A K Bhattacharya: Height of inefficiency

RAISINA HILL

How else can you describe an organisation where a fourth of annual revenue is stuck in arrears?

Of the Rs 2,10,684 crore of direct taxes Finance Minister Palaniappan Chidambaram hopes to collect next year, an estimated Rs 7,000 crore will come by way of arrears collection. The Budget documents do not give any comparative figure for direct tax arrears collected during 2005-06. But government officials will tell you that in the current financial year, collections from direct tax arrears cannot be more than Rs 5,500 crore.

Even in respect of indirect taxes, Chidambaram is taking credit for collecting total tax arrears of Rs 2,450 crore out of a total mop-up of about Rs 2,30,566 crore from customs, excise and service taxes in 2006-07. Once again, there is no clear estimate of the indirect tax arrears collection effort in the current year. But the point is that collection of tax arrears seems to have become a major drive for Chidambaram.

And why not? Consider the total amount of tax revenue he can mop up if only the finance ministry becomes a little more focussed on collecting what is due to the government. Over Rs 1,11,107 crore of direct and indirect tax arrears have piled up as at the end of March 2005. Now, you may argue that a part of this amount is disputed by those on whom the tax has been levied. So, it will be difficult to recover the disputed amount without budgeting for prolonged court cases and consequent delays.

But what about the tax arrears which are not in dispute? Of the total tax dues pending for more than a year, the tax arrears not in dispute are also substantial at Rs 45,760 crore. So, why can't the government simply set a target date and makes it mandatory for the revenue department to clear all dispute-free arrears within that date? Sounds simple, but it seems the government has no such plan on these lines.

A break-down of the dispute-free tax arrears shows that the bulk of these is under income-tax "" at about Rs 33,000 crore. Corporation tax arrears without dispute are about Rs 10,000 crore and the rest is accounted for by excise, customs and service taxes. So, collecting about Rs 2,450 crore of indirect tax arrears during 2006-07 may not prove to be a difficult task. Even more easy should be to meet the tax arrears collection target of Rs 7,000 crore, because the base amount of arrears is so huge. But raise this issue with a revenue department official, he will tell you that not only is there no hope of clearing the dispute-free tax arrears, the total tax arrears amount at the end of March 2006 will in fact go up even further.

Not that the revenue department in the finance ministry does not have enough manpower to collect these tax arrears. Its manpower strength (estimated at over 130,000) makes it the fourth largest non-defence department in terms of salary and manpower after the railways, police and posts. Also, the revenue department has been steadily improving its cost-effectiveness over the years. The cost of tax collection, incurred by the government, used to be a little over one per cent of the total tax collected in 2000-01. Today, it is estimated at about 0.82 per cent. You might quarrel with this pace of improvement. But there is some progress.

The real issue seems to be that the revenue department has so far failed to recognise the magnitude of the problem. Any organisation which reports that an amount equivalent to one-fourth of its annual revenue is stuck in arrears will most probably sack even its top management, let alone those who are responsible for revenue collection. And 10 per cent of the total revenue is stuck in arrears that have no dispute. The effectiveness of the Rs 1,900-odd crore that is spent on the salaries and allowances of 130,000 revenue department employees should be judged from this perspective.

It is time the finance minister thought of some new ways to clear the backlog and put in place a system in which the recurring problem of arrears accumulating over the years becomes a thing of the past. The problem is that arrears once cleared are likely to accumulate again unless systemic changes are introduced to improve collection efficiency. Better use of technology is one option. Outsourcing this task may also not be a bad idea if the revenue department officials fail to clear even the dues that are dispute-free after a deadline. The next obvious step should be to downsize the revenue department.