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Income Tax in dire need of reform


obstacles in the functioning of the IT department and problems faced by its officers are rarely a subject of discussion among the general public because of the invasive regulatory role that it plays.
P SATYA PRASANTH | New Delhi, April 27, 2013 16:06
Tags : Corruption | IAS | IES | Indian civil services | Income Tax |

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 appropriately, for  the expenses of the state. No issue arouses such strong denunciation as 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, G. Madhavan Nair, former Chairman, ISRO, remarked that the people in India are afraid of the income tax (IT) department. Vinod Rai, celebrated Comptroller and Auditor General of India (CAG), reacted in his keynote address, “people are not afraid but very afraid of the income tax department”.

In public perception, the IT 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. IT is also identified with raids, which is its most visible enforcement activity and also the most dreaded. So one can appreciate the thankless job that our officers have to do.

Income tax is a key source of funds that any government uses to finance 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 any government is the collection of tax for development, security and governance. The IT department in India is responsible for policy formulation and planning for direct taxes and for administering direct tax laws like the Income-tax Act, Wealth-tax Act and various Finance Acts passed during every budget session. Today it is the biggest revenue mobiliser for the government.

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 percent in 1990-91 to 56.00 percent in 2011-12.  The direct taxes to GDP ratio has grown from 2.35 percent in 1991-92 to over 6 percent in 2011-12. In the last decade in India, for every 1 percent growth in GDP, there was a corresponding rise of nearly 1.9 percent in direct tax collections.

The obstacles in functioning of the IT 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 its  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 IT department and its employees to identify the bottlenecks and to suggest suitable remedial measures.

Faulty Organizational Structure
It is only apt to start with the organizational structure of IT in India. It 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 senior posts in the Department are manned by the officers belonging to the Indian Revenue Service (IRS), which is a premier civil service of India. 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, IRS officers raise up to the level of Chief Commissioner of Income Tax, with some fortunate ones becoming Chairman/Member of CBDT.

The Revenue Secretary who heads the Department of the Revenue (DoR) 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 govern the Customs and Central Excise Department, function under the administrative control of the DoR. Till recently both these Boards did not even have independent financial powers. Before the Sixth Central Pay Commission, chairmen and members of both the 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 DoR and through it on the Revenue Secretary.

Even regular and routine transfers of the Commissioners of Income Tax and above are routed through and approved only by 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 - 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 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 IAS, IPS, IFS and IRS officers are recruited through the same examination. These days even some top rankers in the Civil Services examination are choosing IRS over IAS and IPS. Women candidates, certainly,  prefer IRS over IAS and IPS because of the little political interference, stable postings and offices in metros. In other words, 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 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 restructuring was recommended both by the Wanchoo Committee (1971) and the Raja Chelliah Committee (1991).

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 portfolio and not to an IAS officer who doesn’t know anything about their functioning.

This is all the more imperative as the IRS forms the largest Group ‘A’ Central Service with around 4,192 officers, second only to the IAS in strength.

Even bureaucratic jobs are for specialists these days. The IFS is headed by the Foreign Secretary who invariably is an IFS officer and diplomats will not allow an IAS officer to usurp their posts and dictate terms to them.

Likewise, the Indian Postal Service (IPoS) is headed by 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.

Therefore there is no logic as to why the highly specialist IRS should function under a generalist IAS, who in most cases doesn’t even know how to file his/her own income tax return.

Acute Shortage of Manpower
The biggest impediment to the proper functioning of the IT department is the severe shortage of officers and staff. Its sanctioned strength has remained at 57,793 since 2001. But over the last decade, workload has grown many folds. The number of taxpayers has gone up from 2.5 crore in 2000 to around 3.5 crore by 2012. This represents just 2.77 percent of the population. There is a considerable scope for further widening the tax base because government revenues would be enhanced while at the same time the burden on each taxpayer can be reduced. The number of assessing officers has not risen since 2001. Because of the increase in workload the percentage of cases selected for scrutiny has decreased from 8.00 percent in 1997-98 to over 1.25 percent 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 percent)  is too low. If more than 98 percent 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 percent 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 is examined closely, 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 others 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 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 globalisation 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 priority attention. 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 five years. However, over the last decade, there have been only four cadre reviews of IRS against eight required. The last cadre review was in 2001. The department is in the process of taking up another cadre review now. A Cadre Restructuring Committee (CRC) appointed in 2008, submitted its report in 2009. Since then it has been doing the rounds across the corridors of the Central Secretariat passing through various stages/levels like the Department of Expenditure, DoR, 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 to know the real reason behind this unnecessary and forced delay. The role of the IT 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. The actual decision is taken by the IAS officers who head and man all the different stages/levels in the central government.

The delay in the cadre restructuring in the IT department is a conspiracy by a coterie of IAS officers spurred by their overwhelming ambition to continue untrammeled their game of self-aggrandisement. The IT 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 this legitimate demand of 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 IT department did not have any posts in the apex scale or the HAG+ scale.Hence, the Sixth Central Pay Commission in its report observed “Despite the large cadre strength, the service does not have a single secretary-level post encadred in the service. This is clearly anomalous 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 IRS have more secretary-level posts, the government will have to seriously examine the issue and resolve the legitimate aspirations of the service.

Now compare the IRS strength to other central civil services. The IAS with a cadre strength of 4,377 officers currently has officers occupying around 170 posts in the apex scale (Union Secretary ) in various Central and state governments. The IFS with a cadre strength of 618 officers has its officers occupying around 26 posts in the apex scale at various locations around the world. The IPS with a cadre strength of 3,475 has its officers occupying around 50 posts in the apex scale. The IA&AS with a cadre strength of 694 has 9, the IPoS with cadre strength of 443 has 1 post in the apex scale and six 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 no posts in the apex and the HAG+ scales.

