The government's tax dues are mounting

There has been a lot of public concern about the non-performing assets of the country's banking system running into a figure close to Rs 100,000 crore (Rs 1,000 billion) or around one-twentieth of India's gross domestic product.

These NPAs are now being brought down to more manageable levels thanks to a recently enacted new law.

What has, however, escaped public attention is the fact that the Union government's total tax arrears are as high as the total amount owed to banks and financial institutions.

What is worse is that the amount of taxes outstanding has grown at a fairly alarming rate in recent years.

The following are the figures of the aggregate amount of income tax, corporation tax (that is, tax on the income of corporate bodies), customs duty and central excise duty outstanding at the end of March:

Year Amount (Rs crore)
1998 47,888
1999 52,617
2000 62,459
2001 67,039
2002 86,342

While the figure of total outstanding taxes at the end of March 2003 is not available, it is almost certain that the amount would have gone up to a figure in excess of Rs 90,000 crore (Rs 900 billion), higher than the official estimate of total NPAs of banks and financial institutions which is in the region of Rs 80,000 crore (Rs 800 billion).

What is especially a matter of concern is the sudden and sharp rise in the figure of outstanding tax dues to the extent of nearly Rs 20,000 crore (Rs 200 billion) between the end of March 2001 and March 2002.

These figures were disclosed in Parliament by former Union Minister of State in the Ministry of Finance and Company Affairs, Gingee N Ramachandran (of the bribe-taking personal assistant fame) while replying to a question raised by Rajya Sabha MP belonging to the CPI-M Dipankar Mukherjee.

When asked if the finance ministry had a time-bound plan of action to reduce the quantum of tax arrears, this is what the minister replied:

"No time-bound, year-wise target for liquidating the outstanding amount of unrecovered taxes can be fixed."

He added that with respect to tax cases that are disputed, the assessee generally does not pay up the confirmed demand of taxes considered due by the department of revenue in the finance ministry "until they exhaust all the available legal remedies".

"This is an ongoing process under which old demands get reduced or collected and fresh demands are added each year," Ramachandran stated, adding: "Persuasive and coercive action, as prescribed under the relevant laws, is being taken."

The point that needs to be taken note of is that many assesses have made it a habit to dispute the demands made on them by the tax authorities with the assistance of a veritable army of lawyers and accountants.

The idea is allow the disputes to drag on for as long as possible. This way, the assessee gets to retain the amount that would be eventually coughed up as taxes and uses the money as working capital during the period of time the tax disputes are pending in different courts of law.

Given the tardy pace at which the country's legal system operates and given the ingenuity of many of our lawyers, it has indeed become a lucrative business to dispute even genuine tax demands made by the revenue department.

This is, however, not to conclude that the tax authorities do not raise unfair demands on assesses. Corruption is rampant among tax officials and the way in which particular cases are treated often depend on whether or not the right palms have been greased.

Another reason for the proliferation of tax disputes is the complexity of India's tax laws.

The Vijay Kelkar committee and other official panels before it have made various recommendations to simplify and rationalize the country's rules and regulations without resulting in revenue collections dipping, but many of these suggestions have not been implemented.

It is also pointed out that tax dues may have gone up because the revenue authorities have been 'soft' in initiating punitive action against defaulters, just as there may be instances of search and seizure raids being conducted to harass particular individuals who may not have 'cooperated' with particular tax officials.

CPI-M MP Mukherjee says certain internal decisions taken by the Central Board of Direct Taxes have resulted in a slowing down of searches and surveys conducted under Section 133A of the Income Tax Act.

For instance, on March 7, 2001, the CBDT issued instructions to the effect that the administrative approval of the Director General, Income Tax, would have to be obtained by the Director, Income Tax, before issuing search warrants.

This was done ostensibly "so that there is better supervision and monitoring of search action for curbing tax action without causing undue harassment to the tax payer."

The government clearly needs to follow a multi-pronged strategy to reduce mounting tax arrears.

Elements of such a strategy would include simplification of rules and procedures and simultaneously cracking down hard on corruption among Revenue Department officials.

As the recent episode concerning Ramachandran's PA has indicated, even a relatively junior income tax officer was willing to pay a bribe of Rs 4 lakh (Rs 400,000) in order to be transferred to a 'lucrative' posting in Mumbai.

Earlier, B P Verma, an official of no less a rank as the Chairman, Central Board of Excise and Customs, was placed behind bars. The story was repeated in the case of a Chief Commissioner, Central Excise, Someshwar Mishra.

There is little or no doubt that these corrupt officials are overtly or covertly supported by their political masters and by other corrupt bureaucrats.

Much remains to be done to clean up our graft-ridden and decrepit tax systems without which the government can never hope to recover the huge amounts blocked in litigation.

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