Discussions on tax terrorism in the country have resurfaced as a result of an unverified letter purportedly penned by the late promoter of Café Coffee Day (CCD) prior to his act of suicide.
In the letter, he alleged that there was a lot of harassment from the previous Director-General of Income-Tax in the form of attaching shares of Mindtree on two separate occasions to block the deal with L&T and then taking possession of the shares although revised returns were filed.
Strangely, the Income-Tax Department responded within hours that the provisional attachment of shares was made to protect its claims — a norm in cases of large tax evasion. The act, it claimed, was based on credible evidence gathered in the search action that was undertaken against CCD.
The Department went on to give numbers — ₹3,200 crore was received by the promoter from the sale of Mindtree shares, but only ₹46 crore out of the total of ₹300 crore minimum alternate tax (MAT) payable on the deal was paid.
As against the balance MAT liability of ₹254 crore and tax liability based on search findings to the tune of about ₹400 crore, the attachment made by the department was less than 40 per cent of the likely tax liability.
In its financial statements, CCD has given the typical non-committal information on the raids — simply stating that “during the year, the Income-Tax Department conducted search/survey under Section 132/132A of the Income Tax Act 1961.” CCD nonchalantly stated that it does not envisage any material impact on the financial statements of the company.
As is usual in such situations, the actual facts would be somewhere between these two extremes.
Tax terrorism
Tax terrorism is not new in India — the ‘Raid Raj’ years typified tax terrorism. The reasons for tax terrorism are not hard to seek — just like marketing managers, the tax department has stiff revenue targets to meet. To meet these targets, they become hyperactive in the months of February and March.
Show-cause notices are issued at will, visits to the premises of taxpayers are made, injudicious positions are taken on tax laws, and tax is collected at any cost. Taxpayers are forced to play along as taking on the department head-on could have collateral repercussions on shareholder expectations.
They normally pay up a small amount of tax as deposit and spend many years litigating over the balance. This is a tried-and-tested formula that is a win-win for both the taxpayer and the department.
However, high-value cases don’t fit into this formula for a simple reason — the higher the tax due, the easier it is for the department to meet its target. It is in such cases that the department resorts to attaching bank accounts and taking some shares as collateral in lieu of the tax paid.
The longer the tax remains unsettled, the greater the risk that the department will cash in on the collateral.
Tax litigation
If tax litigation cases are settled speedily, aggressive action by the department would reduce because of the clarity that emerges from the settlement. The Economic Survey of 2017-18 provided some revealing statistics on tax litigation. Direct tax litigation alone constitutes about 3 per cent of GDP.
Another startling statistic in the Survey is the fact that the tax department is the biggest litigant, though it barely succeeds as the litigation moves to higher authorities.
The Survey also reveals that the Supreme Court and the High Court work at only 64 per cent of their capacity due to the shortage of judges. The position as on date may not have changed much because for every case that is settled, a new one is added.
It is critical that the Central Board of Direct Taxes (CBDT) takes the onus to withdraw frivolous cases where there is clarity, which will ensure that the appellate authorities are freed up to decide on only worthy cases.
The tax department should also bear in mind that tax collections are directly linked to the state of the economy. When the economy is iffy, as it is now, it would be difficult to expect taxpayers to accord priority to tax payments. Instructions should be given to the field officers to take a humane view while seeking payments from taxpayers, especially at a time when the economy isn’t doing well.
It is equally important for the taxpayer to realise that they cannot hoodwink the Department all the time. They should be sensitised to pay what is due within the space provided by the Income Tax Act. They should not consider tax payments to be an obligation but a duty to the nation. It is possible that the law may not be crystal clear in every aspect, in which case they should take a considered view instead of using the lack of clarity as a tax-saving measure.
Combination of factors
The CCD episode may have been due to a combination of many factors, one of which could be pending tax dues. One cannot conclude that tax terrorism has set in on the basis of this case alone.
Yet, it is important that the top brass sensitise the officers on the ground how to handle high-value cases of known companies.
A complicated Income Tax Act that is subject to many interpretations doesn’t help at all. The formula of comfortable rates of tax, uncomplicated rules and easy compliance is the only one that has worked in India to maximise revenue. The government should start focussing on these fronts lest the fad of tax terrorism grows.
Not simplifying the law poses another risk to the government. As the GST law has shown on input tax credit, an open-ended provision can make the taxpayer terrorise the Department with false claims.
The writer is a chartered accountant