The resolution of ballooning tax arrears

Lokeshwarri SK | Updated on: Dec 06, 2021

Dispute settlement schemes are expected to clear the litigation backlog and ramp up revenues

The Finance Minister, in a surprisingly candid statement, acknowledged the trouble that the revenue department has been causing all the taxpayers, during the Budget speech for FY21. She said, “our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.” This would have been sweet music to many who have spent sleepless nights worrying about the demands raised by the tax-man, many of which have continued over many years.

She went on to assure tax-payers that their rights would be protected through a taxpayer charter. Other officials of the revenue department have also been trying to reassure taxpayers over the past week that their complaints would be looked in to.

The noises that the Centre is making and the two schemes launched for legacy dispute resolution recently – Sabka Vishwas Legacy Dispute Resolution Scheme, 2019 for settling disputed cases relating to excise duty and service tax and Vivadh se Vishwas scheme for direct taxes announced in Budget 2020 – seem to indicate that mounting complaints of harassment by the revenue department are threatening to harm India’s image globally and roiling the chance of progressing in the ease of doing business ranks. It may also be having a negative impact on Foreign Direct Investors, whose funds are critical to finance the country’s infrastructure spends.

While harassment by tax authorities is not new, given the rampant tax evasion in the country, demands from the revenue department appear to have increased sharply over the last 5 to six years. This could be due to the pressure on tax department to meet the Centre’s stiff tax revenue targets despite slowing growth caused by demonetisation and transition to GST and more recently due to liquidity driven slowdown.

Numbers appear very scary

According the Budget 2020 documents, Rs 9.4 trillion worth of direct tax amounts had been demanded by the tax authorities, but not paid by the taxpayers. Of this, demands related to corporate tax amounted to Rs 4.88 trillion while taxes on income and other corporate taxes amounted to Rs 4.5 trillion. Demands relating to indirect taxes on commodities services amounted to Rs 1.69 trillion, taking the total unrealised tax demands towards the end of reporting year 2018-19 to Rs 11.09 trillion.

Many of these demands have been disputed in appellate tribunals, high court and supreme court. Of the total unrealised demands, Rs 9.56 trillion is being litigated in various courts while the undisputed sum is just Rs 1.53 trillion.

If we look at the period that the demands have been outstanding, demands worth Rs 10.1 trillion are pending for less than 5 years. This shows that instances of tax harassment increased in recent times.

Of greater concern is the fact that most of these demands are irrecoverable. In a reply to the Standing Committee on Finance looking in to the demand for grants from the department of revenue, the revenue department had admitted that collectible arrears in direct taxes as on 31.08.2019 was just 1 per cent of the demands raised. Recoverable arrears in indirect taxes was higher at 11 per cent.

The Standing Committee had given a rap on the knuckles to the revenue department saying that the quantum of undisputed and uncollected tax in respect of both direct and indirect taxes has assumed “alarming proportions during the last five years”.

The Committee had said that routine replies such as -- tax arrears recovery has been restrained by authorities or that the assesses are not traceable or they have inadequate assets are not convincing enough and that the arrears should be realised in a time-bound manner.

Dispute Resolution Schemes

Tax harassment and the need to close the mounting litigations seem to have been on the mind of the Centre for some time now. The Sabka Vishwas Scheme for settling legacy disputes in excise duty and service taxes, announced in the Union Budget of 2019, closed on January 15, 2020.

It is reported to have been quite successful, helping close almost 95 per cent of the pending cases relating to excise duty and service tax. The amount raised from this scheme is not too large, reports cite a range of numbers between Rs 15,000 crore to Rs 38,000 crore. But the closing of the cases would definitely relieve the burden on the courts.

Following this, a scheme to settle pending disputes in direct taxes – Vivadh se Vishwas – has been announced in the recent Budget. The VsV scheme proposes that a taxpayer will get a complete waiver from interest and penalty if he settles the disputes before March 31, 2020. Those who avail the scheme between March 31 and June 30, will have to pay an additional amount.

It appears as if the revenue department is banking on this scheme to help it boost its Income Tax collections for FY20. The revised estimates for income tax collections show a growth of 18 per cent over the actual collections for FY19, while the CGA website shows growth in income tax collection of just 5 per cent between April to December 2019. It appears as if the Revenue department expects a larger sum in VsV than the Sabka Vishwas scheme.

Published on February 11, 2020
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