Though there have been, from time to time, several complaints against the high-handed approach of the taxman, it is not too often that the CAG documents some of these as meticulously as has been done this year—what makes the report more meaningful is that the head of the CAG, Rajiv Mehrishi is a former finance secretary. So, the CAG report details how, while SBI had paid an advance tax of Rs 4,908 crore in March 2016, the taxman gave it credit for only Rs 1,202 crore and then charged an interest of Rs 5,853 crore on the shortfall at the rate of 5.75% per month—as compared to the normal 1%—and used this generate, in the words of the CAG, an “illusory demand” of Rs 10,109 crore. SBI paid the tax on March 30 and raised a claim for rectifying the taxman’s mistake the same day, this was passed the next day but since the refund was paid on April 2, this meant the taxman’s target for the year was met. Nor was this a stray event since the year before, SBI got a credit of Rs 1,173 crore on its advance tax of Rs 6,144 crore and this led to a tax demand of Rs 7,094 crore and, once again, the refund was paid after the financial year was over. In the case of Bank of Baroda, it got a credit of Rs 595 crore for its tax payment of Rs 1,890 crore and this resulted in “creation of non-existent demand of Rs 1,067.29 crore”—once again, a refund was given, but after the financial year was over. Such tricks, the CAG records, resulted in “inflated collection of revenue of Rs 14,185.74 crore” in FY16 or around 10% of the Mumbai region’s corporate tax collections for the year.
If this is how brazen tax officials can be, imagine the possibilities in the transfer pricing and retrospective tax cases the CAG does not record so meticulously. To put this in perspective, while direct tax arrears have risen 2.2 times in FY13-17, actual tax collections only rose 1.5 times. Amazingly, there is no clarity on what arrears are either since while CAG puts them at Rs 824,211 crore at the end of FY16, the budget puts the number at Rs 659,131 crore—equally amazingly, while the amount figures in each budget, the tax department says 98.6% of this is “difficult to recover”.
CAG also 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. Given that almost 83% of all taxes collected are based on self-assessment, it makes you wonder about the efficacy of the tax assessment/collection machinery; more so given how the assessment orders are so large and the enforcement rate so poor. And while the taxman’s search-and-seizures frighten industry, it is important to note that 12,526 seizures made in 2016-17 resulted in income disclosures of just Rs 15,497 crore—and even this will probably be appealed in various forum—which is less than 2% of that’s year’s direct tax collections. Along with various other flaws/weaknesses highlighted by the CAG, it is clear a broad overhaul of the tax collection/assessment system is called for which includes reigning in of aggressive tax practices which, in any case, are delivering little.