys, a cost-benefit analysis is long overdue. Indeed, were this to result in rationalising manpower, more people could be shifted to scrutiny of cases where, as the CAG points out, less than half the cases are dealt with each year. Indeed, along with the utilisation of information technology tools to get to tax-evaders, there is an urgent need to employ analytical tools to analyse the risks and returns in pursuing both existing cases as well as taking up new ones. While Project Insight, on data warehouse and business intelligence, will help in handling future cases, the National Judicial Reference System—the department’s new project—is expected to help, through a computerised database of appeals and judgments, to identify cases that need not be pursued, and also in prioritisation of cases at the SC/High Courts/ITAT levels. Of course, till such time that tax officials are convinced they will not be hauled up by CAG/CBI/CVC for so-called revenue-loss, they will continue to issue what are, in trade parlance, called ‘preventive demands’ and pursue what everyone knows is frivolous litigation.