If government wants to earn more tax, taxmen need to stop harassing taxpayers
Tax laws need to be simplified, so as to disincentivise taxmen from litigating and continuing to litigate at the drop of a hat.
Recently, responding to a question raised in the lower house of parliament, the Lok Sabha, the union government provided some interesting data regarding the number of outstanding tax cases under both the direct and indirect tax heads.
The total number of outstanding cases under direct taxes stood at around 3.33 lakh.
Take a look at Table 1, which basically lists the details of the total number of cases of outstanding direct taxes, along with the time periods that they are pending.
Source: Lok Sabha unstarred question no 3451. (The above table does not include a total pendency in the Income Tax Appellate Tribunal, which is 92,388 for which age-wise details are not available)
How do things look when it comes to indirect taxes? A total of around 1.19 lakh cases are pending. Take a look at Table 2, which lists the details.
(Source: Lok Sabha unstarred question no 3451)
We cannot add the total number of pending cases for direct and indirect taxes and come up with a single number, simply because the data is for different dates. For direct taxes, the data is as of 31 March, 2017, whereas for indirect taxes, the data is as of 31 January, 2018.
The way the government explains these outstanding cases is pretty interesting. As it says in the written reply to the Lok Sabha unstarred question number 3451: “Comparing the total pendency of arrears with actual recoveries to arrive at a success percentage of arrears recovery is like comparing the incomparable. The two are not comparable because more than 85 percent of pendency is locked up in litigation / restraint, which are not recoverable till the judicial fora takes a final decision which takes more than five years in most cases.”
Also, as per the Economic Survey released earlier this year, as of end March 2017, the total claims for both direct and indirect taxes stuck in litigation amounted to Rs 7.58 lakh crore or 4.7 percent of the GDP. Indeed, that is a lot of money. Why are so many cases locked up in litigation? The government points out that in the case of indirect taxes, the judicial/statutory bodies take over five years or more in deciding the cases.
It is a little too convenient to blame the judiciary and statutory bodies for such a huge number of outstanding cases. As the Economic Survey points out: “Just 0.2 percent of these cases constituted nearly 56 percent of the total demand value; and 66 percent of pending cases, each less than Rs 10 lakh in claim amount, added up to a mere 1.8 percent of the total locked-up value of pending cases.” Basically, a very small number of cases, essentially constituent a bulk of the outstanding taxes.
Also, the question worth asking here is why are so many cases stuck with the judiciary? The answer lies in the fact that the taxmen are big litigants, despite having a very weak record of winning these cases. Take a look at Table 3.
(Source: Economic Survey 2017-2018)
As can be seen from the Table 3, taxmen tend to lose a bulk of all cases. When it comes to direct taxes (which has a significantly higher number of taxes outstanding), the success rate of the taxman in the High Courts is as low as 13 percent. It’s a little better in the Supreme Court at 27 percent.
Despite this lack of success, the petition rate of the taxman in case of direct taxes is very high. The petition rate is basically defined as “the percentage of the total number of appeals filed by” the taxmen. The remaining appeals are those filed by the assessees. In case of indirect taxes, the petition rate is much lower. The Economic Survey points out: “The [taxman] unambiguously loses 65 percent of its cases. Over a period of time, the success rate… has only been declining, while that of the assessees has been increasing.”
Despite losing two in three cases, taxmen do not give up. They keep litigating to higher levels of judiciary. But given that taxmen keep losing a bulk of their cases, especially in the case of direct taxes, it basically means that honest taxpayers are being harassed. Also, given that “just 0.2 percent of these cases constituted nearly 56 percent of the total demand value,” it makes more sense for taxmen to concentrate on these big ticket cases, than spreading themselves thin all over the place, which they currently are.
There is also a message here for the government. Tax laws need to be simplified, so as to disincentivise taxmen from litigating and continuing to litigate at the drop of a hat.
(Vivek Kaul is the author of India’s Big Government—The Intrusive State and How It is Hurting Us. He tweets @kaul_vivek)
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