The Hindu Business Line : Frail arguments for tax trail

ACCORDING to the Finance Minister, Mr P. Chidambaram, the driving force behind the banking cash transaction tax (BCTT) is to provide `tax trails' for checking tax evasion.

Which leaves a better trail, deposits or withdrawals? While a depositor can always be questioned about the person to whom, and the purpose for which, the money was given, there is no such possibility in the case of withdrawals. But how successfully have the trails been pursued by the I-T Department?

The Department's track record

The tax department's record in tracking trails has not been very encouraging. Year after year the Finance Acts have been laying down laws for collection of additional taxpayer details so as to provide the Department information on non-filers and tax evaders. But, thus far, little is known about how the information so collected have been used to check tax evasion, raise revenues or add to the number of taxpayers.

On trails again, much headway has not been made with respect to information collected in ways such as: tax returns filed under the `one by six scheme'; prescribing that every company shall furnish on or before the due date, return in respect of its income or loss in every previous year; asking tax-exempt institutions, bodies, organisations, universities, and so on, to file returns of income even though their income may be below the amount prescribed for filing returns; insistence on getting returns even from such salaried persons, who have no income other than salary and in whose cases tax has been correctly deducted at source; and asking banks to furnish information about deposits that are not tax deductible at source, that is, where the interest amount is less than Rs 5,000 a year.

VDIS 1997 trail

The dismal performance in following up trails has been mentioned by the C&AG in its Report No. 12 for the year ended March 31, 2004 (placed in Parliament on May 16, 2005) with regard to VDIS Scheme 1997, which was introduced by Mr P. Chidambaram while presenting the Budget for 1997.

The CAG has devoted a full chapter VI on matters concerning status and adequacy of "follow up" action in selected post-VDIS 1997 assessments. The period covered is 1998-99 to 2003-04.

However, the valuable information (trails) available in the VDIS declarations have not been followed up by the Department and full utilisation of the information flowing from the VDIS declarations has not been made. The audit report based on sample checks showed the following deficiencies with regard to follow-up and other actions consequent to VDIS declarations:

Audit requisitioned assessment records in respect of 21,853 VDIS declarations that were either "invalid/non-est" or pertained to new assessees, but the Department could produce only 4,906 cases.

In respect of 78 per cent of the new assessees making declarations under VDIS 1997 and selected for the study by audit, neither were their returns available with the assessing officers nor had the AOs taken any action or conducted any survey to ensure that the declarants remained in the tax net.

Audit noticed that remedial action was taken only in 86 cases, where certificates were not issued to the 268 declarants who had not paid any tax. The tax effect involved was Rs 171.25 crore.

The Government would have realised a revenue of Rs 4.20 crore if the income declared on which tax was not paid but certificates were issued in 685 cases produced to audit was brought to tax.

The Department did not take any action in 161 declarations where certificates were issued despite tax being paid after a lapse of three months from the date of declaration, and the auditor having commented in Audit Report 12A of 2000 that these assessees were required to be assessed under normal provisions of the I-T Act; the tax effect involved was Rs 3.34 crore.

The Department did not have any information on whether 81 per cent of the new assessees who had declared gold and silver and whose records were requisitioned by audit were filing their wealth tax returns or not. The Department has also not taken any action to investigate the wealth tax liability of these new assessees.

In Karnataka, in four of the five cases of new assessees who had declared `real estate' and whose assessment records were requisitioned by audit, wealth declared under VDIS was not offered to tax; the tax involved was Rs 31.35 lakh.

Audit could not ascertain whether the Department had taken action to apply the normal provisions of the I-T Act in respect of ineligible persons involved in the `cobbler scam' or in the `loan hawala racket' in nine of the 23 cases produced to audit; the tax involved was Rs 35.10 crore.

The VDIS scheme resulted in 475,477 declarations and Rs 33,695 crore in tax. Of the declarants, 96.9 per cent were HUFs and individuals. But apart from getting Rs 9,729.02 crore as tax and Rs 74.44 crore as interest for delayed payments of tax, no other useful purpose seems to have been served by the declarations filed. This is despite the fact that in 2000, a study regarding VDIS was made by the CAG and various deficiencies were pointed out. The report indicates that not following up on the information received has resulted in wastage of large sums of money. If such a situation continues, the objectives of BCTT would be frustrated.

In his May 2 address in the Lok Sabha, the Finance Minister said that he had "got massive evidence of the banking system's use of money laundering". The BCTT would have got greater credibility if the Finance Minster had indicated how the evidence available would be used and what would become of the persons who used banking system for laundering money. Mere collection of information will not help. It has to be followed up for appropriate action. The Department's `follow up' record has been disappointing. Hence, proper planning in this regard is necessary, else the BCTT will help generate some revenue to the Government without fulfilling its basic objective of tracking tax-evaders.

(The author is a former Chairman of CBDT.)

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