Taxing demands

Unrealistic revenue targets will affect business environment

A recently reported directive by the Central Board of Direct Taxes to senior tax officials to focus on recovering 40 per cent of arrears in direct taxes in the last three months of the current fiscal year (January-March) is ill-advised, both in practical terms and in its psychological impact on business sentiment. The directive, issued after a meeting on December 21, aims to recover about Rs 7.7 trillion out of total arrears of Rs 19.35 trillion in the last quarter of the fiscal year. In addition, targets have been set jurisdiction-wise. Mumbai and Delhi, for instance, at Rs 2.3 trillion and Rs 1.4 trillion, respectively, account for a little over half the total, followed by Gujarat, Bengaluru, Andhra Pradesh, and Telangana.
 

The motive for this directive may be hard to fault — to maximise revenue collection ahead of the Budget on February 1 and enable the government to meet its fiscal deficit target of 6.4 per cent of gross domestic product for the current fiscal year. But it is unclear whether the method of succeeding in this admirable attempt at improved fiscal rectitude is workable. Past trends suggest that the tax department has managed to collect, at best, 10 per cent of arrears annually, so a 30-percentage point jump in three months appears a courageously ambitious target. This apart, the amount of arrears has expanded rapidly from Rs 15 trillion in 2020-21 to Rs 19 trillion in 2021-22, a 25 per cent increase, indicating the magnitude of exercise.
 

If anything, this arrears-collection binge is likely to have the unintended consequence of raising the old spectre of tax terrorism, an accusation the government has worked hard to counter in its bid to improve the investment environment for businesses. In the current circumstances, the government could also be accused of a lack of empathy, not least because the explosion in arrears has mostly been on account of rising incidents of litigation, appeals, mismatches in tax deduction at source, liquidations, and untraceable taxpayers. None of this should be surprising or unexpected, given the lengthy Covid disruptions that led to the wholesale collapse of small and medium enterprises. Instead of a hard and impractical deadline, the tax authorities might do better to work steadily and systematically in the arrears-recovery process through the year. Recently, the parliamentary standing committee on finance, led by Jayant Sinha, suggested legislative and administrative steps to address the problem. Among the latter, the committee suggested the department take the initiative to mediate and settle disputes rather than wait for lengthy legal processes to wind their way through the courts, a sensible suggestion that avoids the stigma or moral hazard of a formal amnesty policy.
 

This process, however, is unlikely to yield much short-term gain, and certainly won’t help fulfil a challenging three-month target. Indeed, the fact that tax arrears have been allowed to rise to significant proportions even in pre-Covid years raises questions about the efficacy of the tax department, especially given the pace at which it claims to have embraced technology, accountability, and transparency in recent years. Achieving these attributes would be better objectives for the tax authorities to work towards in the remaining three months of the fiscal year than an improbable deadline that will end up vitiating India’s business environment.