Alarmed by the rising mountain of direct taxes stuck as arrears or in litigation, the Finance Ministry has come up with incentives/rewards for ‘performance by appellate income tax officers in order to boost government coffers through recoveries.
But finance and tax experts warn that this essentially signals a return of the "tax terror regime" with potentially grave consequences for the assessees.
As per the Central Board of Direct Taxes (CBDT)'s figures, a provisional amount of Rs 11. 23 lakh crore is stuck in arrears as on April 1, 2018. This is an increase from Rs 10.52 lakh crore on the same day the previous year.
This latest figure is almost double the amount of arrears recoverable -- Rs 5.75 lakh crore in April 2014, indicating financial and administrative mismanagement, according to the experts.
However, last year, the I-T department managed to reduce the arrears by 31 per cent by collecting Rs 3.25 lakh crore, including a cash mop-up of Rs 44,633 crore by April 1, 2017. Cash mop-ups or collections are those which are seized during raids.
But this ‘big achievement' in arrear reduction collapsed under an additional net current demand of Rs. 4.62 lakh crore made during 2017-2018, of which a mere Rs 76,641 crore (including a cash collection Rs 52,537 crore) could be recovered.
This resulted in sending warning bells ringing in the I-T officialdom.
In order to reclaim the outstandings, the CBDT has now enhanced the targets for Reduction in Arrears Demand (RAD) to 40 percent of the total demand, according to a confidential Central Action Plan-2018-2019 circulated internally a few months ago.
For ensuring compliance by the I-T Department appellate officers, the CBDT has decided to reward them with two additional units for each quality appellate order passed vis-à-vis the assesees.
In any tax dispute with the government, the Commissioner of Income Tax (Appeal) -- CIT(A) -- is the first point of appeal for the assessees, followed by the courts.
The incentives to the CIT(A) would be based on the quality of appellate orders to be adjudged by senior officers within three parameters -- enhancement has been made; order has been strengthened; and penalties have been levied.
"This effectively means that the assessees will now face the brunt of the tax authorities who could force them to pay up their piled-up arrears, or face more stringent orders and penalties to improve their own appraisal, besides corruption," said RTI activist J. P. Vaghani, specialising in IT matters who also has moved public interest litigations in the courts.
"The new CAP guidelines imply the appellate authorities would become more aggressive against assessees to help reduce the arrears. With elections approaching, is it practical for them to adopt such measures on a wide scale?" Pagur Desai, a chartered accountant told IANS.
However, Commissioner of Income Tax & CBDT spokesperson Surabhi Ahluwalia said "there is no question of a ‘Tax Terror Regime' and the intent behind incentivising the CIT(A) has been completely misconstrued."
The CIT(A), the spokesman said, was the only appellate authority who has the power to enhance an assessment, to remove deficiencies in respect of an assessment order and initiate penalty, wherever necessary. "Therefore, the said statutory power/inherent power of CIT(A) does not amount to any kind of ‘Tax Terror'," she added, seeking to allay apprehensions of stakeholders.
Stressing on the independence of CIT(A), Katalyst Advisors Managing Partner Ketan Dalal said they are supposed to discharge appellate functions and hence perform judicial duties.
"The CBDT's direction for ‘quality orders' is very unfortunate and contrary to basic tenet of independence of appellate authorities. It will be hardly possible for them to be independent when their career progress is impliedly dependent on their functioning like assessing officers, rather than discharging judicial functions," Dalal told IANS.
In August, major stakeholders like Indian Merchants Chamber, Bombay Chartered Accountants' Society, Chartered Accountants Association of Ahmedabad & Surat, Karnataka State Chartered Accountants Association and Lucknow Chartered Accountants Society in a 5-page representation to Finance Secretary Hasmukh Adhia, slammed the CBDT move.
The I-T department, they said, was issuing prosecution notices "mechanically to meet targets," for smallest of faults and "regularly causing havoc by coercive recovery measures every year." This, they contended "created fear psychosis" among tax-payers and foreign investors, especially since a majority of such orders had been quashed later in courts.
"It is imperative that necessary directives be issued by the (Finance) Ministry that no steps be taken by CBDT whereby the actions cause harm to taxpayers and the promise of non-adversarial tax regime is broken," said the memorandum.
According to the CBDT, of the total 3.22 lakh appeals pending as of April 1, 2018, there are 1.96 lakh in the below Rs 10 lakh category and includes 1.15 lakh appeals less than a paltry Rs 2 lakh. In all, 22,256 appeals are pending for over five years.
Interestingly, the highest targets set for mopping up the arrears (RAD) is set for the Mumbai region -- Rs 1.56 lakh crore and then Delhi -- Rs 92,645 crore.Apart from action on arrears, the CBDT has set out a fresh target of 1.25 crore new return filers to be added during the current year to widen the tax-base.