AUGUST 09, 2014

By TIOL Edit Team

INCOME Tax Department (ITD) is perpetually lagging in performing its duties. This is the harsh conclusion one would arrive at every year after reading the Comptroller and Auditor General (CAG's) reports presented annually on different gamut of direct taxes, Central Board of Direct Taxes (CBDT) and Department of Revenue (DOR).

CAG report on ‘Assessment of Firms' presented to Parliament on 18th July 2014, for instance, has observed that Commissioners of Income Tax did not carry out inspections/review of assessment orders.

As put by the Report, “ITD did not give importance to their internal audit as it was neither conducted nor did it cover the firms' assessment records. ITD did not effectively utilize the information available in the tax audit reports and maintain updated registers required for effective control of various functions.”

Internal Audit in any revenue-generating entity is indispensible. It serves as third eye against revenue leakages. There is thus no scope for laxity on this count.

It is the lack of or namesake existence of internal audit that obviously encourage partnership firms to avail more exemptions/deductions by inflating profits through non-payment of remuneration/interest to their partners. CAG also noticed that ITD allowed carry forward/set-off of losses pertaining to the retired/deceased partner to the subsequent year!

Quantifying revenue loss due to laxity in assessment and review of returns of Partnership firms on different counts, the Report has pointed out inconsistencies and lack of clarity in the Income Tax Act. This results in incorrect assessments and short levy of taxes.

CAG turned the torchlight of assessment of partnership firms, association of individuals and body of individuals as they collectively constitute an important tax-paying group after the corporate sector. Their effective tax rate in assessment year 2011-12 was only 23.80% as against statutory rate of 30.90%. CAG thus felt the need for ascertaining the veracity of exemptions/deductions claimed by partnership firms.

CAG has rightly recommended that DOR should maintain complete database of firms and devise a suitable mechanism to keep track of unregistered firms and ensure that they file income tax returns. It also suggested that DOR may consider linking the returns of partners and their firms. This would enable assessment officers to verify transactions. The Finance Ministry should also make it mandatory for firms to declare their partners' name and PAN in the returns.

This, coupled with a slew of other recommendations incorporated in the Report, should hopefully serve as an opportunity for DOR to widen the income tax base and checkmate tax evasion and avoidance in the domain of partnership firms.

Turning to CAG second report on direct taxes, which was also released on 18th july, we are dismayed to learn that DOR has no mechanism to monitor the results of impact of revenue forgone due to numerous tax concessions.

DOR is resorting to buck-passing game by telling CAG that the impacts study on revenue forgone in a particular area has to be monitored by the respective ministries. The impact studies should be regularly carried out by CBDT's tax research unit and also made public.

Leave aside revenue forgone due to tax preferences, ITD has been found wanting in allowing several tax payers to walks with tax benefits even when they are not eligible for them. This is again reinforces the need for putting in place a vigilant internal audit.

ITD should how far it has succeeded in implementing its Vision 2020 that envisaged development of a revenue forecasting model, instituting study on tax leakages, developing business intelligence model, etc. CAG should focus on this stragetic planning in its next report on direct taxes.

CAG noticed that ITD disposed of 59% of the grievances of tax payers within stipulated period during 2011-12. It found that 7167 grievances cases were pending for disposal by concerned assessement officers as on 31st March 2012.

It is indeed shocking to learn that the pendency of grievances ranged from 2 days to 10 years beyond the stipulated period of 60 days. As rightly put by CAG, this state of affairs are symptoms of flaws in the administrative mechanism.

Pendency of grievances apart, ITD is running a huge backlog of replies that it needs to give to CAG's findings. CAG says that the accretion in pendency in replies to audit findings each has resulted in pile-up of 55,072 cases involving revenue effect of Rs 55,202 crore as on 31st March 2013.

Any responsible citizen would find this disclosure alarming. Finance Ministry must treat CAG reports as a shake-up call for ITD, which seems to have developed indifference towards CAG findings. The Government should strive for challenging goal of zero audit objections on the lines of zero defects on the manufacturing/assembly line. The key for this lies in sound internal audit and accountability framework.