Financial Daily from THE HINDU group of publications
Saturday, Jan 21, 2006
Columns - Detaxfication
A legacy of arrears that the economy hauls hard
One can say that of successive Finance Ministers too. For, they have been keeping their miserable customer, the economy, in deep arrears, even while doling out soothers in Budget but letting them lumber with a backbreaking burden that may last for eons to come.
We know about arrears from our college days. The word dates back to year 1432, as www.etymonline.com informs. Source is from Old French ariere, meaning `behind, backward,' which is from Latin ad `to' plus retro `behind.'
Aptly, therefore, most of us don't know that behind us is the load of more than Rs 1 lakh crore that the taxman is yet to collect. Let us, therefore, turn back and see the millstone that's been holding back the economy.
Budget 2005-06, Budget 2004-05
In his `Statement explaining deviations in meeting the obligations of the Government under the Fiscal Responsibility and Budget Management Act, 2003' (http://indiabudget.nic.in/ub2005-06/frbm/frbm4.pdf), the FM said last year that the previous year's Budget (2004-05) had assumed an annual growth of 25 per cent in the tax revenue largely relying on liquidation of tax arrears. "The expectations have not been fully met. We have to be content with about 20 per cent growth which is still higher than the growth recorded in earlier years," said Mr P. Chidambaram.
He blamed "the delays in resolution of tax disputes, build-up of arrears and resultant uncertainties" for `complications in revenue budgeting with final outcomes not conforming to optimistic Budget estimates'. Deciding, therefore, `to err on the side of caution' he assumed `a somewhat more realistic growth of 22 per cent in tax revenues'.
On how the estimate fared, though, we'll come to know next month. "While efforts will continue for liquidation of tax arrears, no significant credit has been taken in the Budget estimates for disputed arrears," said the FM, to explain the increase in the revenue deficit.
The `Medium Term Fiscal Policy Statement' issued last year had something similar when speaking about "long gap between the time of actual collection of tax and the time when it becomes due".
In the document on `Budget Announcement' versus `Status of Implementation', that came along with the Budget papers last year, serial number 64 referred to paragraph 152 of the previous year's Budget Speech (of July 8, 2004). Mr Chidambaram had said then:
"Besides my tax proposals, I have looked at another source of revenue. There are large recoverable arrears both in direct taxes and indirect taxes. Even the undisputed arrears are quite substantial. I have, therefore, assumed that I would be able to recover a tidy sum this year. A special, multi-pronged drive will be made to recover these arrears, the details of which will be announced later."
What was the `Status of Implementation'? The FM said, "Task Forces on Recovery of Arrears of indirect and direct taxes were constituted and a significant amount of revenue has been recovered." The key word was `significant', in the absence of any numbers. Understandably, the Budget Speech on February 28, 2005, didn't refer to arrears.
Arrears, but how much?
To know how much, we can skim through the Web sites of the Lok Sabha and the Rajya Sabha, and gather information from Q&A. For instance, in August 2004, there was this `Starred question No 366' from Mr C. K. Chandrappan on `recovery of income-tax arrears': "Will the Minister of Finance be pleased to state: (a) the details of quantum of income-tax outstanding during the last three years till date, year-wise; (b) the details of arrears recovered during the last three years till date, year-wise; (c) the reasons for increase of income-tax arrears year after year; and (d) the steps taken by the Government to liquidate these arrears?"
The FM answered thus: "(a) The income-tax dues outstanding during last three financial years and in the current financial year are as follows: Income-tax dues outstanding as on July 1, 2004, Rs 84,219 crore; as on April 1, 2004, Rs 87,885 crore; as on April 1, 2003, Rs 72,290 crore; and as on April 1, 2002, Rs 72,671 crore." In short, more than Rs 80,000 crore of income-tax arrears alone.
How much was the recovery, as demanded by part (b) of the poser? Amounts recovered out of arrears were: "FY 2004-05 (up to June 30, 2004), Rs 1,092 crore; FY 2003-04, Rs 5,540 crore; FY 2002-03, Rs 5,470 crore; FY 2001-02, Rs 3,930 crore."
It is no rocket science to deduce that at this pace of recovery it may take centuries to square up the dues.
What are the reasons for the arrears build-up? "The entire demand created by the Income-Tax Department does not get collected immediately for one or more of the following reasons," said the FM and listed the following:
"Demand is stayed by Courts, Income Tax Appellate Tribunal or income-tax authorities; demand is against a person notified by the Special Courts (Scam Cases) and so recovery can be made only after the Court orders release of money for payment of tax; the assessee is not traceable and/or has no assets for recovery; the case of the assessee is before BIFR; the assessee-company is under liquidation; the case is before the Settlement Commission; demand is arising from protective assessment or the Department has lost on similar issues in earlier years; demand is being processed for being written off."
