A taxing audit

CAG report on direct taxes raises troubling questions

The Comptroller and Auditor General of India (CAG) has rapped the Central Board of Direct Taxes and the income tax department in its latest audit report tabled in Parliament on Tuesday. According to the report, the CAG has come to the conclusion that there have been “persistent and pervasive irregularities in respect of corporation tax and income tax assessment cases over the years”. It is important to note that corporation tax and income tax together constitute 33 per cent of the Union government’s revenues, and as such, wide-scale discrepancies in them could not only upset the overall budgetary calculations but could also affect trust among honest taxpayers.

The latest audit report takes note of 457 high-value cases of such irregularities. The assessees include some the best-known entities in the public and the private sectors, and the CAG has detailed various ways in which tax officials have bungled in collecting these taxes. In one chapter of the report, the CAG has pointed out how the income tax department had raised exaggerated demands to achieve its revenue collection target by resorting to methods that were “irregular and unwarranted”. The story does not end just at asking for more than the warranted sum. That is because taxpayers justifiably ask for refunds. By the time this refund is processed, the exchequer ends up paying to the assessee a substantial amount of interest that could have been avoided in the first place. One of the ways that these exaggerated demands are made is by not giving full credit for the taxes already paid. The auditor also pointed out that the income tax department did not adopt a uniform approach in dealing with cases of fictitious donations or bogus purchases. The assessment officers did not take cognisance of reports filed by the investigation wing and failed to initiate necessary follow-up action by disallowing the amounts of the fictitious donations or bogus purchases that resulted in loss of revenue. 

This is a worrying development, and what makes it worse is that this is not a one-off mistake. The CAG has stated that “recurrence of such irregularities, despite being pointed out repeatedly” in earlier audit reports points to structural weaknesses on the part of the tax administration. At a time when India is trying to break into the list of the top 50 countries in the World Bank’s metric of ease of doing business, such reports by the CAG are disturbing. Lack of transparency in taxation is a massive disincentive for business in the formal sector. Repeated irregularities only make the situation worse. This is one of the key areas where this government can show how determined it is to deliver on its promise of making the tax administration people-friendly. The tax department must ensure that taxpayers do not need to submit multiple returns and have quicker options of redress should a dispute arise. This is important as a huge amount of money is locked in litigation due to complicated tax rules and varying interpretations. Costly compliance and loopholes keep about 99 per cent of the population outside the income tax net, and this can be sorted out if the country’s tax administration focuses on electronic assessments and resolving appeals with the help of technology.