The Scourge of Tax Arrears

Business Standard 26th August 2020 Save

Context: The proposal to introduce faceless assessment and appeals in Direct Taxation Regime falls short of addressing the scourge of direct tax arrears, which blocks 4/5th of the Centre’s direct tax collections.

Challenges before the Online Appeals System:

Difficult Communication: It could lead to additional demands from the tax assessment officers since it is difficult to explain a case at the appeals stage based on electronic mail exchanges alone.

Increased litigation: With the increased tax demands, more disputes could arise, overburdening the tax tribunals, whose capacity is already overstretched.

Lack of Confidence: At a time when a majority of taxpayers are neither used to keeping proper records nor comfortable with an online platform for settling disputes, could create problems.

Neither the tax officials nor the tax consultants, let alone the taxpayers, are confident of a completely online system for deciding on tax appeals.

Increasing Tax Arrears: Failure to resolve appeals through a consultative process will only add to the huge tax arrears that the government has accumulated over the years.

As a share in the Centre’s gross tax collections, total tax arrears had risen from 51% in 2013-14 to 53% in 2018-19.

Issues with the Direct Tax Collections: The tax arrears have arisen not out of the government’s tax assessment and appeals process, but because of the weak and porous system in ensuring expeditious collections of dues.

Tax Arrears are more pronounced in Direct Taxes: Even with the government’s effort to streamline tax collection and to reduce tax rates using more technology, arrears kept on increasing.

For indirect taxes, the arrears were about Rs 5 trillion or 22% of the Centre’s total indirect tax collections in 2013-14, this share was brought down to 18%in 2018-19.
In contrast, direct tax arrears of Rs4.76 trillion in 2013-14 were already high at about 75% of the total direct tax collections that year, increasing to 83% by 2018-19.

Failure in collecting of taxes without any dispute:

Between 2013-14 and 2018-19, direct tax arrears without any dispute increased from 10% of the total direct tax collections to 12%.
In the same period, indirect tax arrears without any dispute fell from 3% of the total indirect tax collections to 1.5%.

Overestimation of projected revenue collection: The government’s internal systems of collecting what is due, is marred with overestimation of collection, leading to a rise in arrear count.

For, E.g. Non-tax revenue arrears in the government’s total non-tax revenue collections were only 55% in 2013-14, increased to about 113% of the total non-tax revenue in 2018-19.

Way Forward:

A Hybrid System of handling Tax Appeals: This will instil confidence among the various stakeholders until the new system becomes glitch-free.

- - - For, E.g. preliminary assessments could be completed through an anonymized and online mechanism, but the transition to an online appeals system could be graded.
    - If the decision arising out of that triggers another appeal, then it makes sense to escalate it to a consultative process overseen by a group of senior officers.