India's Arrears Of Revenue Conundrum: How Do You Solve The Problem?

After a due process that involves the issue of a notice, submission of written pleas against the allegations, an opportunity for a personal hearing, a ‘speaking’ order is passed by the adjudicating authority either dropping the charges or confirming the demand fully or partially.

If confirmed, tax revenue notice is consequently ‘raised’- the amount the department feels the taxpayer owes. The aggrieved party, the taxpayer or the department, has the right to dispute the order in the appropriate forum.

The order, if accepted, reaches finality; these are monies unequivocally due to the government. These constitute arrears of revenue.

Tucked away in the Union Budget documents are the details. Unfortunately, they do not get the attention or generate the discussion which they deserve. Thus, for instance, Annex 5 of the Receipts Budget 2024-2025 are details of Tax Revenues raised but not realised. This is a requirement under Rule 6 of the Fiscal Responsibility & Budget Management (FRBM) Rules 2004.

The details of such revenues not realised under the major tax heads are divided into those which are under dispute and those that are not. Similar details are also available in the Receipt Budget of 2023-24.

The Main Problem

A comparative study of these makes dismal reading. As can be seen, there has been an increase in almost every head both in respect of amounts under dispute and amounts not under dispute. Even the recently introduced GST has amounts pending in both categories - if not kept under check, these are amounts which are likely to balloon.

The total amount of arrears (both under dispute and not under dispute) in 2023-24 was Rs 15,82,811.15 crore -- this has shot up to over Rs 21 lakh crore in the next year. This is a staggering amount -- to put matters in perspective, our total fiscal deficit of Rs 16.53 lakh crore could get wiped out if these amounts are recovered!

The recently published annual report of the SEBI similarly has details of the amount termed as "difficult to recover" (DTR) as of the financial year ending 2023-24.

As of March 31, 2024, a total amount of Rs 76,292 crore has been shown in the DTR category. The annual report also gives details of other cases which are sub-judice and pending in various legal fora including consumer forum. Under this category, a total of Rs 95,347 crore is shown as pending.

All of this raises the larger question: how are we going to address this issue?

The trigger for demands being raised is the notice itself which is the result of investigations. As we have witnessed, there is no shortage of trigger-happy, overzealous officials.

Faced with such monumental demands very many adjudicators buckle under the weight of the sheer numbers confronting them. Invariably the result is the demand getting confirmed. The statutes prescribe minimum penalty as also a mandatory penalty in certain cases, which can go up to three times the demand -- in other words the demand having been confirmed, there is little discretion left about the penalty.

All this adds to the arrears.

In case a taxpayer feels the demand is not justified, they have little choice but to go through the expensive litigation process-- appeals are filed in the tribunals (the GST Tribunal has yet to start functioning) or the courts. The success rate of the department in the courts is poor, suggesting that the number of demands were ill-conceived.

Way Forward

A multi-pronged strategy is needed to address the issue.

Departments are expected to have a pre-notice discussion with the taxpayer to get a preliminary view of the taxpayer. Data is not available to assess how this is working, but anecdotal evidence would suggest that this is a mere formality. Notices based on the interpretation of the law should not be issued without a discussion with the policymakers, and the Central Board of Indirect Taxes and Customs (CBIC) to understand the intent of the law.

There is this mistaken apprehension that the dreaded vigilance action will follow in case notices are dropped. The adjudicating authorities need to be empowered to act fearlessly and fairly. All orders are subject to internal review to ascertain the legality and propriety of the decision.

It will require a brave review committee to take up a case, where the decision is in favour of the department. The net result is the piling up of cases in courts.

The courts need to be sensitised to take up these cases early.

Serious focus is needed to recover the undisputed amounts pending. Task forces need to be created to ascertain the availability of the defaulter - civilised versions of the bouncers some banks are said to be engaging to recover loans needs to be put in place. In cases which are more than 10 years old and impossible to recover, a committee needs to examine and recommend write-offs. A difficult call, but one that needs to be taken with the approval of the government and perhaps also by involving the Public Accounts Committee.

Otherwise, these amounts will continue to stick like sore thumbs in the budget documents.

(The author is a former chairman of the Central Board of Indirect Taxes and Customs. Views expressed are personal)