DECEMBER 13, 2023

By Mukesh Arya,  Former IA&AS officer of the C&AG of India

IN the early years of India's Independence, Comptroller & Auditor General of India (CAG) continued with its traditional audit focus on expenditure of the State. This practice required this independent institution to reach out and account for every rupee spent by the government. Most commonwealth countries have followed this practice. The CAG merely carried on the legacy of the British Raj that enjoined the natives of its colonies to be frugal with expenditure but reserved the revenue aspects to the select band of faithful Britons. Breaking loose from this practice, Indian CAG introduced in the year 1961, the concept and practice of income tax audit to expand his mandate under the Constitution. This move significantly shifted the attention of public auditors on questions as to whether revenues have been properly generated, collected and accounted for. Audit of tax assessments is not easy. It has been a painstaking effort at building the revenue audit capacity within the country. In the process, it helped the Revenue department and the Parliament to improve the executive accountability in revenues matters.

In those years, corruption was rampant within the income tax department often serving as the subject of jokes and cartoons in the media. CAG's tax audit reports, both on income tax and customs, carried numerous examples of how the tax officials have made mistakes in assessments, gave undue benefits to the taxpayers, or ignored the specific tax provisions in favour of taxpayers. Typical audit paragraphs on tax audit have always been on assessments finalized by the income tax officers. Over time, the professional rigour of tax audit was slowly but surely escalated to higher levels with audit conclusions increasingly getting validated in the Income tax tribunals responsible for reviewing appeals.

With the advent of theme-based performance audit; appraisals of tax schemes, operation of sections allowing deductions, search and seizure operations, classification of import and export of goods and services were included in the reports. This indeed marked an evolution of tax audit improving upon the transactions audit. Since the reports included findings on test check basis, they immediately prompted corrective actions. Taking the cue from these reports, the tax departments too established their own internal audit wings to extend the audit coverage and self-regulate their operations. The result now is that the CAG and Internal auditors of the revenue departments are doing pretty much the same thing, that is, test check of assessments and reviews of deductions and exemptions.

Is there a need to reimagine the role of CAG in revenue audit? Certainly so, even though its journey so far had been trailblazing, productive and inspiring. If one notices, the current audit reports are effectively addressed to the all-important assessment officers or mid-functionaries, as to their operational functions and on the issues of compliance with tax rules, regulations and procedures. No doubt, this echelon of the department generates big chunk of revenues of the State exchequer and is certainly important. Similar is the observation on indirect taxes such as GST, customs and excise revenues. Often times, transactional audits of taxes trigger the revenue department to conduct scrutiny of assessments. The end result is in routinely raising demands for additional taxes, which in turn lead to clogging of tax appellate tribunals.

But questions arise as to whether the CAG, as the high constitutional authority of the nation, should continue dedicating its time, and 1500 odd tax auditors on activities that are effectively handled, in parallel, by the internal audit wings of the tax departments? Does this truly fulfill the mandate of the CAG concerning accountability? These questions underscore the need for the CAG to reimagine the public audit of taxation.

Contextually, its useful to illustrate areas where the CAG's input could strengthen the accountability of tax executives to the Parliament and increase transparency within the Revenue department. These areas include international taxation and transfer pricing, critical examination of notifications and circulars allowing tax benefits, double taxation avoidance agreements with countries, assessment of crypto assets and IP assets for capital gains tax, scrutiny of private tax advisories to the multinational enterprises, effectiveness of the faceless assessment scheme and big data analytics of GST database. Future scenarios, in the context of G20 and other groups, include mutual tax concessions in South-South multilateralism, import duty reshuffle in return for technology transfer from developed countries, and recognizing taxability of high-tech markets in nuclear, space and defence segments of the economy.

These topics have significant policy implications and are of great relevance to the Ministry of Finance and the Parliament. By addressing these issues, the CAG can draw the attention of Parliamentarians and the high-ranking Revenue officers to the most critical tax issues of the country without infringing on the Parliament's exclusive policy formulation domain.

India is now counted in the world's largest economies, prompting us to consider how the Supreme Audit Institutions (SAIs) of other major economies have evolved in tax audits, such as the USA, the UK, Australia and Canada.

A cursory glance at the Audit reports of these SAIs revealed a very discerning trend: they focus on crucial policy-oriented topics in their public audit of revenues. For example, the U.S. General Accountability Office (GAO) reported on Base erosion and anti-abuse tax, global intangible low taxed income, and foreign tax redeterminations. Similarly, the UK's National Audit Office (NAO) concentrated on Corporation Tax Research and Development reliefs, tackling tax debts, measuring tax gaps and monitoring the progress with making tax digital. In Australia the SAI's reports focused on topics such as strategies to address tax haven compliance risks, use of data matching and analytics in tax administration and studies on identifying and reducing tax debts. The SAI of Canada also examined taxation of e-commerce and tax subsidies for fossil fuels. These reports are not the reports on operational aspects of tax collection but on the policies pursued by the respective countries.

In an era of evolving financial dynamics and increased emphasis on efficiency and transparency, it is incumbent upon India's CAG to go beyond the theme-based revenue audits of transactions and venture into the realms of tax policies that impact the nation as a whole. Its professional insights into the tax policies have the potential to guide the executives to better implement the tax policies and the Parliamentarians to critically formulate and design its policies.

The CAG would do well to rise above being the ticking machine and assume the pivotal role in ensuring that tax policies are guided by the principles of equality, equity, ethics, efficiency, effectiveness and economy. For this to happen, the CAG may need to reskill its tax auditors, spend more on R&D efforts, and empower its independent Audit Advisory Board. By reimagining the revenue audits, the CAG can adapt strategically to contemporary needs, use its resources optimally and enhance its substantial constitutional role in ensuring executive accountability of the tax executives to the Parliament.

(The views expressed are strictly personal.)