Increase in disputed corporate income tax arrears raises concerns of ‘tax terrorism’

There is an oft repeated quote of Benjamin Franklin about death and taxes being inevitable. The quote has also been attributed to Mark Twain at times. The dispute on the origin of the quote aside, in the Indian context, one could add frivolous income tax demands and disputes to that timeless quote.

Income tax receivables that are under dispute have reached ₹6,23,539 crore, according to the documents of the Interim Budget 2019-20. Of this, taxes due by companies or corporation tax, have touched nearly ₹4 lakh crore. There has been a steady rise in income tax receivables under dispute since 2014-15.

This could be mainly due to the target-based tax collection system that income tax officers work under. The higher the tax collections and more vigorous the pursuit of the demand in the courts, much better are their career prospects.

“Target driven approach of tax officers is one of the causes for the unrest in the tax administration,” says Neha Malhotra, Executive Director at Nangia Advisors LLP. Internal instructions are being given by the Tax Department to give incentives for orders demanding more taxes or those imposing penalties on assessees, when the demand is contested at the Commissioner of Income Tax (Appeals) level, she says. “This is a huge concern for the taxpayers at large, and a writ was filed against such instructions. (The writ says) that you cannot praise a tax officer for pursuing demands. The writ has been accepted by the Supreme Court, which gives us a hope that tax-terrorism is on the wane.”

Are they recoverable?

Income tax cases stuck in tribunals and courts clog the legal system. But the Income Tax Department also raises fictitious demands before the end of a financial year, according to a 2017 Comptroller Auditor General of India (CAG) report. And due to this it has to pay interest on these demands, says the report.

The CAG says the outstanding tax demands as on March 31, 2017 were ₹10.45 lakh crore. Of this, the Income Tax Department submitted that it only expects to recover ₹14,963 crore. This means out of every ₹100 demand of income tax, only ₹1.4 was recoverable. The rest were “difficult to recover”, according to the tax authorities. The reasons for this include lack of assets to recover taxes, tax assessees being under liquidation, demands being stayed by courts/tribunals and in some cases, the assessee not being traceable.

“It’s a very strong statement from the tax authorities,” Malhotra says. “Considering that they have accepted that they can never recover this demand, why is this demand not written off?”

The department’s internal manual prescribes a methodology for writing off pending demands. But these “difficult to recover” demands haven’t yet been written off, Malhotra adds.

The remedy

To remedy the situation, the government has formed two committees in the second week of February, said Samir Kanabar, partner at EY. “The first committee will look into what are the best international practices in various parts of the world and how we can bring in those to minimise litigation,” Kanabar adds. This is aimed at solving future problems.

The second panel formed by the government is more concerned with the present. “(It’s) role is largely to look at litigation management of existing cases,” Kanabar says. The solution for reducing pending litigation in income tax cases, according to him will be strengthening the advance ruling mechanism for income tax cases and encouraging settlement of cases by taxpayers.

The two committees are scheduled to give their reports by the end of March, and by that time the Model Code of Conduct for elections will be in force. So, any action that can be taken will have to be done by the next government that will get elected. Till then, the only hope is that the targets don’t drive the income tax officials to raise more demands.

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