With the government looking at a near 45% hike in the number of taxmen in the direct tax section, the question is whether this will help increase tax collections significantly. Based on the information the taxman has collected from over 47 million information records—these are records of people who have bought mutual funds/houses/jewellery/etc of above a certain value—the taxman has identified 1.2 million potential taxpayers that have not filed their income tax returns. While letters have been sent to around a lakh of these individuals, the department simply doesn’t have the manpower to process the replies it gets as well as to send out queries to the rest within a reasonable period of time. To that extent, getting more tax officers in a tax department that is short-staffed is critical.
Along with this, however, the department needs to look at ways to ensure it gets more efficient. Since annual information records (AIR) of what individuals are purchasing have been available to the tax department for several years, it comes as a surprise that such notices are being sent out only now. It should also be a matter of routine for tax returns to be computer-matched with AIR details. More important, while putting out more tax demands is all very well, what is more important is to be able to collect the taxes. Tax disputes for corporation tax, for instance, rose from R46,000 crore in FY11 to R71,000 crore in FY12—how much of this is a result of genuine sleuthing and how much will not stand up in court? Tax demands for not deducting TDS issued to a slew of MNCs in recent weeks, for instance, relate to what is the definition of royalty—while the taxman claims several payments made by their local arms are in the nature of royalty, the MNCs claim they are not and so no TDS is due on them. Tax disputes in the case of personal income tax have risen from R1,07,000 crore in FY11 to R1,38,000 crore in FY12. In the case of excise duties, the numbers have risen from R21,000 crore to R27,000 crore; from R4,700 crore to R7,400 crore for customs and from R9,200 crore to R13,800 crore for service taxes.
As part of the process of re-engineering the tax department, the government needs to find ways to ensure the taxman doesn’t harass innocent citizens and corporates. Comparing data got from AIRs to declared salaries is obviously one good method to spot tax evasion. But it would also be a good idea to also look at the success ratios of various tax demands—and once this has been done, to identify the reasons why tax demands get struck down at the level of various tribunals/courts, and to take appropriate action against the errant tax machinery. If certain payments, for instance, are determined to be non-taxable by a tribunal/court, there is no reason why similar notices should be issued to others. At the end of the day, as the finance minister has said, the taxman must not be seen as adversarial.