As a start, we need to appreciate that the government measures its revenues on a cash basis, i.e. the `12 lakh crore target represents the direct taxes actually collected by the government net of the refunds issued.
The fiscal year has just ended, and like every other year, there is a review of tax collections at the Centre, both direct and indirect taxes. It has become a norm to measure the efficiency of the tax office by taking into account the taxes collected vis-à-vis the target. Early reports seem to suggest that the direct tax collection will be about 15% short of the `12 lakh crore target. The target this year had been considerably enhanced to take into account new taxpayers and the increased income in the formal sector as a result of demonetisation. What does this shortfall indicate?
As a start, we need to appreciate that the government measures its revenues on a cash basis, i.e. the `12 lakh crore target represents the direct taxes actually collected by the government net of the refunds issued. It is common knowledge that, virtually from the month of October, the tap of large refunds is closed, and refunds determined thereafter are paid over only in the beginning of the next fiscal year.
In order to address the concerns of the taxpayer on high-pitched assessments and recoveries made with respect to demands arising as a result thereof, the law was amended to provide that if a taxpayer paid 20% of the tax demanded, the balance demand would be stayed till the disposal of the first appeal. This 20% payment can be contested if demands arise as a consequence of additions made for which there are favourable court orders. In practice, high-pitch assessments are now raised and assesses called upon to make payment of 20% of the tax demanded without even waiting for the mandatory 30-day period provided in the law. What was meant to be an assessee-friendly provision has now become a revenue-raising provision.
It is also quite routine for the tax office to ask taxpayers to make payment of tax deducted at source (TDS) due in April, before March 31 itself, and enhancing collections for the fiscal year. Obviously, this collection gets set-off in the succeeding years!
As such, while we compare the collections vis-à-vis the targets, it is pertinent to note several short-term measures that have been undertaken to bump up tax collections for the year. Towards this, we’ve had some interesting developments this year. First, there has been a fervent demand by the revenue to collect taxes where stay of demand is granted by the tax tribunal in accordance with the provisions of law. A litigation is already afoot on this subject. Second, the Central Board of Direct Taxes (CBDT) called upon appellate commissioners to pass “good” appellate orders as would result in enhancement of assessments. This has also come up before a judicial challenge. Finally, the CBDT has written to the commissioners asking them to take “all possible actions” to recover taxes. Without doubt, it is the duty of the revenue to collect taxes that are due by an assessee. The unfortunate part is that the use of the words “all possible actions” is prone to be interpreted by many at the ground level to taking coercive steps and forcing assesses to pay taxes that may not necessarily be due.
I may hasten to add that this is a recurring saga and, to that extent, there is a window dressing that happens in all the budgets.
To my mind, increase in collection of revenues is a direct factor of increase in the taxable income of assesses and the increased compliance on account of widening of the tax base. To have a target for collection of revenues using any other barometer would mean passing of assessment orders that are high-pitched and that seek to tax income not earned by the assessee. We have witnessed examples of how high-pitched transfer pricing orders were passed or how infusion of capital was treated as revenue. The only other measurement is the expansion of the taxpayer base. India has one of the lowest tax-to-GDP ratios and it’s important that if higher tax revenue targets are fixed, they are achieved by bringing those taxpayers into the tax net who have consistently remained outside of it. Creating high-pitched assessments that cannot be sustained in appeals only clogs up the judicial system. The current approaches to augment tax collections may not resonate well with India Inc, and do not further the objective of the government that wants to see India among the top-50 countries in the Ease of Doing Business index.
The author is CEO, Dhruva Advisors