Despite the government?s best efforts, a resolution of the Vodafone tax dispute seems pretty distant at the moment. There is a distinct possibility that the parties will be back to square one with the company rejecting an offer of reconciliation under Indian laws. Now, the two options that the government has are to either agree to a reconciliation in another country, or fall back on retrospective tax law amendments to reiterate its demand for the unpaid taxes. Choosing the second route, through the amended provisions of the Income Tax Act, for collecting the tax due (about Rs 20,000 crore including penalty and interest) would spawn another round of protracted litigation.
Whether the government opts for this or not will depend completely on finance minister P Chidambaram. However, this case certainly is a lesson for the income tax department which has a history of goofing up the cases that it takes up to recover dues. A close look at the department?s plan for picking up scrutiny cases in the current financial year, however, shows it is still continuing with its reckless approach rather than developing a sound system which can deliver good results.
The list of cases that will be compulsorily scrutinised in FY14 includes: (1) cases where the value of international transaction exceeds R15 crore and (2) cases involving transfer-pricing additions, of R10 crore or more, in the earlier assessment years, confirmed in appeal or pending before an appellate authority. There are several other categories of cases included in the list, which is part of the instruction issued by the Central Board of Direct Taxes (CBDT) on August 5, to the chief commissioners and director generals of income tax. Though there is emphasis on handling all the scrutiny cases through a systems software, this would be effective only if the cases have been picked up after gathering credible information about tax evasion and not the way the department wants it to do.
A Parliamentary panel and CAG have pulled up the department for its poor track record of handling scrutiny cases. Even an internal study of the department points out that the selection and handling of such cases has been mostly ad hoc, resulting in poor returns in terms of revenue. The number of disposal of scrutiny assessments per assessment officer was 146 in FY08, 167 in FY09 and in FY13 it was 114.
The most worrying part is a majority of the assessment orders are not able to withstand even the first appeal, revealing a lack of quality. In FY10, out of the 4,09,197 scrutiny cases, appeals were filed in 89,271 cases and the success rate of the department was a mere 5.97%. And in FY12, the department?s success rate went up marginally to 9.96% with a lesser number of cases disposed and more appeals filed as compared to FY10.
The CBDT analysis found that 70% of the reported assessment which were considered quality assessment came from the basket with computer-aided scrutiny selection (CASS). In such cases, penalty was imposed/initiated in 56% of cases?only 24% of quality cases were contributed by ?manual selection? under the compulsory mode.
The records worsen in the scrutiny cases selected under the discretionary mode, cases in which political pressure and arm-twisting plays a major role?only 6% of such cases have been reported as quality work. The study found that of the total cases scrutinised after selecting the cases manually (based on discretion), additions were made only in 14% of them. This is a dismal figure, especially because such selections are made with abundant application of mind and that too with the approval of supervisory authorities.
The trend suggests there is either a serious flaw in the selection of discretionary cases or proper efforts are not made to frame quality assessments. It is not surprising, therefore, that worthwhile enquiries were made only in 8% such cases.
Not surprisingly, the question rightly asked in this backdrop is: when 80-90% of the tax revenue is collected through pre-assessment taxes, why deploy bulk of the resources in handling scrutiny and post-scrutiny litigation?
The answer is simple. At present, increasing the tax base is a must, which, in turn, will boost tax collection. The tax base in the country is still very small and contribution to the tax kitty in terms of income brackets is also skewed. Over 98% of a total of about 3.5 crore asseessees show less than R5 lakh income and their contribution was only 10% of the total personal income tax collected in FY12. As against this, those reporting more than R20 lakh income were only 0.38% of the tax base and contributed 63% to the kitty.
So, there is no case for avoiding scrutiny. There is also no case for mindless scrutiny as it yields nothing. The real solution lies in selection of cases on the basis of firm investigation and definite information about tax avoidance. With the ongoing cadre restructuring in the income tax department set to add 20,751 officials at various levels, this aspect would hopefully be taken care of if the department seriously wants to improve its scrutiny record.
santosh.tiwari@expressindia.com