Years of unreasonable tax demands has led to a situation where, while tax collections have risen just two times between FY08 and FY14, tax arrears have risen more than 5-fold. What is more alarming than the fact that the proportion of disputed arrears is growing dramatically—while the disputed amount was around 62% of total arrears in FY08, the proportion rose to 86% in FY14—is the fact that the taxman admits than under a fifth of these arrears are collectable. According to papers circulated at the annual conference of tax officials last week, of the R8.3 lakh crore of outstanding tax demands, R6.7 lakh crore are difficult to recover. Of this, roughly 40% (R2.6 lakh crore) is on account of the fact that the assessees do not have the assets which can even be attached in case they do not pay the tax. In which case, the taxman will have to keep a close eye on the financials of firms it is taxing—the tax department has suggested the taxman obtain details of bank accounts and all assets of assesses while passing tax orders. Another 18% (R1.2 lakh crore) can’t be collected as the demands have been stayed by the courts—a related issue here is the fact that the taxman wins just between a fourth and a fifth of most appeals filed in various levels of courts.
In which case, apart from linking the filing of tax notices to their collectability—at least in terms of winning the cases in the court—the taxman will have to devote special effort to collecting arrears which add up to a substantial fraction of tax collections in any year. Since there are nearly 2 crore assessees from whom taxes are due, it is easy to assume the department is being overwhelmed by paperwork. But, as the report circulated at the annual conference brings out, the taxman is to blame for this situation. Nearly two-thirds of the assessees (1.2 crore of the total of 1.9 crore) owe Rs 1,445 crore, or R1,204 each on average. Surely the taxman can write this off immediately and focus on the more important cases? Imagine the relief this will bring to assessees. Another 5.5 million assessees have been served a tax demand of R9,288 crore or R16,887 each on average. Whittle down the list further and, it turns out, just 38,981 assessees owe nearly 90% of the tax due. There is a big case to just focus on the big tax demands and leave the rest alone. Given the taxman’s record in winning cases, though, in this case too, there is an urgent need to have a well-oiled settlement mechanism to deal with these demands.