– P. Satya Prasanth
The history of the taxation since time immemorial has been the history of the attempts of one class to make other classes pay for their expenses or, more rightly, the expenses of the Government. So, no issue arouses such strong denunciation as does the taxation. In his address as the Guest of Honour during the Inauguration Ceremony for the 2010 Batch of the Indian Revenue Service (IRS) officers at the National Academy of Direct Taxes, Nagpur, Dr. G. Madhavan Nair, former Chairman, ISRO, remarked that the people in India are afraid of the Income Tax Department. Shri. Vinod Rai, Comptroller and Auditor General of India (CAG), reacting to this comment, during his keynote address in the same function as the Chief Guest said, “People are not afraid but very afraid of the Income Tax Department”. In the public perception, the Income Tax Department is identified as a gross violator of the privacy of an individual through its act of digging into one’s pocket to take a slice of his/her hard earned income in the form of tax. The Department is also identified with raids, which is its most visible enforcement activity and most dreaded. So, one can understand the thankless and hated job that the officers and staff of the Income Tax Department have to do. Income tax is a key source of funds that any government uses to fund its activities and serve the public. It has been aptly said that taxes are the price we pay for civilization. No civil society is possible without revenue. One of the most important sovereign functions of a Government is the collection of tax for development, security and governance of its citizens. Taxes, therefore, are the true keepers of a nation’s identity, sovereignty, territorial integrity, international dignity, sustainable development, environmental balance and social cohesion. The Income Tax Department in India is responsible for policy formulation and planning for direct taxes and for administering the direct tax laws like the Income-tax Act, Wealth-tax Act and various Finance Acts passed during every budget session. Today the Income Tax Department is the biggest revenue mobilizer for the Government of India. The gross direct tax collections of the Central Government increased from Rs.15,352 crore in 1991-92 to Rs.5,90,077 crore in 2011-12. The percentage of direct tax revenue to total tax revenue increased from 14.00% in 1990-91 to 56.00% in 2011-12. The direct taxes to GDP ratio has grown from 2.35% in 1991-92 to over 6% in 2011-12. In the last decade in India, for every 1% growth in GDP, there was a growth of nearly 1.9% in the direct tax collections. The obstacles in the functioning of the Income Tax Department and real problems faced by its officers and staff is rarely a subject of discussion among the general public because of the invasive regulatory role that it plays. It is also rarely a matter of concern for the Government either, at least, as long as there is a steady growth in the direct taxes revenue and the Government coffers are filling up. It is with this grave situation in mind that an attempt has been made here to dissect the functioning of the Department and its employees to identify the bottlenecks and to suggest suitable remedial measures.
1) Faulty Organizational Structure:
It is only apt to start with the organizational structure of the Income Tax Department in India. The Income Tax Department is headed by the Central Board of Direct Taxes (CBDT), which is a part of the Department of the Revenue in the Ministry of Finance, Government of India. The CBDT is a statutory authority created by the Central Board of Revenue Act, 1963 and is headed by a Chairman and comprises six other Members who are all ex-officio Special Secretaries to the Government of India. All the senior posts in the Department, including those of the Chairman and Members, are manned by the officers belonging to the Indian Revenue Service (IRS), which is a premier civil service of India. The IRS officers are recruited by the Union Public Service Commission (UPSC) through the Civil Services Examination held every year to recruit among other services the Indian Administrative Service (IAS), Indian Police Service (IPS) and Indian Foreign Service (IFS). Starting with the post of Assistant Commissioner of Income, the IRS officers raise up to the level of Chief Commissioner of Income Tax, with some fortunate ones reaching the post of Chairman/Member of CBDT. The Revenue Secretary who heads the Department of the Revenue is usually an IAS officer. The entire problem lies here, in this age old and faulty setup. Both the CBDT and Central Board of Excise and Customs (CBEC), which governs the Customs and Central Excise Department, functions under the administrative control of the Department of Revenue. Till recently both these Boards did not even have independent financial powers. Before the Sixth Central Pay Commission, the Chairmen