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Pitch for zero recurrence of common mistakes in tax administration

MARCH 31, 2017

By TIOL Edit Team

THE Law of Inertia continues to govern India's tax administration. This is inescapable conclusion one would arrive at after reading Comptroller and Auditor General's (CAG's) four reports on income tax, customs and excise laid in Parliament on 10 th March.

The common thread in the latest and previous CAG is the prevalence of same arithmetical errors, same wrong application of tax rates or tax incentive, same lack of coordination among different wings within on tax authority, same inefficiencies and same administrative indifference. If mistakes recur year after year, leading to revenue leakages and losses, it is time to sit up and ask a few tough questions.

Have the Department of Revenue, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) developed Chalta Hai attitude (indifference) towards CAG's meticulous findings? Or is that the existing carrot & stick human resource management in tax administration too feeble to break free from inertia? How much is shortage of manpower responsible for recurrence of mistakes?

Is there more to it than what meets the eye in recurrence of mistakes & resulting revenue leakages of a few thousand crores every year? Or do the reports prove the fact sound and fury over tax reforms is not leading to desired outcomes?

Prevention of revenue leakages through avoidance of recurring errors is as important as collection of additional revenue through business intelligence.

We urge Finance Minister Arun Jaitley and Prime Minister Narendra Modi to seek a meeting of tax officials on recurrence of revenue leakages through same or similar routes year after year.

This should make tax administration more responsive. PM might tell them that Government would hold the concerned officials accountable for recurrence of avoidable mistakes.

A few instances mentioned in the 4 CAG reports would help stakeholders appreciate the gravity of the laxity in tax administration. The report on direct taxes has another wake-up call on income tax arrears, which increased from Rs 7.00 lakh crore in 2014-15 to Rs 8.24 lakh crore in 2015-16.

What message Income Tax Department (ITD) wants to convey to honest tax payers when it says that more than 97.3 per cent of uncollected demand is difficult to recover. How difficult is difficult? Is it more difficult than demonetization? Has ITD held anyone accountable for this colossal loss of revenue, adequate to meet basic needs of all poor citizens?

ITD recovered Rs 6,122.43 crore in the last five years from demands raised following detection of errors by CAG. This includes Rs 525.68 crore recovered in 2015-16.

The report notes that the accretion in pendency in replies to audit findings each year has resulted in accumulation of 48,106 cases involving revenue effect of Rs 72,391.68 crore as on 31 st March 2016. What is the hitch in replying to queries raised by auditors?

The report mentions 320 high value cases pertaining to corporation tax with tax

effect of Rs 3,298.93 crore. These include ones resulting from arithmetical mistakes in computation of income tax. A case in point is Essar Capital. ITD under-assessed company income of Rs 379.57 crore, resulting in short levy of corporation tax of Rs 126.09 crore in September 2015 for assessment year (AY) 2011-12. Finance Ministry accepted this audit objection and rectified mistake in May 2016.

A similar mistake and its correction happened in the case of Tamil Nadu State Marketing Corporation in 2015. The mistake resulted in under-assessment of income of Rs307.53 crore for AY 2012-1, leading to short levy of corporation tax of Rs 99.78 crore.

There several more similar cases discussed in the report. Devoting a full chapter to 'Fictitious sales and purchases by Shell Companies/Hawala Operators', the report says: "Audit noticed failure of the ITD to effectively use various tools at its disposal to carry out suo motu detailed investigation of the facts and take up cases for scrutiny in order to bring to book the severe economic offenders."

Turn now to 2 nd CAG report on 'Performance Audit of Implementation of TDS/TCS Schemes', CAG noticed that the "ITD was not doing sufficient 'Know Your Customer' (KYC) before allotting 'Tax Deduction/Collection Account Number' (TAN) to tax deductors and therefore was not able to track all TDS defaulters".

It came across 128 cases where assessment officer "failed to disallow expenditure though tax was not deducted at source or deducted but not deposited by the assessee, resulting in short levy of tax of Rs 2026.42 crore".

According to CAG, "in 168 cases that, AO(TDS) failed to impose interest amounting to Rs 902.16 crore under section 201(1A)/206C(7) on the defaulting tax deductors".

The Report observes that ITD did not initiate penalty in 311 cases and prosecution in 343 cases against the tax deductors.

CAG rightly recommended that the CBDT should ensure sharing of information among TDS units and respective Jurisdictional assessment units to synergize revenue collection efforts. It also expects CBDT to prescribe the procedure and criteria for selection of TDS returns for verification.

Consider now CAG's observations in its 3 rd report on excise. It says: "Huge amount of Central Excise revenue amounting to Rs 92,162 crore is under litigation at various levels. The amount is increasing every year."

It adds: "If no recovery is made by Departmental efforts, cases need to be transferred to the Recovery Cells which have been empowered to take action for recovery by attachment and sale of property of the defaulter. No cases were transferred to the Recovery Cells in 23 Commissionerates during 2014-15, there were 15,388 cases amounting to Rs 18,700.27 crore pending for recovery."

It has also voiced concern over poor outcome of constitution of a Centralised Task Force (CTF) by CBEC in 2004 to coordinate, facilitate, monitor and oversee the efforts of Customs and Central Excise field formations in recovery of arrears.

The Report says: "We observed that though the Task Force was entrusted with finalising and implementing strategies for realisation of arrears it did not take any such action for realization of arrears".

Similarly, CAG, in its 4 th report on Customs-Compliance Audit, has flagged the issue of customs arrears. It observes that special institutional arrangement like creation of Recovery Cell and Task force "has not made any significant impact on improving the extent of recovery of revenue arrears".

In some of the Commissionerates, these arrears have increased manifold during the three year period covered in audit, it adds.

All these instances should enable all stakeholders to focus on avoidable revenue leakages. It is high time the Government considers undertaking tax gap studies for direct and indirect taxes to gauge the extent of non-compliance of tax rules.

The Government should also consider some tough measures for recovery of tax arrears, which are far more serious than non-performing assets of banks.