Just over 5% of these are undisputed
When you look at the sharp hike in tax arrears—from R2.49 lakh crore in FY11 to R6.75 lakh crore in FY15 for direct taxes and from R56,890 crore in FY11 to R1.5 lakh crore in FY14 for indirect taxes—it is easy to assume this is money the government can hope to collect during the year. As it happens, it is not clear how much can be collected, though the evidence suggests it could be precious little. The arrears include very high-pitched assessments, for instance, that are under appeal. The R2.2 lakh crore worth of transfer-pricing adjustments orders passed between FY09 and FY14, for instance, would form part of the ‘arrears’. So would the R20,000-crore Vodafone order that pertains to Vodafone’s purchase of Hutch’s India operations. So would the R1.2-lakh-crore tax demand made on the Pune-based stud farm owner Hasan Ali—reports suggest the I-T department has all but given up on this demand. According to data presented to the Standing Committee on Finance in December 2014, just a little over 5% of the so-called arrears are unencumbered—R22,801 crore for direct taxes and R20,210 crore for indirect taxes—and can be collected easily. In which case, as the latest report of the Tax Administrative Reforms Commission (TARC) has suggested, the finance ministry has to begin an exercise to clean up these arrears.
This implies being realistic about the nature of the demands. Since a very large portion of the appeals filed in these cases will have been ones where some level of adjudication would have taken place, perhaps the government could apply the formula used in the Vodafone/Shell case—if the taxman has lost the appeal, don’t pursue that matter further. Theoretically, the taxman would like to take the case all the way up to the Supreme Court, but before doing that, the data in the Standing Committee’s report is worth looking at. In cases filed by the central board of direct taxes (CBDT) in the income tax appellate tribunals, around 60% are either decided against the government or simply set aside; at the high court- and Supreme Court-levels, the number is 65-70%—in none of the judicial forum are more than a fifth of the cases decided in favour of the taxman. Around R2.4 lakh crore worth of cases are pending at the CIT level, another R1.4 lakh crore at the ITAT level. In which case, as the TARC has suggested, it may be a good idea to withdraw appeals and simply liquidate the cases. Apart from the fact that the CBDT had, in any case, planned to reduce the pending cases by 60% this year, imagine the boost this will give to investor sentiment.