The Hindu Business Line : Low tax collection costs

One of the achievements for which the Income-Tax (I-T) department takes considerable credit is the low cost of collecting income-tax. A recent CAG (Comptroller & Audit General) report on cost of collection for the year ended March 2006 states thus:

“Cost of collection of corporation tax for the year 2005-06 was Rs 147 crore, while for income-tax it was Rs 954 crore, totalling in all to Rs 1,101 crore. Cost of collection per rupee of tax collected in terms of paisa was 0.15 for corporation tax and 1.70 for income-tax, while per assessee it has been reported to be Rs 3,740 for corporation tax and Rs 325 for income-tax.”

. The fact that the total cost in 2005-06 (Rs 1,101 crore) has fallen vis-À-vis 2004-05 (Rs 1,218 crore) gives a good account of the I-T department’s ability to manage well its tax collection expenses

Cost computation

However, there is a hitch in the way costs have been worked out. According to the CAG report, in 2005-06, corporation tax collections were Rs 1,01,277 crore and income-tax, Rs 55,985 crore. Other direct taxes contributed Rs 7,954 crore to the exchequer’s kitty, making the total collection Rs 1,65,216 crore .

The issue is whether the expenditure of Rs 1,101 crore should be seen against the total collection after excluding the pre-assessment stage collections by way of advance tax payments made by the assessees and tax deducted/collected at source and paid by way of self-assessment. This is because in the pre-assessment stage collections, the costs are incurred by the assessees and not by the Department.

In the case of corporate assessees, 80.48 per cent of gross collections were made at the pre-assessment stage, of which advance tax accounted for 53.37 per cent. In the case of non-corporate assessees, 91.01 per cent of the gross collections was made at pre-assessment stage, with TDS making up 51.89 per cent of this.

For such collections, the I-T Department does not incur any expenditure, except a miniscule amount for processing the payments. Therefore, the total collections need to be reduced by those amounts for which no expenditure was incurred towards collection.

Higher burden

If this is done, the collections, which could be attributable to the I-T Department’s efforts, would be as follows:

Total corporation tax — Rs 1,01,277 crore

Less: 80 per cent (pre-assessment collection) — Rs 81,022

Corporate tax collected as a result of I-T department’s efforts — Rs 20,255 crore

Income-tax and other direct taxes — Rs 63,939

Less: Pre-assessment collections at 91 per cent — Rs 58,185

Direct taxes collected by way of the department’s efforts — Rs 5,754 crore

Total collections consequent to the department’s efforts — Rs 26,009 crore

The cost of collection of Rs 1,101 crore needs to be seen against a tax collection Rs 26,009 crore and not Rs 1,65,216 crore. This way, the cost works out to be much more.

It is also not clear why the cost of collection per assessee in the case of corporate taxation should be as high as Rs 3,740 compared to Rs 325 per assessee for income-tax. This needs to be clarified.

The CAG has, in a way, accepted this position, by stating in paragraph 2.15 of the report thus::

“The position of cost of collection as depicted by the department needs to be viewed against the background that 91.01 per cent and 80.48 per cent of gross collection during 2005-06 from non-corporate assessees and corporate assessees respectively were realised at pre-assessment stage, i.e., in the form of advance tax, TDS and self-assessment tax”.

Change in approach

Thus, for a realistic picture, the I-T department should work out the cost of collection after excluding the tax collected at pre-assessment stages. At best, some credit by way of processing charges for pre-assessment collections can be taken while calculating the total cost of collection. The CAG, too, should follow this approach while preparing its reports.

Further, whether efficiency should be compromised merely to save a few crores of rupees needs to be considered.

(The author is a former chairman of CBDT.)