and Members of both these Boards were only ex-officio Additional Secretaries to the Government of India. The CBDT and CBEC are not completely independent in their functioning and are dependent on the Department of Revenue and through it on the Revenue Secretary. Even the regular and routine transfers of the Commissioners of Income Tax and above are routed through and done only after the approval of the Revenue Secretary, read IAS. The Revenue Secretary even writes the Annual Performance Appraisal Reports (APARs) of the Chairmen and Members of both these Boards. What is worse and more disgusting is the fact that most often than not the Revenue Secretary, an IAS officer, belongs to a junior batch than the IRS officers who man both these Boards. This means that all the Chairmen and Members of both CBDT and CBEC report to a person who is junior to them, which is a cause of great concern and heartburn among the IRS officers. This is when all the IAS, IPS, IFS and IRS officers are recruited through the same examination. These days even some of the top rankers in the Civil Services Examination are choosing IRS over IAS and IPS and quite definitely most of the lady candidates prefer IRS over IAS and IPS because of the least political interference, stable postings and postings to metros. This means that a higher ranked candidate in the Civil Services Examination who chooses IRS is forced to become a subordinate to a lower ranked candidate who chooses IAS in the same examination or even worse an IAS officer who is much junior to him in service. This faulty setup also robs the dynamism of the Income Tax Department and the IRS officers as everything is to be routed through the additional and unnecessary level of Revenue Secretary. The only and the best solution to this sad situation is to immediately upgrade the status of CBDT to that of a Department in the Government of India by renaming it as the ‘Department of Direct Taxes’, with its Chairman and Members having the status of ex-officio Secretary to the Government of India (unlike the present status of ex-officio Special Secretary). This type of structure was recommended by the Wanchoo Committee (1971) and the Raja Chelliah Committee (1991) too. Similar is the case with the CBEC. These two Boards should be restructured on the lines of the Railway Board and the Postal Board, where the Chairman and Members report directly to the Minister heading the Ministry but not to an IAS officer who doesn’t know anything about their functioning. This is all the more needed as the IRS forms the largest Group ‘A’ Central Service with around 4,192 officers, second only to the IAS in strength. All most all the services recruited through the same Civil Services Examination have setup and hierarchy independent of the ever conquering IAS lobby. The IFS is headed by the Foreign Secretary who invariably is an IFS officer and the IFS won’t allow any IAS to usurp their posts and dictate terms to them. Indian Postal Service (IPoS) is headed by the Secretary (Posts) who is again from the IPoS. Similarly, other services like the Indian Railway Traffic Service (IRTS), Indian Railway Accounts Service (IRAS), Indian Railway Personnel Service (IRPS), Indian Civil Accounts Service (ICAS), Indian Defence Accounts Service (IDAS), Indian Defence Estates Service (IDES), Indian Audit and Accounts Service (IA&AS), etc have a functionally independent setup of their own. There is no logic as to why the highly specialist IRS should function under a generalist IAS officer, who in most cases doesn’t even know how to file his/her own income tax return.
2) Acute Shortage of Manpower:
Today the biggest impediment to the proper functioning of the Income Tax Department is the severe shortage of officers and staff. The sanctioned strength of the Department has remained at 57,793 since 2001. But over the last decade the workload of the Department has grown many folds. The number of taxpayers has gone up from 2.5 crore in the year 2000 to around 3.5 crore by 2012. This represents just 2.77% of the population. There is a considerable scope for further widening of the tax base. If the tax base is widened, the revenue of the Government would be enhanced while at the same time the burden on each taxpayer can be reduced. But the number of Assessing Officers has not increased since 2001. Because of the increase in workload the percentage of cases selected for scrutiny has decreased from 8.00% in 1997-98 to over 1.25% in 2011-12. It is a fact that whenever the Department has increased the number of cases selected for scrutiny, it has been able to collect more tax. The present level of scrutiny (1.25%) is too low. If more than 98% of returns are accepted without examination this would encourage a feeling among taxpayers that they have a high probability of escaping detection if wrongful claims of deduction are made in their returns of income. The number of taxpayers