The Hindu Business Line : The worry about arrears

ACCORDING to news reports, the Finance Minister, Mr P. Chidambaram, is anxious about mounting arrears in both direct and indirect taxes. This matter was discussed at the Chief Commissioners' Conference recently.

The total arrears as on April 1, 2004, has been put at Rs 1,03,000 crore, of which, Rs 87,800 crore relates to direct taxes and Rs 15,200 crore, indirect taxes. The Finance Minister hopes to collect Rs 18,000 crore from both these sources, and special teams are being constituted for this.

The problem of arrears, however, cannot be solved by such ad hoc measures. It needs to be tackled in a firm and planned manner. The Public Accounts Committee in its 93rd report has expressed concern over the growing tax arrears and advised the Income-Tax Department to:

Take stringent and deterrent measures to discipline those who do not pay the taxes, including prosecution under the law to create fear in the minds of habitual defaulters; and

Incorporate in law a time limit for disposal of appeals up to the Appellate Tribunals.

The second suggestion has been partially implemented by incorporating sub-section (6A) in Section 250 to provide that the Commissioner (Appeals), where it is possible, may hear and decide an appeal within one year.

Similarly, sub-section (2A) was inserted in Section 254 stating that the Tribunal may hear an appeal within a timeframe of four years. The disposal of the appeals within the prescribed period is not mandatory.

Extent of the problem

In Report No. 12 of 2004 (for the year ended March 2003), the C&AG has given details regarding the pendency of arrears (see Table).

The uncollected amount of Rs 67,638 crore comprise Rs 48,821 crore of earlier year's demand and current demand of Rs 18,817crore outstanding as on March 31, 2003.

The reasons for the mounting arrears as mentioned in the C&AG Report No. 13 of 2003 are as follows:

Even undisputed demands have not been paid: In its report (supra), the C&AG has said that its scrutiny revealed that in 110 cases in Punjab, Orissa, Rajasthan, Haryana, Andhra Pradesh, Uttar Pradesh, Maharashtra and West Bengal, tax arrears of Rs 734.44 crore were not paid within the specified time. The demands were neither under appeal nor stayed by any court. No action was taken to attach the assessees' movable/immovable properties or to ensure their arrest and detention.

Failure of the assessees to abide by instalment scheme: The C&AG has said that in two cases in Uttar Pradesh and J&K, though instalment

facilities were given to the assessees, they did not abide by the instalment scheme.

Arrear demand has become irrecoverable because of assessees leaving India, becoming untraceable or having no assets.

Non-invocation of Section 179 to recover arrears from directors of private companies/partners of firms in liquidation.

Delay in service of demand notice/non-service of demand notice.

Irregularities in notices issued under Section 226(3) by the TRO.

Dossier reports not prepared in a large number of cases. As per the Board's instruction issued in No. 1825 F No.405/54/-88/ITCC dated August 28, 1989, the assessing officer is required to prepare a Dossier Report where arrear demand in each case was Rs 10 lakh and above. These reports are required to be submitted to the CCIT/CIT regularly. Audit scrutiny revealed that the dossier reports were not being prepared in all cases where arrears were Rs 10 lakh and above.

Non-reconciliation of arrears appearing in different records.

Lack of coordination between AOs and the TROs.

Issue of refund despite outstanding arrears of demand.

Irregularities in charging interest. Failure to charge interest as per the provisions of Section 220(2) and CBDT's instructions has led to under-reporting of tax arrears.

Non-adhere to the prescribed internal controls and monitoring system.

Non-maintenance or improper maintenance of control register. According to the C&AG report, the CBDT has — to facilitate control, quick transmission of relevant data to various supervisory authorities and effective control over the arrears and their clearance — prescribed various control registers to be maintained. The control registers include: a) demand and collection register; b) arrear of demand register; c) register of proceedings against defaulters; d) register of demands stayed or kept in abeyance; e) register of movable/immovable property; f) instalment register; g) register of irrecoverable demands; h) register of appeals; and i) register of written-off cases.

These control registers were, however, not being maintained in the Department.

With respect to the arrear demands in Report No. 13 of 2003, the C&AG has stated thus:

There was a rising trend both in number of cases and amount of demand in arrears in the past five years. Only a small percentage (14.34) of tax demand was collected against the demand raised during 1996-97 to 2000-01.

The Department was slack in taking effective steps to recover the arrears, and had failed to recover even undisputed demands.

About 48 per cent of the outstanding amount was held up in appeals or, because of demands, stayed by courts, implying that immediate steps were not taken for the disposal of appeals at various levels.

Lack of co-ordination among the various departmental authorities in maintaining, updating and correlating the assessment records and dossier reports had also contributed to non-recovery of demands.

The Department had no effective mechanism to monitor the implementation of orders/instructions to be carried out by the functionaries responsible for effecting recovery of demands in arrears, thus resulting in the locking up of revenue for long periods of time.

The way forward

Barring those arrears which are stayed by appellate authorities/courts, other arrears can be taken care of by administrative vigilance and concerted action against defaulters and the tax collectors who fail to act swiftly in realising the demand. There is no reason why undisputed demand should fall in arrears.

Demands from taxpayers who are out of India or not traceable should be written off. In respect of stayed demands, requests can be made to the appellate authorities to either decide the appeals quickly or lift the stay.

However, follow-up has to be on continuous basis and not after yearly intervals. The action to be taken is well defined and, therefore, what is required is a strong will for execution.

(The author is a former chairman of CBDT.)