The FM then spoke of about ten steps to liquidate the arrears.
In July 2004, Mr Raghunath Jha had sought to know whether it was a fact that the CAG in its report No. 13 of 2003 (Direct Taxes) in para 1.7 on pages 6 and 7 had revealed that Rs 39,631.50 crore was outstanding as arrears of tax demand in 3,993 cases that were made available to the audit. Mr Jha had also asked for details of tax demand outstanding Commissionerate-wise, and steps taken to recover the outstanding tax demand.
It was the Minister of State in the Ministry of Finance, Mr S. S. Palanimanickam, who answered the query thus: "The total outstanding demand as on April 1, 2004, is Rs 87,885.21 crore. Commissionerate-wise details are not centrally maintained at the Ministry level. The position of outstanding arrears of demand continuously changes with liquidation and fresh addition of demand."
He explained that the measures taken to liquidate arrears of taxes "include steps towards speedy disposal of appeals, vacation of stay, monitoring of high arrear cases, reduction in litigation and setting up of special units for effecting recovery".
When answering Mr Arjun Charan Sethi's question in August 2004, Mr Palanimanickam gave the following information: "On assessment of the income-tax arrear position as on July 1, 2004, the government has found that out of the total outstanding demand of Rs 84,219 crore, demands amounting to Rs 58,447 crore are in dispute before various Courts, Tribunal, etc., including Rs. 9,887 crore of demand stayed by these appellate authorities."
And answering Mr C. Perumal's question on the subject in April 2005, Mr Palanimanickam gave details about the arrears of direct taxes for the years 1997-98 to 2003-04. The amount was Rs 42,947 crore in 1997-98, that is, at less than half of what it climbed to in 2003-04. What were striking was these nuggets of insight: "Figures are not maintained separately for Corporation Tax and Income Tax. As far as indirect taxes are concerned, the information is being collected and will be laid on the Table of the House."
On December 23, 2005, `Starred question No 453' from Mr Harisinh Pratapsinh Chavda included this: "Whether the outstanding amount of tax of the taxpayers is continuously increasing."
The FM answered, "Yes, sir." He also gave statistics on the outstanding amounts of tax at the end of last three financial years: Rs 72,290 crore (FY 2002-03); Rs 87,885 crore (2003-04); and Rs 98,912 crore (2004-05). Apparently, the numbers were of income-tax arrears.
For the avid, there is further material for research on the CAG's site (http://cag.nic.in/reports/d_taxes/2004/index.htm). "Uncollected amount of Rs 67,638 crore comprised demand of Rs 48, 821 crore of earlier years and current demand of Rs 18, 817 crore outstanding as on March 31, 2003," reads the chapter on tax administration. "Though outstanding demand both in corporation tax as well as income-tax decreased as compared to last year, substantial amount still remained uncollected at the end of the year. At the end of March 2003, Rs 41,365.77 crore or 61 per cent of total uncollected demand was stayed/kept in abeyance." Catch up with the colourful graphics in the report.
Arrears are a function of many factors
Let me wrap with a pick from the debates in the Upper House (http://rajyasabha.nic.in/rsdebate/deb_ndx/206/29112005/11to12.htm) dated November 29, 2005. Mr Dipankar Mukherjee asked the FM the following query: "During 1997-98, the central tax arrears were Rs 47,000 crores. If I am not mistaken, in 2001-02, it became Rs 87,000 crore... Will the Minister say that in spite of this increase whether arrears have come down during the last 1½ years?"
Mr Chidambaram explained, "Sir, arrear is a function of many factors. Arrear is a function of how much current demand you raise in the current assessment year. But the moment a current demand is raised, it becomes an arrear, if it is not paid. Secondly, arrear is also a function of the amount of litigation. If a matter goes up in appeal to the High Court or the Supreme Court and there is an interim order of the stay, then, the amount not collected becomes arrears. So, you cannot put your finger and say that arrears have gone up because of this, or arrears have gone down because of this."
He continued: "Thirdly, if the total estimated income from a particular tax increases, say, by about 20-25 per cent a year, as shown in the Budget, then, it is fair to expect that the arrears also will increase because to that extent demand has been raised for that tax. So, I do not think these are amenable to very easy categorisations and easy answers. All I can tell you is, in the period April-October, 2005, I believe, we have collected about Rs 3,660 crores of arrears. And I am hopeful that we will collect as much this year as we did last year which, as you know, was a record collection year for arrears."
While all that's for the record, how one wished the Government put its entire machinery to collect all the arrears, so that we may have a few years of tax-free life, in celebration!
Disciple: "Guruji, I want to live a life of service."
Master: "Taxable or non-taxable."
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