Unrealistic tax collection targets will only push up disputes; arrears under litigation stand at whopping Rs 12,42,786 crore

Among the top economy-related news in the papers on Wednesday (18 December) appears to be the government setting revenue collection targets for tax officials for the current financial year. The target for goods and services tax (GST) has been set at Rs 4.55 lakh crore and that of direct tax at Rs 7.78 lakh crore . Media reports also say that revenue secretary Ajay Bhushan Pandey has told tax officials that the cuts in corporate tax rates will not be accepted as an excuse for lower revenue collection.

It’s obvious why the government is so desperate. It is way behind its tax revenue targets. Corporate tax collections as of October, were 35 percent of budgeted estimates, income tax collections 42 percent and GST collections 43 percent. Business Standard reports that advance corporate tax collections fell 5.2 percent in the October-December quarter over the same period last year.

Faced with slowing growth and a definite slippage in meeting deficit-reduction targets, it wants to contain the extent of this slippage as much as possible. There’s a limit to which it can cut back on spending—sorely needed to do to pep up the economy—so it will have to focus on garnering as much revenue as it can. Hence the pressure on babudom to get more.

Representational image. Reuters

But how much can the pressure on tax officials yield when the economy is undeniably slowing and people are holding back on purchases? If tax officials are supposed to meet targets in spite of this—or the corporate tax rate cut—then the inevitable result is going to disputes that land up in court. Tax officials will raise unreasonable demands, companies will contest this and the case drags on. Ultimately, the government does not gain because the money only gets stuck in prolonged litigation, some cases dragging on for over ten years.

The most recent data on tax arrears bears this out. According to the report of the Standing Committee on Finance, as of 30 September, direct taxes to the tune of Rs 996,829 crore were stuck in disputes. That is 74 percent of the 2019-20 budget target of Rs 1,335,000 crore. Incidentally, this amount under dispute is 82 percent of uncollected taxes. In the case of indirect taxes, as much as Rs 245,957 crore was stuck either in litigation/appeals or were restrained by various government agencies or were written off. This is 21 per cent of the budget target of Rs 1,119,247 crore.

It was not for nothing that Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome had said in May 2014 that India has “by far the highest number of disputes between the tax administration and taxpayers with the lowest proportion of recovery of tax while arrears in dispute resolution are pending for the longest time periods”.

The first time this issue of `tax revenue raised but not realised’ figured in a budget speech was in July 2014, when the late Arun Jaitley acknowledged the problem and announced various measures to reduce litigation. These included allowing resident taxpayers to obtain advance rulings on their income tax liability above a certain threshold, making changes in the transfer pricing regulations, setting up more benches for the Authority on Advance Rulings and enlarging the scope of the Income Tax Settlement Commission. Finance Minister Nirmala Sitharaman has, in response to criticism about over zealous tax officials, spelt out steps to curtail harassment, including faceless assessments and mandatory use of a documentation identification number (DIN) for any correspondence between tax bureaucracy and assessees.

If, in spite of all this, uncollected taxes (direct and indirect) under dispute stand at Rs 1,242,786 crore, then one can well imagine what will happen if unrealistic targets are handed out to tax officials. In fact, the TARC had pointed out that the strategy of targets being set for officials regardless of the economic context be reviewed and that assessing officers should be trained to conduct assessments in a way that the fact finding is conclusive and final.

One ray of hope comes from the Legacy Dispute Resolution scheme that was launched in September, which allows taxpayers to pay outstanding dues without interest and penalty up to 31 December. Under this, applications relating to disputed amount of around Rs 27,000 crore has been received. At a press conference on 13 December, Pandey also said that 13,000 appeals against the tax department have been withdrawn from various courts. The real clincher, however, will be the withdrawal of appeals by the tax department against orders by courts or appellate authorities that go against it.

This is not to argue that there is all prodding of tax officials will have negative consequences ant that there is no lethargy on their part. Indeed, amounts not under dispute may account for only 18 per cent of uncollected direct taxes, but they still amount to Rs 219,173 crore, which is not exactly peanuts.

In its response to the Standing Committee, the finance ministry detailed various procedures to ensure plug this. It might be better to focus on this. Another sensible proposal is the move for sharing of data between direct tax authorities and GST authorities. This can help check tax evasion in a relatively non-intrusive way and will spare honest taxpayers.

Total uncollected taxes (disputed and undisputed) stand at Rs 1,490,768 crore. The government would do well on working to bring part of this into its coffers, instead of putting undue pressure on tax officials, which may only result in seeing these numbers go up next year.

(The writer is a senior journalist and author. She tweets at @soorpanakha)