The 38% problem

With tax collections not doing as well as expected in certain segments, it is obvious that Finance Minister P Chidambaram will be exhorting his taxmen to do their best to increase collections in what is left of the year. While doing so, the minister would do well to keep two things in mind. For one, as a news report in this newspaper pointed out last week, as much as 38 per cent of the total additional direct tax demands made (after examining returns filed by individuals/companies) in the last nine years did not stand up to scrutiny, in the sense they were eventually dismissed in the appellate process or through negotiated settlements with the taxman. While the total additional demands in this period were Rs 2,78,677 crore (plus another Rs 29,260 crore as arrears on March 31, 1996), a whopping Rs 1,17,788 crore were written off from this due to dismissal/negotiated settlements. Considering the harassment that taxpayers go through before they can prove their innocence, and the number of years it takes to go through the entire process, with the government appealing each dismissal of its tax demands in a higher court, this is an unacceptably high figure. The actual figure of unjustified demands may be even higher than 38 per cent, since there are still around Rs 1,00,000 crore of arrears still pending, and tax appeals against these have yet to be concluded. Then, there are cases like the ITC one, where even after the government lost the final appeal in the Supreme Court, it changed the law and finally agreed to a compromise and got ITC to settle for part of the total amount. Perhaps it's time to start penalising taxmen for making demands the majority of which get dismissed in the appeals process, possibly in the form of adverse remarks in their annual assessments.

The second issue worth keeping in mind is the gearing up of the tax department to make use of the wealth of information being collected through the Tax Information Network (TIN), on high-value transactions of various kinds, ranging from automobile purchases to registration of property. While the current emphasis is more on scrutinising existing returns, surely there are more taxes to be collected from those not filing returns and who are now getting highlighted through TIN? After all, as Surjit Bhalla's work for the tax department has shown, the compliance ratios (those who file tax returns as a proportion of those who should) are in the range of 30-40 per cent in most income brackets. Essentially, a larger proportion of the tax work force needs to be used for data mining and bringing in new taxpayers than has been the case so far. Another exercise that's worth undertaking is to examine the effectiveness of the plethora of new taxes vis-à-vis the difficulty being introduced in tax compliance. While the Fringe Benefit Tax (FBT) is a good example of this since the same level of additional tax could have been got by simply increasing the corporate tax by a small fraction, it would be interesting to see how many companies have actually changed their salary structures to take advantage of FBT since shifting more elements of compensation into what is considered a fringe benefit helps lower the employee tax outflow.