The finance ministry has done well to get the Cabinet to clear its proposal to hire another 20,750 officials in the income tax department especially since, as the ministry has said, this alone will add R25,000 crore more to the tax kitty. That is just 2% of FY14 tax collections, but it could even add a lot more since the department has often cited the lack of manpower as a reason for its inability to pursue potential tax evaders. In a reply to the Standing Committee on Finance, while talking of 40 lakh pieces of information received from Annual Information Returns (AIR) involving transaction of R106 lakh crore, which it suspected was unaccounted money—30% of the transactions didn’t have a valid PAN—the taxman is quoted as saying “the required follow-up, even in cases of AIR-High Value Transaction, is not possible for paucity of manpower”. Equating the problems of the taxman to merely a shortage of manpower, however, is missing the woods for the trees. Direct tax arrears, to cite one figure, have shot up from R2.48 lakh crore in FY11 to R4.82 lakh crore in FY13, making you wonder why so many tax demands are being filed but not collected. Dig a little deeper, and the picture gets worse. Nearly two-thirds of the cases filed in different appellate bodies have been filed by the taxman himself—after this, the taxman loses 50% of the appeals at the tax tribunals and 60% of the appeals reaching the high courts and the Supreme Court. So, when industry complains of harassment by overzealous tax officials—transfer pricing adjustments shot up from R44,000 crore in FY12 to R70,000 crore in FY13—it certainly seems to have a point.
The taxman’s track record is equally poor when it comes to following up the number of returns filed—only 3.5 crore of the 11 crore entities with PAN cards filed their returns in FY11. Much of this is masked by the steady increase in tax collections—over the decade, direct tax collections rose 700%, but the number of taxpayers rose just 35%; the number of new assessees was 17.8 lakh in FY09 and, instead of rising , this fell to 7.2 lakh in FY12. While adding to the number of tax officials is certainly a good idea, a lot more can be achieved by smartening up the tax administration, by letting computers do a lot of the searching of AIR databases, for instance—sending tax notices to 1 lakh persons in FY13 on the basis of AIR returns resulted in 1.25 lakh returns being filed within a few months.