Can’t be fixed till solution found to high-pitched demands
The Central Board of Direct Taxes’ (CBDT) target—in its annual Central Action Plan—to reduce pending tax arrears’ demand by 40% of that pending on April 1, 2018, is, on the face of it, quite impressive and an extension of the moves made by the government some weeks ago to curb pending litigation for small taxpayers. More so, since tax arrears continue to increase faster than even tax collections; indeed, right now, tax arrears are around 1.1 times the direct tax collections. Between 2012-13 and 2017-18, tax arrears rose 2.3 times, from Rs 4,86,180 crore to Rs 11,22,752 crore, while direct taxes rose a much slower 1.8 times.
The problem, however, is that while successive Central Action Plans propose equally ambitious numbers that the CIT (Appeals) is not able to meet, there is an equally high number of new demands that are filed by the taxman—in 2017-18, the Central Action Plan also set a 40% reduction target, this time for arrears as on April 1, 2017. According to the latest Central Action Plan, gross arrears were reduced by Rs 3,24,528 crore, or 31% of carried-forward demand. But with Rs 4,62,412 crore of fresh demands made in that year, the total tax-demand arrears keep on increasing.
So, if the government is really serious about fixing tax-demand arrears, it needs to understand why high-pitched demands continue to be made, and then to come up with a solution to reduce this. The last CAG report on this, in December 2017, is interesting, more so because the head of the CAG is a former finance secretary as well. The CAG looked at a sample of cases where the taxman had added Rs 10,700 crore of income to assessees’ tax returns, but only a fifth of this stood scrutiny after appeal. Indeed, as the CAG points out, the tax department itself classifies most of these arrears as “difficult to recover”—while the proportion was 95.9% in 2012-13, this went up to 98.6% in 2016-17. Some years ago, the prime minister said the taxman would be penalised for making demands that do not hold up in court. It is not clear how extensively this has been used, but the rising arrears suggest it has not really worked. The CAG also details how, in March 2016, an extra demand of Rs 5,853 crore was levied on SBI by incorrect calculations of its advance tax and the bank was refunded the amount on April 2; several other examples are given to show this seems to be a routine exercise—in FY16, such inflated demands amounted to 10% of the Mumbai region’s corporate tax collections for the year.
Amazingly, instead of looking at fixing the taxman’s tendency to issue inflated demands, the latest Central Action Plan has said that an additional credit of two points will be given for each ‘quality’ order passed by the CIT (Appeals) and ‘quality’ is defined as increasing the tax demand made or finding a way to strengthen the taxman’s case. In other words, there is now an incentive for the CIT (Appeals) to increase tax demands instead of genuinely adjudicating them.