DECEMBER 26, 2014

By TIOL Edit Team

The prospects of enhancing income tax kitty through prevention of revenue leakages as well as through widening of tax net keepings hitting the national agenda time and again.

Agenda this time is readily available as recommendations and conclusions mentioned in the latest reports from comptroller and Auditor General (CAG), Public Accounts Committee (PAC) and Parliamentary Standing Committee (PSC).

Modi Government must pay serious attention to these reports rather than allowing civil servants to handle the recommendations in the routine bureaucratic fashion. It thus must act by swiftly and effectively plugging loopholes and through stringent enforcement of rules.

The case for such an approach becomes evident by flipping to these reports presented in the winter session of Parliament.

CAG, for instance, has made certain recommendations to strengthen statutory auditing by chartered accountants (CAs) to plug revenue leakages. CAG's 'Performance Audit on Appreciation of Third Party (CA) Reporting in Assessment Proceedings' for three years ending 31 st March 2013 is timely as the exercise to draft detailed Finance Bill for next fiscal is underway.

CAG found that CAs failed to report full and correct information in 367 cases leading to short levy of taxes of Rs 2813.11 crore. Similarly, Assessing Officers (AOs) in Income Tax Department (ITD) failed to utilize information available in 102 CA certificates leading to short levy of Rs 1310.05-crore taxes.

It spotted another 616 cases where CAs committed mistakes in allowance of deductions/exemptions, etc. It also detected lacunae in the existing forms which needs modifications in order to capture full picture about the operations of assesses for proper levy of taxes.

As rightly pointed out by CAG, it is not for the first time such issues have been raised. It evaluated CAs' role in tax audit first in 1997 and later in 2008. In both these previous reports, CAG had drawn Finance Ministry's attention to non-utilization of information by AOs. The reports also listed instances of submission of incorrect information by CAs in their certificates.

It is indeed distressing to find CAG telling the Ministry again that these flaws in tax system are persisting.

As pertinently put by CAG, "Thus, objective of introducing tax audit and certification by accountants get defeated. With the growing revenue foregone every year and complex nature of business environments, Accountant's role in ensuring true picture of accounts and taxes due to the Government as per the Act is very crucial."

We hope both ITD and the Institute of Chartered Accountants of India (ICAI) would join hands to ensure compliance by AOs and CAs with relevant rules.

It is, however, hearting to see the Ministry telling CAG that the latter would consider in the forthcoming budget the recommendation to prohibit a CA, who is a relative of a tax payer or of director of a company, from signing any audit report.

We hope the Ministry would respond positively to recommendations contained in other reports. One crucial recommendation that brooks no delay is improving ITD's success in tax litigation. Public Accounts Committee (PAC), in its Action Taken Report (ATR) on its earlier report on Tax Administration, has noted its recommendation to form a Panel of Special Counsels is still stuck in the inter-ministerial discussion mode.

In the ATR presented to Parliament on 11th December 2014, PAC says: "the proposal is pending with the Ministry of Law and Justice for approval/concurrence."

ATR's recommendation for a 'special monthly drive' to settle maximum number of internal audit objections in ITD also deserves favourable response from the Government.

The Government should also act on PAC's recommendation for setting up of National Economic Information Sharing System (NEISS) deserves priority. In its report on Information Technology applications in ITD, PAC stated: "The country has a diverse array of independent organization with information in 'silos'. This does not enable the law enforcement agencies and policy makers to 'connect the dots' even when the required information is sloshing in dispute systems."

PAC wants proposed NEISS to regularly capture economic data and allow its access to authorized stakeholders in a timely and secure manner to effect administration of tax and other laws and for sound formulation of policies.

A similar initiative that deserves prompt implementation lies in the realm of widening of tax base that has been articulated by PAC.

ITD should focus on implementation of an 'Analytical Model for Widening of the Taxpayers' Base' developed by National Institute of Public Finance And Policy at its behest. There is also a strong case for full deployment of 'Non-Filers Monitoring System' that has been successfully tested on pilot scale to track and contact tax payers who stopped filing the returns.

There are many other crucial recommendations incorporated in the latest reports including CAG's report on performance of special economic zones (SEZs) and its another report on depreciation and amortization.

Modi Government should treat these reports as benchmarks for initiating good governance and credible reforms.