THE POLICY LAB (TPL) - 50
AUG 20, 2024

By J B Mohapatra

AT a higher level, tax gap is defined as the difference between the effective taxes collected and those which could have been collected had the tax administration ensured absolute compliance. At a practical level, tax gap generally connotes difference between what is statutorily determined as tax payable and what is collected out of the tax dues. Tax gap at both levels has long term implications for sustaining a nation's fiscal health at acceptable levels. At short and medium term, it reflects on the quality and efficiency of tax department's own processes, robustness of technology that supplants the processes, and efficiency or lag at the assessment and appellate stages. Universally, large tax gaps are said to breed inequity.

In the India context, disclosure of central tax revenues raised but not realised for each reporting year or the tax gap as is commonly understood is available at annexure 5 of the Receipt Budget (part of the Union Budget documents) under the FRBM Rules 2004. The details thereof (in Crs) from FY 16-17 to FY 22-23 below:

A reading of the trend of unrecovered tax for the 7 year period from FY 16-17 to FY 22-23 largely indicates the following: One, tax gap as a percentage of real GDP (GDP at constant prices) rose from 7.09% in 2016-17 to 13.25% in 2022-23. Two, unrealised direct tax grew by 163% and indirect tax grew by 43% over the 7 year period. Three, disputed direct tax not recovered grew by 71% and indirect tax grew by 35% . Finally, undisputed direct tax not recovered for FY 22-23 was 628% more than what it was in FY 16-17.

Among the many reasons why direct tax both under disputed and under undisputed categories remains unrealised are principally the following: (a) demand cases pending for write-off (b) taxpayer remaining untraceable (c) taxpayer with no assets (d) protective demand cases (e) cases admitted with NCLT (f) companies under liquidation (g) demand stayed by courts/ tribunal/ Income Tax authorities (h) demand covered by instalments (i) stay petitions pending to be decided (j) TDS/ prepaid tax mismatch (k) bank guarantee obtained under MAP (l) duplication of demand entries.

While reasons such as taxpayer not traceable, or taxpayer with no assets, demand stayed at appellate or post- assessment stages by assessing or appellate authority are by far the more compelling of the reasons why large chunks of demands remain unrecovered, no less significant is ' demand raised to keep an issue alive in appeal' if one were to analyse the sub-components of the gross demand unrecovered. Starting from Instruction No 1914 of 1993, these disputed demands of a relevant year anchored on issues which have been decided in taxpayer's favour by an appellate authority or tribunal or courts for any previous year are stayed by the tax authorities themselves.

Between the two positions (a) create a demand and hold the demand in abeyance owing to appellate decisions favouring the taxpayers and ( b) do not create a demand since there is a decision favouring the taxpayer for a past year, direct tax dispensation does not have a statutory basis for opting for (b). They perforce have to create a demand irrespective of whether the previous appellate decisions have gone against the revenue. This is the sole basis why all steps comprising direct tax's litigation management starts off at the appellate forums and never at the assessment or pre-assessment stages. For example, the legislative provision disfavouring filing of appeals in section 158A/ 158AB and laying down a procedure whereby a question of law decided against the revenue by the Tribunal or the High Court and against which revenue's appeal is pending either at the High Court or the Supreme Court will not be litigated further in the appropriate appellate forum, subject to certain conditions. Or a monetary ceiling with regard to filing appeals before the Tribunal or the High Court or SLP/appeals to the Supreme Court. Or CBDT Instruction dated 23-4-22 on procedure to deal with high-pitched assessments. All these are ex-post advices/ instructions and subsequent to finalisation of assessment and determination of a demand.

There is though not a single provision in the statute or in the administrative processes in the direct tax, unlike in some other legislation, which will mandate the assessing authority, in the back of a previous appellate decision against the revenue, to either refrain from raising a demand and/or postponing the creation of demand.

Take section 75(11) of CGST Act, 2017 as an example. The provision reads as follows:

"An issue on which the Appellate Authority or the Appellate Tribunal or the High Court has given its decision which is prejudicial to the interest of revenue in some other proceedings and an appeal to the Appellate Tribunal or the High Court or the Supreme Court against such decision of the Appellate Authority or the Appellate Tribunal or the High Court is pending, the period spent between the date of the decision of the Appellate Authority and that of the Appellate Tribunal or the date of decision of the Appellate Tribunal and that of the High Court or the date of the decision of the High Court and that of the Supreme Court shall be excluded in computing the period referred to in sub- section (10) of section 73 or sub-section (10) of section 74 where proceedings are initiated by way of issue of a show cause notice under the said sections."

Since section 75(11) of CGST Act is inextricably linked to the status of the issue in any case in an appellate forum, few sentences on configuration of appellate hierarchy in the CGST Act below: Function and jurisdiction of Appellate Authority who is the first appellate authority in the GST and gets to hear on matters emerging from any order of the Proper Officer is in section 107. The second level in GST appellate hierarchy is the GST Appellate Tribunal constituted as per section 109 and having the jurisdiction to hear and render decisions on orders emerging from the Appellate Authority referred to in section 107. Orders passed by the State Bench or Area Benches of the Appellate Tribunal could be challenged in the jurisdictional the High Court under section 117. Finally, an appeal against the orders of the High Court lies with the Supreme Court in terms of section 119 of the CGST Act.

What section 75(11) of CGST Act intends to lay down is the following: in case a decision on an issue in any case is rendered against the revenue in any one in the appellate hierarchy administering appellate jurisdiction under GST, the time available for passing an order by the Proper Officer in terms of section 73(10) or section 74(10) is correspondingly extended. The extension in time would be equal to the period spent (a) between the date of order of the Appellate Authority and the Appellate Tribunal, (b) between the date of order of the Appellate Tribunal and the High Court and (c) between the date of order of the High Court and that of the Supreme Court. Thus on an issue in respect of which a First Appellate Authority or the Tribunal or High Court has rendered a decision against the revenue, and an appeal to the Tribunal or the High Court or the Supreme Court has been lodged against that decision by the revenue, and decision on that appeal is pending, the period between the two dates is to be statutorily excluded for determining the time available that is 3 years under section 73(10) or 5 years under section 74(10) for passing the relevant adjudication orders. In clear statutory terms, CGST Act recognises that it will be imprudent to determine a tax demand on an issue in a case, where the same issue has been decided against the revenue by any authority in their appellate hierarchy. That it will be far more prudent to postpone the creation of demand until such time a degree of finality emerges at the appellate level.

How far and well the processes at CGST can be replicated at direct tax level depends much on readiness of the direct tax's system to capture the issue in question from the show-cause notices, thereafter corelate the issue in question to those cases where the department has gone in appeal before the appropriate appellate authority, and compile the assorted data in a system-run call book. If the process of synchronising the critical data on status of and decisions in appeals at the Tribunal and High Court though operationalising the provisions under section 158AB and thereafter following through on the methodology as laid down in Circular 8/2023 has been completed to the department's satisfaction, it would be a short step away, if the direct tax department so intends, from replicating the section 75(11) model being followed at GST. Though onerous, the changes will make the unrecovered direct tax demand in the Receipt Budget look a bit better, convey the actual demand position in a more purposive manner, and remove a long running irritant.