By TV Mohandas Pai | S Krishnan

The latest Union Budget reveals that tax demand raised but not realised due to disputes amounts to Rs 13.36 lakh crore as of March 31, 2024. Corporation tax under dispute is Rs 8.06 lakh crore, of which about 80% is less than five years old, amounting to Rs 6.44 lakh crore — an increase of 35% over the previous year. Meanwhile, income tax (I-T) under dispute is at Rs 5.30 lakh crore.

Shockingly, unrealised tax demands that are not disputed amount to Rs 15.23 lakh crore as of March 31, 2024. This has increased by about four times since FY21 and is surprisingly higher than taxes under dispute for the first time during this period. More than 60% of unrealised non-disputed tax demands relate to I-T (non-corporate), which has increased by about 5.8 times during this period to Rs 9.32 lakh crore. This indicates tax terrorism against individuals and non-corporate entities. The prominent reasons for not realising tax revenue under the non-disputed category are inadequate asset or no assets for recovery, failure to trace taxpayers, and so on; however, the real reason is high-pitched tax demands without much substance.

The total tax revenue demand not realised (disputed and not disputed) has nearly doubled from Rs 14.41 lakh crore in FY21 to about Rs 28.59 lakh crore in FY24. If this amount was realised, the fiscal deficit (revised estimate) of Rs 15.70 lakh crore for FY25 can be erased! The unrealised tax revenue every year is more than the tax revenue collected for that year. Corporation tax demand not realised stands at Rs 13.97 lakh crore as of FY24, whereas actual corporation tax collected is at Rs 9.11 lakh crore. Similarly, unrealised non-corporate tax demand is Rs 14.62 lakh crore, whereas actual tax collected is Rs 10.45 lakh crore for the same period.

Over the past three years, there has been great tax buoyancy in India. The Central Board of Direct Taxes (CBDT) has reported that the gross direct tax collection for FY25 as of February 10 is Rs 21.89 lakh crore, an increase of 19% from Rs 18.38 lakh crore in FY24 (as on February 10). Refunds issued so far are worth Rs 4.1 lakh crore, 18.7% of the gross amount, resulting in a net collection of Rs 17.78 lakh crore. The total refunds issued during this period increased by 43% over the previous year, while the refunds issued to corporates (Rs 2.30 lakh crore) increased by 63%. The lower net collection this year is due to huge refunds for earlier years, settlement of older disputes, and faster refunds and withdrawal of cases by judicial authorities due to an increase in threshold for litigation. The big increase in gross collections and hopefully lower refunds in FY26 gives great confidence in meeting the budgeted targets for the next year, even if growth is slower. The `1 lakh-crore reduction in taxes for individuals for FY26 is expected to be made up by lower refunds next year.

The Comptroller and Auditor General of India (CAG) Compliance Audit Report No. 14 (2024) on “Outstanding Demand on Income Tax Assessees” noticed instances of exaggerated tax demands raised by the I-T department (ITD), such as not allowing credit for taxes already paid by the assessee, levying incorrect interest, and committing mistakes while giving effect to the appeal orders. Cases where tax deducted at source (TDS) was deposited into the government account but was yet to be credited are being classified as “demand difficult to recover”, contributing significantly to an increase in their figures. The CAG audit also noticed that figures of outstanding demand continued to include nullified demands. A delay in effecting appeal orders led to a delay in issuing refunds. The audit observed delays of up to seven years in implementing the appeal orders passed by appellate authorities, with one case still awaiting orders for over 11 years, resulting in harassment of the assessees. The demand classified by the ITD as “difficult to recover” was more than 97% of the total outstanding demand.

The government should write off the unrealised tax revenue which is not under dispute and relieve the taxpayers from unwarranted harassment and hardship. A massive clean-up of the government books is urgently needed.

The large quantum of pending tax disputes for less than five years shows that high-pitched assessments have continued in this period, despite the finance minister promising to reduce repeat litigation between taxpayers and the ITD. The government should now set a moratorium on high-pitched assessments for a period of at least two years till the pending disputes are settled fully. This is gross mismanagement of the entire tax assessment system and both the CBDT and the finance ministry should be held accountable by Parliament for this. Sadly, accountability for tax collectors is a distant dream for India and even the Opposition hardly raises this issue.

The government should increase the number of benches of judicial authorities to settle pending litigations. The CBDT should also enhance the low monetary limits for filing appeals by the ITD to Rs 1 crore before Income Tax Appellate Tribunals (ITATs), Rs 5 crore before high courts, and Rs 50 crore before the Supreme Court. It should also ensure that all appeals filed by the ITD before the higher authorities that are below the monetary limits are immediately withdrawn. The enhanced limits would prevent tax officials from filing routine, frivolous cases and enable the judicial authorities to focus on high-value litigation. The ITD should aim to complete all pending appeals within the next year and release the inappropriately collected taxes to taxpayers. In case of appeals pending at higher levels, the ITD should aim to settle all cases pending at the ITATs within the next year and all cases pending with the courts within the next two years.

In 2014, the National Democratic Alliance’s former FM promised to remove tax terrorism. Sadly, this promise has not been kept even after 11 years and needs urgent attention from the Prime Minister. FY26 should be declared as the year of tax resolution and the entire focus should be on resolving a great majority of tax disputes.

The writers are respectively chairman, Aarin Capital Partners, and tax consultant.

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