Income Tax department: Efficient, but not really effective

By: |
Published: September 23, 2019 3:23:51 AM

Together, these numbers suggest taxpayers have to suffer huge, unsustainable additions, and then wait for years before their grievances are redressed.

The department can thus hardly be said to be collecting taxes according to law.The department can thus hardly be said to be collecting taxes according to law.

The months of August and September have brought both good as well as bad news for the Income Tax Department. August started poorly. VG Siddhartha’s suicide note suggested that the harassment that he faced from the department was one of the reasons for breaking his will to live. The department was quick to respond; officers who dealt with his case were only doing their duty when they attached the shares of Coffee Day Enterprises, the holding company of Café Coffee Day, the enormously successful café chain he founded. The mood in the industry lightened perceptibly when Prime Minister Narendra Modi, during his Independence Day address to the nation, signalled a policy shift by the government: Wealth creators, he pointed out, deserve our respect and encouragement. “A mindset change is needed,” finance minister Nirmala Sitharaman reiterated to tax officers a few days later.

Corporate tax rate cut decoded! Why FM Sitharaman’s announcement is a Diwali bonanza for economy

More recently, in line with her policy of reducing interaction between tax officials and taxpayers, she announced a slew of administrative measures to allay the fears—to check misuse, from October 1 onwards, all tax notices, summons, etc, will be issued by the department through its centralised computer system. Taxpayers may disregard all notices issued otherwise. Actions pending under earlier notices are to be brought to a close by the end of September. Otherwise, they will have to be revived by a fresh notice to be issued centrally. New notices issued on or after October 1 must now be disposed off within three months. All these measures are in addition to schemes like making scrutiny assessments faceless without allowing any interaction between the department and taxpayers, and reducing litigation through liberalisation of income limits for filing of departmental appeals before the Income Tax Appellate Tribunal (ITAT), the high courts and the Supreme Court.

These events mask a complicated story, which is multidimensional and layered. At one level, the department goes about its business with a Bismarckian efficiency. This was reflected in the expeditious manner in which it attached the shares of Coffee Day Enterprises to protect its interests. It is also reflected in its performance data between 2000-01 and 2017-18, when its revenues grew from Rs 68,305 crore to Rs 10,02,741 crore at an impressive rate of 17.12% per annum. During this period, the cost of collection decreased by 55.15% from 1.36% to 0.61% of net revenues, and the direct tax to GDP ratio improved from 3.25% to 5.98%. Over the last five years of this period, return filers have almost doubled from 3.8 crore to 6.85 crore, at an impressive annual rate of 15.9%.

Statistics between 2011 and 2018 reveal another heartening fact; some regions, not known to generate large revenues—Jharkhand, Madhya Pradesh, Rajasthan, Kerala, Chhattisgarh, Haryana, amongst others—outperformed the national rate of revenue growth.

Altogether, within a certain framework, the department’s performance has been impressive. This could not have been possible without rigorous monitoring. The department certainly did do certain things right. However, the question, in the context of Siddhartha and other complaints of harassment, is whether it also did the right things? Its performance must be judged in terms of not only its operational efficiency, but also by the extent to which it achieved its policy objectives.

Its raison d’être is assessment and collection of tax, according to law, at the lowest possible cost to the taxpayer and the exchequer. At the end of FY18, arrears of tax due to it were Rs 11,14,182 crore, 111.11% of the net annual collections of Rs 10,02,741 crore! And Rs 9,61,472 crore (or 86.29%) of these arrears were locked up in appeals before various appellate authorities. Past studies show that the department’s success rate in appellate cases before the ITAT, the Supreme Court and the high courts is usually less than 30%, and sometimes as low as 13%.

Together, these numbers suggest taxpayers have to suffer huge, unsustainable additions, and then wait for years before their grievances are redressed. The costs they incur—in terms of time, money and energy—to comply with the law and pursue appeals are much higher than in other tax jurisdictions; understandably, they are also a cause of considerable harassment. The department can thus hardly be said to be collecting taxes according to law. Cost of collection to the government may be internationally competitive, but the costs to the society are extremely high.

PM Modi, in a sense, took note of this sense of disappointment—articulated by many business leaders on Siddhartha’s suicide—during his Independence Day address. The reforms recently announced by the finance minister are all designed to align the department to its original purpose and improve its effectiveness to realise policy objectives. All taxpayers will hope that she succeeds. Apart from induction of technology and process simplification on which the department has been relying so far, training for generating behavioural change may also help.

The author is ex-Chief Commissioner of Income Tax

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.