per Assessing Officer has increased from 7,250 in 2001-02 to over 11,000 in 2011-12. Consequently, the scrutiny workload per Assessing Officer has gone up from 55 to 200 during the same period. The number of PAN card holders has grown from 1.65 crore in 2001-02 to over 10 crore in 2011-12. All the PAN card holders are potential taxpayers. The potential tax loss due to circulation of huge black money in the country amounts to more than 50% of the tax actually collected. So, the Department’s ability to curb tax evasion is positively correlated to the manpower available for intelligence gathering, investigation, assessment and administration. If the spending matrix of India is seen, today we have 16.01 lakh people who made payment above Rs.2 lakh against credit cards, 11.91 lakh persons who bought or sold property above Rs.30 lakh, 33.83 lakh persons who have made cash deposits of Rs.10 lakh or more in their savings bank accounts, 52.42 lakh persons who acquired mutual funds of Rs.2 lakh or more, bonds or debentures by RBI or companies of Rs.5 lakh or more and equity shares by a company of Rs.1 lakh or more. But we have only 14.62 lakh people filing their returns disclosing a taxable income of Rs.10 lakh. This spending matrix shows that India has one of the largest tax bases in the world, but the reality is that those who pay tax are only a small proportion. With globalization and opening up of the economy, there has been a great increase in the number and complexity of taxation issues relating to cross border transactions and entities. A host of new and emerging areas like transfer pricing, international taxation, Direct Tax Avoidance Agreements (DTAAs), Tax Information Exchange Agreements (TIEAs), etc. now require attention on priority. However, the Department finds itself constrained from delivering better results in keeping with the potential of the economy due to lack of manpower and distortion in the cadre structures. The guidelines of the Department of Personnel and Training (DoPT), which is the coordinating agency of the Central Government in personnel matters, especially in respect of issues concerning recruitment, training, career development and staff welfare, require cadre review of Central Government Departments every 5 years. However, over the last decade, there have been only 4 cadre reviews of IRS against 8 required. The last cadre review was in the year 2001. The Department is in the process of taking up another cadre review now. A Cadre Restructuring Committee (CRC) has been appointed in 2008, which submitted its report in 2009. Since then the report has been doing the rounds across the corridors of the Central Secretariat passing through various stages/levels like the Department of Expenditure, Department of Revenue, DoPT, Cabinet Secretary, Ministry of Finance, Union Cabinet and the Committee of Secretaries. But it has not seen the light of the day even after being subjected to numerous changes at every stage. Who is responsible for this delay? It is very important for the people of India to know the real reason behind this unnecessary and forced delay. The role of the Income Tax Department ends with the submission of CRC report, which it had done in 2009 itself and starts again when the report is finally accepted and gets a go ahead from the Government of India. The actual decision is taken by the IAS officers who head and man all the different stages/levels in the Central Secretariat mentioned above. The delay in the cadre restructuring in the Income Tax Department is a conspiracy by the coterie of the IAS spurred by their overwhelming ambition to continue untrammeled their game of self aggrandizement. The Income Tax Department has proposed creation of 42 posts in the apex scale (Rs.80,000) that is equal to Secretary to Government of India and 74 posts in the HAG+ scale (Rs.75,500-80,000) in its CRC report. The IAS lobby is hell bent on not conceding to this legitimate demand of the IRS officers. Let us dissect this demand and see whether this is genuine or not. Before the Sixth Central Pay Commission recommendations were implemented, the Income Tax Department did not have any posts in the apex scale or the HAG+ scale. Hence, the Sixth Central Pay Commission in Para – 3.3.35 of its report observed as under:
“Despite the large cadre strength, the service does not have a single Secretary level post encadred in the service. This is clearly anomalous especially because this service is performing the important function of revenue collection. The Commission is aware that as a general policy, no recommendation regarding restructuring of individual cadres is being made. However, considering the fact that other group ‘A’ services with less than 1/10th the strength of Indian Revenue Service have more Secretary level posts, Government will have to seriously examine the issue and resolve the legitimate aspirations of the service.”
