Poor man's burden

With a more responsible and active tax administration, the government could have avoided increasing the prices of diesel and cooking gas.

WHILE the Union government is consistently cutting down the proportion of budgetary expenditures on education, health and other social sectors, its tax administration has been inexcusably indolent in not collecting tax dues. Had it been more responsible and active in collecting in time the taxes for which demand notices have been issued, there would have been no need to increase the tax burden on the people or to resort to increasing the prices of diesel and cooking gas steeply.

Year after year, the Comptroller and Auditor-General (CAG) has been pointing out the mounting arrears in tax collection. According to the audit reports, the cumulative arrears in tax collection have exceeded Rs.1,60,000 crores as on March 31, 2005.

The law provides that when any tax, interest, penalty, fine, or any other sum is payable as per an order, a notice of demand is served on the assessee. The amount demanded should be paid within 30 days unless the time limit is extended by the assessing officer. An assessee can go on appeal only after paying the tax on the returned income. The uncollected amount becomes the arrears to be realised in the following year along with the fresh demands raised.

For a number of years the demand of corporate tax was higher than that of the income tax. But the demand of the income tax rose from Rs.8,261 crores in 1990-91 to Rs.1,33,236 crores in 2004-05, overtaking the corporate tax demand. However, 63 per cent of the demand of Income Tax remains uncollected.

Any increase in tax collection cannot be attributed to the efficiency or the recovery skill of the Central Board of Direct Taxes (CBDT), which administers the direct taxes. The audit reports have noted that in the case of corporate assessees, 89 per cent of gross collections was made at the pre-assessment stage; of this 70 per cent was by way of advance tax.

In respect of non-corporate assessees, 92 per cent of the gross collections was made at the pre-assessment stage of which 53 per cent was by way of deduction at source. Hence, the collections through regular assessment and other receipts formed 11 per cent in respect of corporate tax and 8 per cent in respect of non-corporate tax.

There have been so much inaction and ineptitude on the part of the tax administration that the arrears are kept pending over long periods. As on March 31, 2004, the total arrears of corporation Tax, income tax, interest and other revenue was Rs.58,562 crores. Of this Rs.15,588 crores, constituting 27 per cent, has been pending for a period of five or more years.

Pending cases are classified as gross and net arrears. The latter comprise gross arrears minus arrears that are not due, amounts claimed to have been paid pending verification, amount for which are permitted to be paid in instalments and amounts stayed or kept in abeyance.

Of the cases of gross arrears as on March 31, 2005, involving Rs.1,23,181 crores, more than 85 per cent are cases where the arrear was over Rs.1 crore each. Similarly, in respect of the net arrears of Rs.71,264 crores, more than 93 per cent were cases involving over Rs.1 crore each.

The bigger its size, the easier it is for the fly to break through the spider's web. Similarly, the larger the assessment, the easier it is for the assessee to evade the tax net.

When the pending cases and arrears keep mounting, the performance of the CBDT comes down. Obviously, on crucial occasions, the efficiency goes overboard for the tax administration.

Introducing Wealth Tax in 1958, Finance Minister T.T. Krishnamachari said: "The system of taxation on incomes has to be supplemented by taxation on wealth. This is more equitable and it also promises over a period to reduce the possibilities of tax evasion". However in the areas of wealth tax, with all amendments and coercive clauses introduced in the law, expected revenue remains uncollected and tax evasion is rampant.

After 35 years, Finance Minister Manmohan Singh found that the wealth tax had "far too many exemptions making its administration enormously complicated" and announced in his 1993-94 Budget the abolition of wealth tax on all assets except certain specified assets.

Although the number of wealth tax assessees had declined from 2.02 lakhs in 2001-02 to 1.02 lakhs in 2004-05, the recovery skills of the tax administration also declined, which is evident from the increase in the arrears of Wealth Tax demand from Rs.844 crores in 2000-01 to Rs.1,148 crores in 2004-05

As on March 31, 2005, there were 45,804 cases involving a total excise duty of Rs.28,691 crores outstanding, pending adjudication/recovery. Of them, 6,424 cases involving Rs.3,058 crores were outstanding for more than five years.

The department detected a total of 5,399 cases of fraud/presumptive fraud during 2002- 05, involving a total duty of Rs.4,898 crores. The department raised a demand of Rs.2,588 crores only and out of this it recovered only Rs.205 crores (7.91 per cent). Similarly, out of a penalty of Rs.866 crores imposed, the Department was able to recover only Rs.0.58 crores (0.07 per cent).

