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CAGs audit of direct taxes: Drab and routine exercise
June, 30th 2007
The past few years reports show that audit work is not taken seriously by the tax department and the CAG is unable to ensure compliance in respect of many of its decisions.

T. N. Pandey

The Comptroller and Auditor General of India conducts yearly audit of the Governments revenues from direct taxes through test checks of assessments to assess the effectiveness of their working and evaluate the degree of compliance with tax laws, rules and judicial pronouncements in the assessment, demand and collection of revenues from various taxpayers.

A yearly report is prepared after the audit and is Tabled in both the Houses of Parliament. The report for 2005-06 was so placed on May 14, 2007. The report, at sometime of the year, is discussed by the PAC (Public Accounts Committee) with the CBDT (Central Board of Direct Taxes) officers for implementation. In the meantime, the process for the next year starts, and this has been going on for years. Unfortunately, despite such annual exercises, the same types of mistakes get repeated year after year.

Audit not taken seriously

The past few years reports show that audit work is not taken seriously by the tax department and the CAG is unable to ensure compliance in respect of many of its decisions, except mentioning about the non-compliance in its reports. The report for the year 2005-06 shows:

Records for consecutive audit cycles not produced to the audit parties;

Draft paras mentioning objections not attended to promptly;

Up to March 31, 2005, 71,526 observations relating to income and corporation taxes involving a revenue effect of Rs 23,223.47 crore was pending ;

Targets for settlement of observations remain unfulfilled, and the objections pending.

Remedial action in 2,265 cases, involving a tax effect of Rs 911.27 crore, became time-barred for want of timely corrective action; and

Action plans for settlement of audit objections not substantially achieved.

The performance of the internal audit set-up of the I-T Department has been dismal. Even with reduced workload, the targets could not be met.

Hence, there is urgent need for the tax department to gear up for internal audit work.

Re-orientation of methodology

Year-after-year the audit exercises are being carried out mechanically , with the sole objective of finding faults and working out revenue losses. Despite the quantum jump in assessments, almost the same number of cases is picked up for checking each year.

Considering the increase in assessments, the number of cases checked cannot be considered as a reliable sample to come to any firm conclusion. Hence, other innovative methods have to be designed for bringing improvements

Too much emphasis on figures in the report has to be avoided, as it makes the report cumbersome. There does not seem to be any need to be correct to the last paisa.

The emphasis of the report must shift from faultfinding to constructive reporting. And, besides the mistakes, the good work done by the I-T Department should also be mentioned.

The audit approach needs to be change considering the increase in the number of assessments. Rather than mention mistakes of the same nature, as in the Performance Appraisal Report, suggestions as to how these can be eliminated should be given. Audit of 15,000-16,000 assessments cannot be an adequate sample to evaluate efficiency in the background of the nearly 2.5- crore assessments completed in a year.

Merely approaching the work numerically is proving to be a frustrating exercise. Hence, refinement in this regard is necessary.

The constraints under which assessing officers (AOs) work should be taken into account while evaluating the work, and recommendations be made to redress the same.

There is no use following the beaten track. Both the CAG and the CBDT should meet periodically to review how the system works and discuss about the problems in implementation. The adversarial relationship between the two has to change.

The reports do have some useful information which need to be examined by the I-T Department to improve the system. Likewise, the CAGs audit parties should go beyond faultfinding and make their exercises a tool for better results.

To ensure timely compliance to the audits requisitions,, the CBDT should be asked to also place before Parliament each year an Action Taken Report (ATR) on the CAGs report of the previous year.

T. N. Pandey
(The author is a former Chairman of CBDT.)
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