The Scourge of Tax Arrears

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.

• Careful Budgeting: instead of rushing to plunge into a new online tax appeal system which may increase tax arrears and related disputes.