MARCH 25, 2015

By TIOL Edit Team

COMPTROLLER and Auditor General of India (CAG) has done a commendable job in exposing massive revenue leakages resulting from misuse of tax incentives by pharmaceuticals companies largely due to laxity of Income Tax Department (ITD).

Without using the word revenue leakage, CAG has referred to deficiencies ITD and its operations resulting in "total effect of Rs 1348.44 crore."

This figure is an under-estimate as it based on 246 cases detected from 83.57% of the 3432 assessment records sought by CAG from ITD for four years ending 31 st March 2014.

In its report captioned 'Performance Audit on Assessment of Assessees in Pharmaceuticals Sector' presented to Parliament on 20 th November, CAG has cited several instances of ITD's failure to prevent revenue leakages. The instances include mundane ones such as the practice of overlooking wrong claim of tax incentive by companies.

A shocking instance that requires elaboration is that of turning a blind eye to Maharashtra Government-identified hawala operators in the pharmaceuticals. What is most deploring is ITD's attempt to rationalize this grave lapse!

It is high time Department of Revenue (DOR) realizes the need for making tax officials accountable for deliberate oversight to revenue leakages in all situations. It can define what constitutes deliberate oversight of wrong claim of incentives and expenditure by a company to avoid scope for harsh treatment of staff.

The gravity of deliberate oversight to an alleged crime can be appreciated by quoting the CAG report. It says: "Sales Tax Department of State of Maharashtra, in the course of their investigation had unearthed a massive scam in which they had found that some dealers were issuing invoices without actual sales/purchase transaction, which is nothing but hawala transaction. Thereafter, they started publishing the list of such hawala dealers on the website of Sales Tax Department of the Government of Maharashtra. Purchases made from such bogus dealers are not admissible deduction for the assessees."

The report cites a specific instance of an assessing officer (AOs) from ITD's CIT-VIII, Mumbai, overlooking alleged/suspected bogus purchases aggregating to Rs 13.20 crore in a year by a pharmaceuticals company from one of its dealer firms.

Noting that the concerned dealer firm figured in the list of bogus dealers on the website of Maharashtra sales tax department, CAG says: "hence these expenses were not allowable. Omission to do so, resulted in under assessment to the same extent involving potential tax effect of Rs 3.96 crore."

ITD has brushed off CAG objection by stating that "audit had relied on third party information."This reply is specious as the so-called third party is none but Maharashtra's Sales Tax Department.

CAG has aptly countered by noting that "the ITD itself uses information from this website for disallowances of purchases bogus in nature. Further it has been judicially held that records maintained by various State / Central Government authorities are important piece of evidence."

One does not know whether ITD and Financial Intelligence Unit (FIU) joined hands to crack this Maharashtra hawala case. The existence of rampant practice of generating bogus invoices across the economy has been suspected for long. It calls for regular, coordinated vigilance and action by all concerned central and State authorities.

The Maharashtra case ought to be perceived as timely alert for DOR to prevent revenue leakages for existing taxes as well as in the future domain of goods and service tax (GST). The Department should proactively issue GST guidelines for information sharing and cooperation between indirect taxes administration of the Centre and the States.

It should also reflect over the well-known issue of lack or insufficient information sharing and cooperation between Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC).

As pertinently put by CAG report, "ITD does not have any mechanism to correlate & verify the turnover declared in Income Tax with turnover declared in Central Excise which is part of the same Ministry of Finance."

This brings us to the need to urge DOR to shed its reluctance to merge CBDT and CBEC as cogently recommended by Tax Administration Reform Commission (TARC).

DOR officials have reportedly told International Monetary Fund staff that the merger is undesirable as the functional specialisation of the two boards is necessary.

CAG's recommendation to CBDT to maintain sector-wise data of assessees to whom various tax incentives are doled out should be implemented.

Referring to Ministry's reply expressing inability to cull and maintain such data, CAG says: "Maintenance of sector-wise data is necessary for tax planning and sector specific policy by the concerned departments of the Government of India."

CBDT also need to reinforce among its staff for the need for assessing whether expenditure deduction is in compliance with regulatory guidelines. This aspect has been interestingly discussed and elaborated by CAG while referring to massive expenditure on gifts and other facilities extended to doctors. It has cited specific instances of such deductions being non-compliant with the guidelines issued by Medical Council of India.

We can draw a few messages from CAG report. First, it serves another reminder for reducing tax incentives to the bare minimum with matching reduction in tax rates. Second, coordination between direct and indirect tax authorities is essential to detect tax evasion. Third, the Finance Ministry should present a comprehensive report of tax expenditure and its efficacy to Parliament as it is done in certain countries and the provinces of certain developed countries.

In our country, Tax expenditure and subsidies are treated like a perennial river with copious flow of water. The Government is thus not seriously bothered about preventing misue of water (read tax incentives and subsidies). Accounting of the efficacy of tax sops is alien concept for the Government.