SEPTEMBER 06, 2024

By Munish Arya

Balancing Tax Administration with Principles of Fair Governance

THE Directorate General of Analytics and Risk Management (DG-ARM), established on July 1, 2018, under the Central Board of Indirect Taxes and Customs (CBIC) aims to strengthen tax administration in India through data analytics and intelligence gathering. Its primary objectives are to identify potential tax evasion, support policy formulation, and ensure the effective enforcement of tax laws. However, there is a growing concern that a tool designed to detect tax evaders is apparently being misused by certain officials to exploit taxpayers and through coercive practices. This raises critical questions about the methods being employed by field staff to verify the intelligence developed by DGARM.

The Nature of DGARM Data: Preliminary and Raw

DGARM-generated data is fundamentally indicative and preliminary in nature, often highlighting apparent mismatches between figures reported in Income Tax returns and GST returns. Such data serves as a starting point for further investigation rather than conclusive evidence of tax evasion. The information provided by DGARM should be viewed as a red flag that requires additional scrutiny and analysis, not as a final determination of wrongdoing.

Field formations under CBIC are responsible for validating this data by conducting thorough analyses and cross-verifying it with information already available within the department. The standard operating procedure for further verification involves writing letters to the identified taxpayers, requesting the necessary information. If the taxpayer does not respond, a summons under Section 70 of the CGST Act may be issued to ensure compliance. Only if these methods fail should an Authorisation for Inspection/Search be issued, and even then, as a last resort.

Instances of Misuse: Issuance of Search Warrants Without Proper Evaluation

Despite clear guidelines from CBIC emphasizing non-intrusive governance, there have been glaring instances where Authorisations for Inspection/Search have been issued directly and indiscriminately, solely based on preliminary DGARM data. This has often occurred without first attempting the less invasive steps of writing letters or issuing summonses. Such misuse of authority risks transforming a tool intended to enhance tax governance into a mechanism for harassment, coercion, and potential corruption.

DGARM data, being raw, should not be used as the sole basis for enforcement actions without proper evaluation. The indiscriminate use of inspections and searches, especially when less intrusive methods of obtaining information are available, not only defies logic but also undermines the principle of non-intrusive tax administration. Moreover, deploying teams of Preventive Officers for tasks that could be addressed with a simple letter or a summons is both a waste of manpower and a significant, unnecessary expense to the government exchequer.

Ensuring Proper Use of DGARM Reports for Fair Tax Administration

For DGARM to serve its intended purpose as an effective tool for enhancing tax compliance, it is crucial that field formations exercise caution and due diligence when acting on DGARM reports. Authorisation for Inspection/Search should be the exception rather than the norm—reserved only for cases where there is clear, corroborated evidence of tax evasion that cannot be resolved through less intrusive measures. Proper procedures and guidelines must be followed to ensure that actions are justified and taxpayers are not subjected to undue stress or coercion based on incomplete or preliminary data.

Furthermore, the guidelines issued by CBIC [01/2023-24-GST (Inv.); Dated: March 30, 2024] clearly state that summonses should not be issued indiscriminately and searches should only be conducted when there is substantial, corroborated evidence. Ignoring these guidelines not only undermines fair governance but also risks damaging the trust between the taxpayer and tax authorities.

Conclusion: Striking the Right Balance

By adhering to the established and fair principles and guidelines, tax authorities can maintain a delicate balance between enforcing tax laws and respecting the rights of taxpayers. Proper use of DGARM reports, guided thorough verification and a focus on non-intrusive governance will help foster a more transparent, equitable, and effective tax administration system. This approach will not only ensure compliance but also build trust and cooperation between taxpayers and the government, which is essential for a fair and just tax system.

[The author is Partner, Utkrisht Solutions, Mohali and the views expressed are strictly personal.]