In a report tabled in Parliament last week, the Comptroller and Auditor General of India (CAG) has highlighted several issues in the functioning of working of the Central Board of Direct Taxes and the Income Tax Department. The most significant and persistent among them is that the income tax officers continue to make 'exaggerated' demands on large companies which are refunded the following financial year, along with interest. Though there have been, from time to time, several complaints against the high-handed approach of the taxman, it is not too often that the CAG documents some of these as meticulously as has been done this year. Making exaggerated demands on corporate assessees and refunding the excess with interest is an old trick of the department. What makes the latest report more meaningful is that the current head of the CAG, Rajiv Mehrishi, is a former finance secretary.
The report details several cases in which the income tax department had raised exaggerated demands on certain corporate assessees including the State Bank of India and Air India to achieve its revenue collection targets. The demands so collected were refunded in the next financial year along with interest, which eventually put a heavy burden on the exchequer. The CAG looked at a sample of cases where the taxman had added Rs 10,700 crore of income to assessees' tax returns but only a fifth of this stood scrutiny after appeal. The weaknesses highlighted by the CAG in the system underline the need for an overhaul of the tax collection system to and reign in aggressive tax practices which deliver little. Such practices may have been acceptable in the past when overzealous officers raced to meet stiff, and often unrealistic, targets set by the government for tax collections. Troubled by such unreasonable demands, the assesses may have complied, possibly due to quid pro quo deals with the assessing officer that exaggerated demand would be refunded a few months later with interest. But such practices are out of tune with a modern economy that counts rankings in the ease of doing business as an important metric.
Investor-friendliness does not end with helping an entrepreneur start a business and ensuring that she gets quick, trouble-free access to factors of production. Placing impromptu and unreasonable tax demands does not qualify for being investor-friendly. Two committees headed by Vijay Kelkar during the previous NDA regime of A B Vajpyee had called for substantial administrative reforms in tax laws and their implementation with a focus on the citizen as a "customer" of government services. Most of these critical reforms are still overdue. A reformed tax administration will not only reduce needless litigation but also lead to buoyant revenues.