Taxing targets

It has now become a regular feature of India’s fiscal management. First, the government sets an overly ambitious target for revenue mobilisation, and when the figure falls desperately short, the taxman comes knocking. While on the stump for the 2014 elections, the Bharatiya Janata Party attacked the ruling regime for unleashing “tax terrorism”, which, it argued, not only created anxiety among the business class and affected the investment climate, but also dented the image of the country. But six years later, the tradition continues.

According to a report in this newspaper, the tax department is sending notices to directors of private limited companies, holding them liable for pending dues. The number of such notices has risen exponentially in recent weeks, and the amount demanded is in the range of Rs 5 crore to Rs 20 crore. In some cases, directors are expected to pay within 10-15 days. The liability is being imposed under Section 179 of the Income Tax Act. In such cases, bank accounts and properties of directors can be attached if they fail to pay in time. Although the Section is meant for firms under liquidation, it can be applied to all companies.

The only way out for directors, according to experts, is to prove that the non-recovery cannot be attributed to gross neglect or breach of trust on their part. Tax notices of this kind, and possible attachment of property, will discourage people from taking up directorship in private limited firms, which constitute about 95 per cent of all companies in India. The action of the tax department is in sharp contrast to the government’s stated objective of increasing the ease of doing business. Such notices are at odds with the aim of reducing tax litigation. The government has announced a new scheme to address tax disputes, worth about Rs 9 trillion. Unreasonable tax demands will only increase litigation and affect the business environment.

However, the reason for tax notices can be traced to the Budget. Even after a significant downward revision, it will be extremely difficult for the government to meet the current fiscal year’s revenue target. It needs to mobilise about 40 per cent of the net tax revenue target in the last quarter of the fiscal year, which is a difficult job. For instance, less than 30 per cent of net tax revenue was collected in the fourth quarter of the last fiscal year. 

As the government has invoked the escape clause under the Fiscal Responsibility and Budget Management Act and would not be in a position to let the fiscal deficit expand more, it will have to cut or postpone expenditure if the collection falls short of the target. What is worse is that things are unlikely to change even next year. The government has assumed a revenue growth rate of 12 per cent for the next fiscal year, which is again ambitious. Instead of going through the same process year after year, it is important to make realistic revenue projections and adjust expenditure accordingly. Putting pressure on the tax department with unrealistic targets not only results in harassing taxpayers and litigation but also affects the business environment. This is not to suggest that the government should not collect what is due. But indiscriminate use of law and state power to achieve revenue targets demoralises businesses.

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