Ease of business vs tax pressure

Last Tuesday, the shares of Polycab, which had a market capitalisation of Rs 80,000 crore and sales of over Rs 16,000 crore, slumped 9 per cent on the news of income-tax (I-T) searches at its offices for alleged tax evasion. The stock stabilised for a day and then collapsed 21 per cent on Thursday, when the I-T Department issued an unusually detailed press release saying that it had discovered undeclared cash sales of Rs 1,000 crore — the release did not name Polycab. It also mentioned uncounted cash payments of about Rs 1,000 crore in fake expenses and undeclared transactions of Rs 500 crore. Polycab denies any wrongdoing but its market capitalisation has fallen by 25 per cent in just a few days because it was considered a rock-solid stock and was in the portfolio of many institutional portfolios and mutual funds.
 

In the past six weeks, after the recent state polls, unbridled enthusiasm had gripped the stock market on expectations of a huge win for the Bharatiya Janata Party (BJP) in the upcoming general elections — an outcome that companies and investors are looking forward to. At the same time, a slew of very large, well-regarded, blue-chip companies have received notices from the I-T and Goods and Services Tax (GST) Departments for tax violation. While Polycab’s case seems more serious than others, here is an extraordinary list of large companies that have been slapped with notices for different kinds of “violations” and “short payments”. Government-controlled Life Insurance Corporation (LIC) got an Rs 806 crore notice from the Maharashtra government on January 1 for alleged short payment of GST in 2017-18. The move appears to have inspired GST offices in other states, and Tamil Nadu, Uttarakhand, and Gujarat came up with demand notices totalling Rs 667 crore on LIC; Telangana chipped in with a Rs 116 crore demand and it had already sent a Rs 183 crore notice in December.
 

LIC is not alone. From January 1, tax demand has rained on dozens of blue-chip companies. Hindustan Lever has a GST demand of Rs 447.5 crore from five states. Software biggie LTIMindtree got a Rs 206 crore notice. Others to get such notices were Asian Paints, Eicher Motors, ICICI Prudential, and Nestle. Earlier, the gaming industry got a tax demand of around Rs 1.5 trillion; the insurance industry is already contesting a demand of over Rs 5,500 crore and the real estate sector one of over Rs 2,000 crore. About 33,000 GST notices were issued for mistakes and short tax payments relating to FY18 and FY19. In November 2023, the Directorate General of GST Intelligence (DGGI) issued demand notices to Zomato and Swiggy, asking them to clear pending tax dues of Rs 400 crore and Rs 350 crore, respectively. According to a media report, around 33,000 GST notices have gone out for returns filed in 2017-18 and 2018-19, while GST notices of Rs 1.45 trillion have gone to about 1,500 businesses in December alone. Not to be left behind, the I-T Department slapped demand orders of totalling Rs 3,528 crore for the assessment years between 2012-13 and 2019-20 and another Rs 1,371 crore for 2011-12 on the same companies. What is going on?
 

Obviously, tax officials believe that all these tightly regulated companies, including government ones, have short-changed the government. But why the rush? Because the GST deadline to recover any money for 2017-18 was December 31, 2023. A media report says GST authorities believe in general, tax recovery based on earlier demand notices has been weak. It quotes GST officials saying that about only Rs 18,541 crore was recovered from notices aggregating Rs 1.51 trillion while the internal “target” was Rs 50,000 crore. So, they compounded the companies’ difficulties by sending out more notices.

If you think that revenue officials are going berserk, acting on their own, while the government chants the mantra of “ease of doing business”, you would be wrong. These moves appear to have full official backing. Last week, the government upped the ante by giving GST officers more time to issue demand notices for discrepancies in annual returns for FY19 and FY20. On Thursday, the government extended the deadline for FY19 to April 30, 2024, and for FY20 to August 31, 2024. This means more and more companies will be wasting time and costly resources to untangle long-running disputes.
 

It is hard to believe that these blue-chip companies, with the best tax and legal expertise and multiple layers of compliances mandated by the market regulator, would indulge in tax evasion of this magnitude. They are all aware of the reputation damage and financial dent that would follow, along with directors’ liability (given the draconian GST laws). One tax expert says, “The GST law is so loosely and hurriedly drafted that every officer can take a new view and put penalties beyond capacity of assessees.”
 

The most vicious aspect of such taxtortion is that the disputes won’t be settled anytime soon. Unlike I-T, GST laws have no process for out-of-court settlements through a settlement commission. These notices will be contested before the adjudicating authority. If the companies lose, they appeal to higher courts. Given the magnitude of demand and question of law involved, each case would probably go up to the Supreme Court. All this will take years and involve enormous high-quality time and effort. The courts are still hearing matters pertaining to service tax and excise (predecessors of GST), so newer issues will take at least three to five years to be resolved. The main beneficiaries would be tax experts and law firms. Ease of doing business can be compromised in many ways. Taxtortion is among the worst. Finally, if this goes out of hand, investors may panic, assuming the worst. If more stocks meet the fate of Polycab, it will have serious multiple implications. 

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers