I must confess that Anna Hazare has managed to create a lot of impact on the general polity of India. There can be no doubt about this. My teen aged student was wondering, why this old man was fasting and if, this was the way Gandhi had also fought the British. Of course, I could not answer this question, as I had not been born at the time the Mahatma was around. But surely, we are fortunate that we are able to witness a sight like this, in our life time. This unique agitation brings into question, the role played by the so called tax professionals and practitioners (like me), in the area of ‘corruption management’.
For many of us, who are in their late 30s or even early 50s, the last few years in the profession have indeed been traumatic. I am not talking of the absolute chaos that prevails in terms of the tax statutes and the rather perverse interpretation by the tax officials. I am talking of the complete change in the mind set of the average tax officer, these days, which has changed for the worse, in a significant manner. In the olden days, a ‘reasonable’ tax official would pass an order, in accordance with law and would ‘prefer’ a gift (which, many others, refer to as a ‘bribe’). Over the last few years, the tax official would seem to have become very ‘professional’. These days, assessees are given various options to choose from, by the tax officer, and it goes without saying that, the option that is least harmful to the assessee would perhaps, be the most ‘profitable’ to the tax official concerned.
As a student of Vedanta, I was instructed much earlier in my life that the omnipotent and the omnipresent concept is that of the ‘Brahman’, that which cannot be seen but whose impact can be seen. Almost after about 25 years of experience in tax related issues, I have come to the conclusion that the omnipotent and the omnipresent reality, in at least, so far as the tax administration is concerned, is indeed corruption. This is what a tax practitioner sees and confronts, in his day to day dealings with the tax officials.
The situation, one must admit, is far worse, in so far as the state taxes and especially, VAT, is concerned. Corruption is highly facilitated due to an absolutely lack of clarity in terms of the VAT provisions which has led to each officer interpreting the provisions, in most cases, in a perverse manner, to suit his own ‘agenda’. Perhaps, the lawmakers have, consciously kept these confusing provisions in the statute book, for reasons which are obvious.
Talking of confusion and pervert tax provisions, there is nothing to bear the VAT laws. In most VAT laws, there are Sections that provide that an assessment /re-assessment can be made within a certain number years from the end of the prescribed tax period or within a certain number of years after evidence of facts, sufficient in the opinion of the prescribed authority, to justify making of the re-assessment, comes to the knowledge of the tax officer, whichever is later. The implication of this draconian section which is present in most State VAT laws is that, re-assessment can be done by a VAT officer, even after, say, 30 years from the tax period. And, there can be multiple re-assessments.
Further, look at the provisions governing the appellate procedures under a law like the Karnataka VAT Act, 2003. An assessee, aggrieved by an order of the re-assessing authority, has to deposit a minimum of 50% of the tax demanded, in cash. In most practical situations, the First Appellate Authority, who is a Joint Commissioner, would ask for 50% of the VAT demanded to be paid by cash and the balance to be secured by a bank guarantee. The unfortunate appellant, who is destined to live in a state like Karnataka, is dead and gone, even in a rare event that he wants to go on appeal, given the fact that, he has to shell out the tax before filing the appeal, not-withstanding the merits of his case. And, with no time limit fixed for disposal of the appeals, the appellant should be able to ‘manage’ his appeal with the jurisdictional Appellate Commissioners, if he wants his appeal to get disposed off. What else will provisions like these promote, except corruption?
Take the provisions in the KVAT Act, for instance, which talk of the powers of the VAT officers to re-open concluded assessments/re-assessments under, what are known as ‘Suo Moto Revision (‘SMR’) provisions. The very word SMR is enough to create convulsions in the minds of the unfortunate assessees operating in a state like Karnataka. Even an order passed by an Appellate Joint Commissioner can be re-opened under the SMR route by the Additional / Commissioner of Commercial Taxes.
It is a never ending story of how these obnoxious provisions are used by the officers to harass the assessees, under most state commercial laws. Even an otherwise honest assessee would prefer to pay bribes rather than get into the wrong side of the officers, given the fact that a VAT officer can pass any order he deems fit and there is no way the harassed assessee can go on appeal, without paying up 50% of the demand in cash and the balance by way of a bank guarantee.
I am not, for a moment, suggesting that, the assessees are angels from the Heaven. But, there is no denying the fact that a fair and equitable law could result in much better compliance from the assessees.
It’s an open secret that, in most states, plum postings in the VAT department are awarded on the basis of considerations other than merit and in most cases officers who are able to cough up significant amounts to their own senior bureaucrats and their political bosses end up landing in postings. Officers are always in a game of meeting their own ‘return on investment’ parameters and it is no wonder that corruption runs high and wide. A tax practitioner often gets to hear the story of the tax officer, justifying the collection of a bribe on the basis that he has already incurred a lot of ‘investment’ in getting that particular posting. The situation is so bad that in most states, even the tax tribunals established under the state commercial laws do not command much respect and this is really unfortunate indeed.
Of course, the situation is far better, when it comes to the central indirect taxes, one must unhesitatingly admit. Though one does come across some corruption at the level of the junior adjudication officers, one does come across very honest officers especially at the appellate level.
In today’s scenario, the question that the tax payer comes across is…. is the officer ‘reasonably’ corrupt or is he, ‘unreasonably’ corrupt? Though this might seem to be a subjective question, it is, in actual parlance, a highly objective question. Most tax payers have come to understand and perhaps appreciate the fact that, corruption is an inevitable phenomenon and that, a ‘reasonable’ corrupt officer is a lesser evil as the ‘payments’ to him would be justified in terms of the ‘benefits’ or’ advantages’ that such an officer would have allowed to the assessee.
I have also seen that, these days, most honest assessees seem to prefer to ‘buy peace’ rather than, take a litigating stand, even when it comes to even claiming the legitimate benefits.After all, taking a stand against corruption might be morally right but might be commercially very wrong and might even end up ruining the assessee s business, in the light of the scenario that the appellant would have to cough up the entire demand, by way of cash and bank guarantee before filing the appeal. And, of course, the appeal could take several years to get heard and here again, one will have to grease the hands of the appropriate authorities, to get the appeal ‘heard’ at an earlier date.
It is a recent development that, one comes across corruption even amongst the direct recruits to the IRS, which is very unfortunate.
There is another angle to corruption in the tax bureaucracy, which comes in the form of intellectual dishonesty. The system has become so rotten that, even a honest officer who passes a favourable order to the assessee or the appellant, especially in respect of issues involving large amounts of tax, is often regarded as corrupt and for fear of being branded as corrupt, even good and upright officers with an excellent knowledge of the legal provisions, often end up passing orders completely rejecting the genuine claims of the assesses/appellants. The assesse /appellant is often left wondering if he would have been better off with a corrupt officer, who, in the least, would have, at least agreed, to some of his genuine and legally sustainable demands. In a state like Karnataka, where I live, the honest assessees go through a nightmare during the month of March. Large demands are confirmed to meet tax collection targets and the assessees are left with no choice but to strike deals with the Departmental Officers.
As between the central direct and indirect tax administration, my view is that, it is far easier to handle the indirect tax administration related issues as contrasted to the direct tax administration. At least, in terms of the indirect taxes, the appellant is not required to pay up the taxes till his stay petition is disposed of, by the Tribunals. This is not so, in the case of direct taxes like income tax, where the assesse/appellant is virtually at the mercy of the ‘Assessing Officer’, as the tax becomes payable on the passing of the assessment/re-assessment order in the absence of a stay.
The Government has indeed taken some steps to reducing corruption, by going in for electronic filing of the returns and the direct credit of the refunds to the assessees’ bank accounts. This, one must say, has gone some way in reducing corruption in income tax related administration. But, there is no denying the fact that the Government is the largest contributor to tax related corruption, by having tax related provisions that enable corrupt officers to bend the law to harass the tax payers Has corruption in tax administration ‘helped’ the tax professionals? Yes, in my view.
Gone are the days when a tax professional was respected for his knowledge of the statutory provisions and case laws. These days, it is the professional who can ‘fix’ up things in the Department who can survive and grow. Even, the tax payers seem to want ‘go getting’ professionals who can ‘handle’ things in the Department. In today’s world, the ‘manage’ment skills are much more in demand, as contrasted to knowledge related skills, which used to be the pre-requisite for a tax professional till about 10 to 15 years back. By and large, tax professionals seem to be happy with the way, things are, for reasons that are obvious. Old fashioned guys (like me) are completely out of sync with the new ‘system’ and are no longer in demand, Sir.
Though many of us, as tax professionals, talk of how the tax administration is so complex, etc….heart of hearts….. we know that, a simple and clean tax administration system would drive most of the tax professionals out of business. In fact, this logic is more applicable to the tax administering bureaucracy which also knows, that, a simple tax system is definitely not in its ‘interest’. This is the reason perhaps that, in the name of and under the garb of ‘simplification’, the law and its administration is becoming more and more ‘complex’, aiding and abetting corruption in tax administration.
Cynical that I have always unfortunately been…. do I have some positive suggestions to the Governments at bringing down corruption in tax administration…. Here are some of them..
• Increase e-governance with a zeal, in tax administration. Look at how things have greatly improved in the Income tax Department. From a situation refund orders could not be obtained without a bribe, we have now progressed to a situation where, one is able to refunds in an absolutely seamless manner, and more importantly, in time.
• Remove all discretionary powers vested with the Departmental officers, in terms of levy of penalties. Any statutory provision that says that the Department can levy a penalty of up to 200% of the tax ‘sought to be evaded’ is an open invitation to corruption. Have reasonable penalties and make their levy, mandatory, once it is proved that tax has been evaded. Under the Karnataka VAT law, we have a mandatory penalty of 10% of the short paid. Once, the assessee knows that he is liable for a mandatory penalty, there are lesser chances of his meddling around.
• Significantly cut down on the manpower deployed on Enforcement, Anti-Evasion, Preventive, Audit, Intelligence and other similar set ups. In a country where more than 90% of the tax is collected on a voluntary basis, there is no need for such huge set ups, which is a clear wastage of public money. These Departments are the breeding ground for corruption.
• Make the statutory provisions simple, understandable and practicable. Use the intelligent and honest brains in the Tax Departments to educate the officials on the tax provisions. Currently, there is a huge gap between the senior officers and the junior officers, in terms of their understanding of the tax provisions. Lack of understanding leads to corruption.
• Totally eliminate powers to arrest, while, the powers to prosecute can be retained, to be deployed in justifiable cases. It is a well known fact that these provisions are used by many Departmental officers to suit their personal agenda.
• Make the appellate process, independent of the adjudication process, in respect of the taxes administered by the States. Currently, the appellate Commissioners are an extension of the Department, in so far as VAT and other levies are concerned. Further, make the appellate process, in respect of the State levies, similar to that which exists in respect of the central indirect taxes. Any law which requires an appellant to deposit 50% of the demand in cash and the balance by way of a bank guarantee, is a mockery, in itself and encourages corruption.
• Bring in time limits, for disposal of cases, at the adjudication and appellate forums. This will go a long way in minimizing corruption in the tax departments.
• Last, but not the least, the Government should go all out to encourage honest tax officers. Today’s tragedy is that, while the dis-honest officers far outnumber their honest counterparts, it is a fact that, the honest officers are subjected to all kinds of internal and external pressures and due to these, many a honest officer is forced to turn dishonest.
• Bring in a unified legislation for GST, incorporating the most appropriate provisions found in the central and state laws. This will go a long way in minimizing corruption in the state tax administration.
Any suggestions for my fellow tax practitioners…. Well……I neither have the age nor the experience to get into an advisory or suggestive mode. But, I do feel that, tax practitioners can play a positive role in managing corruption. It is an open secret that, most of the tax evasion that happens today, is facilitated by some of the most brilliants tax brains of the country. I wouldn’t say, tax practitioners abet evasion. But, they can play a more positive role in clearly advising their clients that evading taxes, wouldn’t help. Tax Practitioners might have to draw a clear line between tax evasion and tax planning and restrict themselves, to the latter.
I’ve seen many tax practitioners encouraging their clients, to get into the litigation mode. Tax Practitioners should advise their clients to comply with the laws and when tax compliance does not work, then, litigation might be the only way out. Corruption in tax administration can be minimized, if assessees follow the law whenever there is confusion and tax professionals can play a positive role in this direction.
Before concluding…
It is a sad fact that, corruption in tax administration affects the honest taxpayer, much more, than the dishonest taxpayer. The former, by refusing to ‘grease’ the palms of the tax official, runs the risk of ruining his business at the hands of an ‘unsatisfied’ tax official. On the other hand, a dishonest taxpayer can have the luxury of entering into a ‘commercial proposition’ with the tax official and have, what is popularly known in the corporate world as a ‘win-win’ situation and perhaps, justify the ‘outgo’ vis-à-vis the ‘savings’ that he would have got from the officials concerned. In fact, the current system is driving even the honest tax payer to become dishonest.
A common legislation under GST should go a long way in minimizing corruption that is widely prevalent in the administration of the state commercial laws. But, it remains to be seen if the State Governments would be willing to give up on the currently existing obnoxious provisions which promote discretion and consequently, corruption.
I must reiterate, at the cost of repetition, that corruption in the central tax administration is far more ‘manageable’ as contrasted to the utterly despicable situation that prevails in respect of VAT and other taxes levied by the State Governments.In so far as the corruption that prevails in the State Tax Departments is concerned, even God would seem to have given up hope.