The amount of customs duty assessed up to March 31, 2005 and which remained unrealised as on June 30, 2005 was Rs.1,806 crores.

Service tax was introduced in July 1994, to be administered by the Central Excise Department of the Finance Ministry. It has a separate apex authority headed by the Director-General of Service Tax.

Initially, the service tax covered only three services - Telecommunications, Insurance and stock brokers; Of the items covered by this tax were increased to 26 in 1999-2000, 58 in 2003-04 and 71 in 2004-05. The collections increased from Rs.411 crores in 1994-95 to Rs.14,196 crores in 2004-05. With inclusion of more items, the potential of service tax is expected to rise to very huge proportions in the future.

The number of cases of demands for service tax outstanding for adjudication/recovery on March 31, 2005 was 36,367, involving Rs.2,535 crores; of this 70 per cent in terms of number was with the adjudicating officers of the Department.

The Department detected 2,605 cases of fraud/presumptive fraud during 2002-05 involving Rs.510 crores. Of this, it raised a demand of Rs.327 crores and recovered only Rs.36 crores (11.10 per cent).

Similarly, out of a total penalty of Rs.56 crores imposed, the recovery was only Rs. 0.33 crores (0.59 per cent).

As on March 31, 2005, the arrears have grown to the staggering level in the following items:

Income tax - Rs.83,977 crores, Corporation tax - Rs.39,204 crores, Wealth tax - Rs.1,148 crores, Excise duty - Rs.34,249 crores, Customs duty - Rs.1,806 crores and Service tax - Rs.3,064 crores.

The total arrears on the major taxation items came to Rs.1,63,448 crores.

This may not be a complete picture of the actual arrears. The findings of the audit are brought to the notice of the Ministry and the administrative unit concerned through `draft paragraphs'. Sufficient time is given for their response so that responses could be considered before the finalisation of the report.

However, there is a growing tendency on the part of the Ministry/Department to delay inordinately their replies, which frustrates the work of the audit in finalising the audit paragraphs of the report.

As on March 31, 2005, the Ministry has not responded to 80,958 audit observations on direct taxes involving a revenue effect of Rs.20,994 crores. This does not include the audit observations communicated between April 1, 2004 and March 31, 2005 (Para 1.8.1, Report 8, 2006).

The audit objections raised up to March 31, 2005 and pending settlement as on September 30, 2005 in the various custom houses and combined commissionerates of central excise and customs increased to 10,883 cases involving Rs.10,391 crores (Para 1.10, Report 7, 2006).

The position will be clear only after the explanations are submitted by the Ministry/Departments and considered by the audit and by the parliamentary committees.

If there is no response from the Department on an audit paragraph, the Audit has no option but to put it mildly as `inadequate attention being paid'.

In fact, the delay should be taken as a serious dereliction of duty on the part of the authorities concerned.

There is also growing disinterestedness on the part of the Parliamentary committees concerned, which is evident from the fact that they choose only a fraction of the audit paras for detailed examination. Thus, the purpose and importance of the audit and its reports are lost.

The Public Accounts Committee (PAC) could take up only a limited paras every year for detailed examination. It devised in 1982 a procedure under which the Ministries/Departments concerned should give their explanation and remedial action proposed to be taken on all paragraphs contained in the audit reports and submit the action-taken notes within four months from the date of the tabling of the audit reports in Parliament.

It is incumbent on the Ministry/Department to submit records and furnish relevant information to the audit. Of the 55,821 cases requisitioned twice - before and during 2004-05 - 67 per cent were not produced for audit.

This amounts to serious obstruction to the working of the supreme audit and a definite defiance of the concept of accountability to Parliament.

Unless Audit paragraphs in the draft or in the reports receive due attention, the purpose of public audit will be lost in ensuring the accountability of the Executive to Parliament and, through Parliament, to the people.

It is high time Parliament and its committees took up the case of staggering accumulation of tax arrears and imposed remedial measures. The committee should take concerted attention to curb the inexplicable delay caused by the Ministry in responding to the draft paras and submitting the explanatory notes on the audit paras not taken up by the Committees for detailed examination.

Era Sezhiyan is a former Member of the Lok Sabha.