The real picture will emerge when compared with the structure in other central civil services. The IAS with cadre strength of around 4,377 officers currently has officers occupying around 170 posts in the apex scale (Secretary to the Government of India) in various Central and State Governments. The IFS with cadre strength of 618 officers has its officers occupying around 26 posts in the apex scale in the Government of India at various locations around the world. The IPS with cadre strength of 3,475 officers has its officers occupying around 50 posts in the apex scale. The IA&AS with a cadre strength of 694 has 9 posts in the apex scale. The IPoS with cadre strength of 443 has 1 post in the apex scale and 6 posts in the HAG+ scale. There are huge number of posts in the HAG+ scale that are occupied by the IAS, IPS, IFS and IA&AS officers. The IRS with cadre strength of 4,192 officers has absolutely no posts in the apex and the HAG+ scales. Post the Sixth Central Pay Commission recommendations, the posts of one Chairman and six Members of the CBDT have been upgraded into apex scale but no posts in the HAG+ scale have been created. All the Chief Commissioners of Income Tax who usually head the Department in a state or sometimes a group of states are currently placed in the HAG scale (Rs.67,000–79,000). As far as the Indian administration is concerned, unless the hegemony of the IAS is done away with there is no hope in the hell for an honourable career for other services. One can only hope that realization will dawn upon the Government of India, read IAS, and the current cadre restructuring proposals of the Income Tax Department are accepted immediately in toto. Another important issue is that the creation of additional posts in itself won’t solve the problem. Subsequent recruitment has to take place on war footing in a phased manner. Otherwise the organization gets an inverted pyramid kind of structure with lots of senior posts and very less posts at levels which really matter like the Deputy Commissioners, Assistant Commissioners, Income Tax Officers (ITOs), Inspectors and Tax Assistants. Even now the actual working strength of the Department is only 40,756 even though the sanctioned strength is 57,793, which is a shortfall of 29.5%. The recruitment at the level of the Assistant Commissioner is done by the UPSC through the Civil Services Examination. The number of vacancies for IRS has already been increased by the Government of India to 150 every year. So, there is no problem at this level. The recruitment at the levels of Inspector and Tax Assistant is done by the Staff Selection Commission (SSC). The SSC has become too big and unwieldy these days. Hence, there is a delay in recruitment done through SSC for almost all the Central Government Departments. So, a separate Recruitment Board has to be established for the Income Tax Department for the purpose of recruitment at the levels of Inspector and Tax Assistant on the lines of the Railway Recruitment Boards (RRBs), Agricultural Scientists Recruitment Board (ASRB), etc. Infact separate Recruitment Boards have to be established for all the large Departments in the Government of India for timely recruitment and smooth functioning of the Government.
3) Poor Infrastructure and Mobility:
The poor infrastructure in the Income Tax Department is a cause of great worry and concern. World Bank in its “World Development Report 1994” pointed out that productivity growth is higher in countries with an adequate and efficient supply of infrastructure services. The office and residential spaces for the functioning of the Income Tax Department are simply inadequate. The Department has resorted to outsourcing of some of its work because of its poor infrastructure. But outsourcing is not the answer in sensitive areas like enforcement and dispute resolution. The sovereign functions of the country cannot be outsourced. Each Assessing Officer is supposed to scrutinize about 20,000 tax cases of individuals or oversee the accounts of not less than 1,000 companies annually. This is a gigantic task. But an Assessing Officer is not provided with any vehicle or security to conduct surveys and recoveries. This makes them vulnerable to threats and is one of the reasons why Assessing Officers function mostly from their offices. There are instances where IRS officers were threatened, coaxed into submission, and even kidnapped. Only around one or two surveys are carried out by each Assessing Officer in a year. This means that an Assessing Officer makes a personal visit to survey only one or two companies or individuals in a year. Ideally, they should be making at least five to six surveys or recovery calls every month. Lack of infrastructure results in summons and recovery orders not being followed up by personal visits by taxmen in most cases. It’s a field job to assess tax and recover them, but these are not followed due to poor mobility in the Department. Imagine the amount of revenue the government would collect if most of the taxpayers are surveyed. An atmosphere of deterrence has to be created among the tax evaders. Right now, all the Department does is a post-mortem. Prevention is definitely better than cure. There is lack of willpower at the highest level both in the Department and the finance ministry when it comes to provision of adequate infrastructure for proper functioning of the Department. The Directorate of Income-tax (Infrastructure) has been created during 2002-03 and the work of the Ad-VIII (Administrative Division–VIII) of the CBDT with respect to infrastructure has been transferred to it. This is a good development and the results are there for all to see. But the CBDT and the Chief Commissionerates have to be more proactive and aggressive when it comes to development of infrastructure in the Department. Starting from the year 2008, operational vehicles