Growing burden of tax arrears
With direct tax arrears accounting for 45 per cent of the govt’s gross tax collections, the big challenge is to prevent fresh disputes
The Narendra Modi government’s initiative to reduce litigation in direct tax cases has ignited a flicker of hope among taxpayers with 483,000 cases pending in various courts and appellate forums. But it is only a flicker and the features of the scheme, Vivad Se Vishwas (From Dispute To Trust), may prove to be a big disappointment for many such taxpayers.
If the taxpayer, under the scheme, has lost the case and gone in for an appeal, the assessee can pay 100 per cent of the disputed amount (without penalty and interest) and settle it. This may well result in many taxpayers bringing their disputes to an end and get the tax department off their back. Vivad Se Vishwas may make some headway.
But if a tax payer has won a case and the tax department has gone in for an appeal, then the assessee can pay 50 per cent of the disputed tax amount (without the penalty and interest) and settle the case. Many problems can arise in such situations. Why should a tax payer, after having won the case in a lower forum, agree to pay half the disputed tax amount?
The tax department is known for filing an appeal against any case it loses in tax disputes. The assessee, therefore, may well wonder if the price for not prolonging a dispute is to pay half the disputed amount even though he/she has won the case. Complicating it further is the fact that the tax department now has the task of meeting a huge revenue collection target in the remaining few weeks of the current financial year. The fear is that to achieve that goal it may put undesirable pressure on taxpayers with pending disputes to settle them under this scheme. The government will get the desired extra revenue and the scheme will also become a success.
But there is no guarantee that this will end the larger problem of tax disputes leading to accumulation of tax arrears. In the last 10 years, the problem of tax arrears has got worse ( see table). In 2009-10, the total value of direct tax arrears on account of both disputed tax cases and tax cases without any dispute was only about ~1.1 trillion, just about 17.5 per cent of the Centre’s gross tax collections of ~6.24 trillion. In 2018-19, the share of such tax arrears in gross tax collections skyrocketed to over 45 per cent. Of the total gross tax collections of ~20.8 trillion, direct tax arrears accounted for about ~9.4 trillion.
This is a problem for which both the governments of Manmohan Singh and Narendra Modi should be held responsible. The Singh government allowed arrears on account of direct taxes to grow from 17.5 per cent of its gross tax collections in its first year to 42 per cent in its last year, that is, 2013-14. The Modi government checked the growth in these arrears, but did precious little to bring them down. They rose to over 45 per cent in 2015-16. Of course, there was a decline in these arrears to 43 per cent in 2016-17 and 38 per cent in 2017-18, thanks to some initiatives to resolve direct tax disputes. But in 2018-19, they spiked again to over 45 per cent.
Remember that the bulk of these arrears is on account of direct tax disputes. The share of arrears due to direct taxes without dispute in gross tax collections has more or less remained unchanged in the last 10 years — from 6.88 per cent in 2009-10 to 6.66 per cent in 2018-19. The problem has arisen mainly because of the share of tax disputes in gross tax collections rising from 11 per cent to 39 per cent in this period.
The tax department, therefore, has to focus more on bringing in a system that does not create disputes and does not allow the disputes to remain unresolved for several years. Vivad Se Vishwas can earn the government a one-time tax revenue bonanza. But this gain (almost like the one-off disinvestment gains are for fiscal consolidation) will not be sustainable unless durable reforms in the taxation system are implemented to prevent disputes and ensure their early settlement.