The government may consider reviewing the process of setting a tax target during the annual budget every year.
According to experts, actual tax revenue collected usually falls short of the budget estimates set in the beginning of the year as the process of determining the target is not dynamic in nature. It does not consider the macroeconomic conditions that could vary during the year.
Further, the target creates a pressure on regional authorities who often resort to coercive action to fulfil their goals. Observers believe this creates a negative impression about tax authorities.
Data from the finance ministry reveal that in the five-year period, from 2007-08 to 2012-13, gross tax revenue has fallen short of the budget estimates for four years, excluding 2010-11 (see chart). For 2013-14, the revised estimates of gross tax revenue receipts is substantially lower than the budget estimates.
“The process of setting a tax revenue target needs to be looked into. In my opinion, this creates pressure on tax authorities to fulfil their targets,” Parthasarathi Shome, chairman of the tax administrative reforms committee (TARC), told The Telegraph.
The TARC had been set up by finance minister P. Chidambaram to suggest reforms in tax administration to make the collection process service oriented.
According to tax advocates, the bulk of the collection, primarily direct taxes, usually takes place in the final quarter of a fiscal. Finance ministry data show that 60-65 per cent of the budgeted tax receipts are collected between April and December.
To make up for the shortfall, tax authorities often ask assessees to pay more advance tax in the last quarter when instances of surveys and scrutinies also rise.
For instance, in the Bengal circle, which stares at a shortfall of Rs 900-1,000 crore in direct tax collection, the number of surveys had gone up from 147 last year to 222 by March 11 this year. The amount of income admitted has gone up from Rs 128.28 crore to Rs 305.69 crore.
“When collection is under pressure, firms are asked to pay more advance tax to fulfil the target. This is irrespective of the economic condition. Even the number of surveys and scrutinies go up for this purpose,” a Calcutta tax advocate, who handles such cases, said.
“Further, the assessing officers often inflate actual assessed tax amount knowing that the payer would then have to appeal before the income tax commissioner and the I-T tribunal for refund. This is totally unjustified and expensive as well,” he added.
According to Shome, an alternative to setting targets could be the adoption of a tax gap system that is followed by the British revenue and customs department. “In the UK, for instance, there are no revenue goals. Instead they measure the tax gap and continuously try to minimise it,” he said.
The tax gap is the difference between the amount of tax that should theoretically be collected against what is actually collected.