have been provided to the Department at the rate of two vehicles per Range. A Range Office of the Department usually comprises of one Additional Commissioner, three officers of the rank of Assistant or Deputy Commissioner, three ITOs, 10-12 Inspectors, 2-3 Office Superintendents, 10-15 Tax Assistants, 3-5 Notice Servers and around 5 Peons. Each Range Office (Corporate Range in a metro like Hyderabad) typically collects around Rs.5,000 crore in revenue and handles around 700 to 800 scrutiny assessments, processes thousands of returns of income, conducts many surveys to unearth unaccounted income and to recover tax dues, handles hundreds of appeal related matters, monitors advance tax and self assessment tax payments, handles hundreds of audit objections, is responsible for widening and deepening of tax base, handle hundreds of taxpayer grievances and RTI applications apart from all the attendant protocol functions associated with any Government Department. All these functions are to be done with two operational vehicles, which in most cases are not forthcoming as they are used for protocol works. What is more appalling and disgusting is the fact that these operational vehicles are provided as an incentive if the actual tax collections cross the budgeted targets. The Government has earlier started a 1% Incentive Scheme for the Income Tax Department wherein 1% of the amount of tax collected in a year that is in excess of the target fixed (budgeted) will be used for the welfare of the employees of the Department. The targets fixed are so steep that the actual collections will always be lesser. For the information of the readers, it is to be clarified that the revenue collection targets are fixed by the Government, read politicians and IAS, but not by the Income Tax Department. This also explains the reason for the steep and unpractical revenue targets. The operational vehicles were provided for the first time under this 1% Incentive Scheme. Provision of vehicles is an operational requirement for the Income Tax Department. It is not an incentive but a requirement. It is not luxury but a necessity. At least one vehicle should be provided for the office of the ITO and above in the Department. This will increase the surveys conducted, field enquiries/investigations made, better recovery of tax dues, increase the deterrence value, reduce tax evasion and increase tax compliance. More importantly the expenditure for the vehicles has to be booked under the ‘Office Expenses’ and definitely not under the 1% Incentive Scheme. The hiring and running of the vehicle should be the sole responsibility of the head of the office i.e. an ITO, Assistant Commissioner or a Deputy Commissioner should control and be responsible for the vehicle allotted to his/her office. No senior officer should be given any control or power over the vehicle belonging to the office of his/her subordinates. This will avoid any possibility of misuse of vehicles for protocol duties at the cost of proper functioning of the Department. The computerization drive that was started in the Department has a long way to go. The Department still uses age old software, which needs to be replaced rather than upgraded. More number of Central Processing Centres (CPCs) have to be setup. Assessments and report submissions have to be done online thereby saving precious paper. All refunds have to be automated. The legal setup of the Department has to be strengthened and expanded for early disposal of appeals pending before various appellate authorities. The number of posts of Commissioner of Income Tax (Appeals) and the number of benches of the Income Tax Appellate Tribunal (ITAT) have to be increased. The Office of the Commissioner of Income Tax (Appeals) has to be strengthened by increasing the number of staff and computerizing it fully.
While tax policy and tax laws create potential for raising tax revenues, the actual amount of taxes flowing into the government treasury, to a large extent, depends on the efficiency and effectiveness of the revenue administration. While large amount of information on transactions is being collected by the tax authorities, there is hardly any meaningful analysis of such data for lack of personnel to do it. Improvement in tax administration would seek to secure maximum tax revenue effectively and efficiently. Thus no tax policy can be successful unless there is an efficient tax administration. Weaknesses in tax administration could lead to inadequate tax collections. The centrality and importance of the Revenue Services to administration and nation-building has been recognized down the ages. In all developing countries and in most progressive countries, Revenue Services are accorded an important place in the governmental setup and hierarchy. The affairs of the State cannot be managed without according due importance to the Revenue Services. The mobilization of resources is in itself an important and challenging task. Collection of tax with an accelerated annual growth rate is the basic prerequisite for domestic mobilization of resources. Direct Tax laws, policies and administration are the off springs of a nation’s macroeconomic policies. When Chanakya aphorizes in the Arthashastra, ‘Kosha Moola Dandah’, he makes the important point that the Treasury and its flows are the sources of a Government’s might. The establishment and implementation of a scientific Direct Taxes Policy and Administrative System therefore remains a cardinal need. It’s high time the political leadership looked beyond the half cooked platter of facts (read lies) presented by the administrative leadership (read IAS) and set the administration and governance in order and thereby the country.
Satya Prasanth Pinisetty.
The Author is an Indian Revenue Service (IRS) officer currently posted as Assistant Director of Income Tax (Investigation) at Hyderabad.