After, the Sixth Central Pay Commission recommendations, the posts of one chairman and six members of the CBDT have been upgraded to apex scale but no posts in the HAG+scale have been created. All Chief Commissioners of IT 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 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 realisation will dawn upon the government of India - read IAS - and the current cadre restructuring proposals of the IT department are accepted immediately and in toto.

Now the situation is such that even the creation of additional posts will not help. Subsequent recruitment has to take place on a war footing in a phased manner. Otherwise the organisation gets an inverted pyramid kind of structure with a number of senior posts and a very small number of posts which really matter like Deputy Commissioners, Assistant Commissioners, Income Tax Officers (ITOs), Inspectors and Tax Assistants.

Even today, 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 percent. Recruitment at the level of Assistant Commissioners is done by the UPSC through the Civil Services examination. The number of vacancies for IRS has already been increased to 150 every year. So, there is no problem at this level. The recruitment at the levels of Inspectors and Tax Assistants is done by the Staff Selection Commission (SSC). The SSC has become too big and unwieldy these days hence there is delay in recruitment for almost all central government departments. So, a separate Recruitment Board needs to be established for the IT department for hirings at the levels of Inspector and Tax Assistants on the lines of the Railway Recruitment Boards (RRBs), Agricultural Scientists Recruitment Board (ASRB) and others. In fact separate recruitment boards have to be established for all large departments in the government for timely recruitment and smooth functioning.

Poor Infrastructure and Mobility
Poor infrastructure 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 IT department are simply inadequate. The department has resorted to outsourcing of some of its work because of poor infrastructure. But outsourcing is not the answer in sensitive areas like enforcement and dispute resolution. Sovereign functions of the country cannot be outsourced. Each Assessing Officer is supposed to scrutinise 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 they function mostly from their offices. There are instances where IRS officers have been threatened, coaxed into submission and even kidnapped.

Only about one or two surveys are carried out by each Assessing Officer in a year. This means that he or she 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. Imagine the amount of revenue the government would collect if most taxpayers are surveyed. An atmosphere of deterrence has to be created among tax evaders.

Right now, all the department does is a postmortem. Prevention is definitely better than cure. There is lack of willpower at the highest level both in the IT 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) was 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 Commissionaires have to be more proactive and aggressive when it comes to development of infrastructure. Beginning 2008, operational vehicles have been provided at the rate of two vehicles per range. A range office usually comprises one Additional Commissioner, three officers of the rank of Assistant or Deputy Commissioner, three ITOs, 10 to 12 Inspectors, 2 to 3 Office Superintendents, 10 to 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 available as they are used for protocol work. What is more appalling and disgusting is 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 percent Incentive Scheme for the Income Tax Department wherein 1 percent 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.

The targets fixed are so steep that the actual collections will always be lesser. For the information of readers, it is to be clarified that revenue collection targets are fixed by politicians and IAS officers and not by the IT department. This also explains the reason for the steep and unpractical revenue targets.

Operational vehicles were provided for the first time under this 1 percent incentive scheme. Provision of vehicles is an operational requirement; it is not an incentive but a requirement, not a luxury but a necessity. At least one vehicle should be provided for the office of the ITO and above. This will increase the surveys conducted, field inquiry 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 ‘office expenses’ and definitely not under the 1 percent Incentive Scheme. The hiring and running of vehicles 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 computerisation drive 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.

Direct Recruits versus Promotees
The friction between Direct Recruits (DRs) and Promotees (PRs) in the Income Tax Department is as old as the department itself. It is a case of  ‘we against us’, hardly the ideal way for an organization to function.

This friction is visible at every level in the department; it is there between the DR and PR Tax Assistants,  between the DR and PR Inspectors as well as other officers. This has led to the formation of three different employee associations in the Department – Indian Revenue Service Association (IRSA), Income Tax Gazetted Officers Association (ITGOA) and Income Tax Employees Federation (ITEF). All the direct recruit IRS officers recruited through the UPSC form the members of IRSA. The promoted IRS officers and all the ITOs are the members of ITGOA. All other employees from Inspector and below belong to ITEF. There is frequent friction between these three associations. More often than not, the animosity between them is because of the delay in promotions, faulty transfers and postings, shortage of required resources and the flawed organizational setup. There is also a historical reason. Administration of income tax in India began as early as 1860. In 1924, the Central Board of Revenue was constituted for administration of the Income Tax Act, which was enacted in 1922. Initially officers from the erstwhile ICS manned top posts. The Income Tax Service was established in 1944, which subsequently came to be known as the Indian Revenue Service (IRS) from 1953.

Direct recruitment to Income Tax Class I service commenced in 1944 with a view to infuse young blood and improve tax administration. Before this, persons joined the department in junior positions like clerks or as inspectors, got promoted to higher posts over the years. In the earlier period the quota of direct recruitment was 75 percent. However, since the number of officers in the lower ranks was large and sufficient number of direct recruits was not available, more officers were inducted through promotions and the officers so promoted were also given a weightage of three years of service in Class I with retrospective effect. Consequently the promoted officers became senior to direct recruits joining in a particular year and the quota rule was also violated through more promotions thereby causing resentment among direct recruits, which led to fierce litigations.

A promoted officer even became the first Chairman of the CBDT in 1965. This trend continued for a long time. Thereafter direct recruit ex-army officers with back dated seniority rose to this position. It was only around 1976-77 that other direct recruits started adorning this chair. The prolonged litigation  came to an end in 1974 when the Supreme Court of India laid down the principle of roaster system for recruitment and promotion in the ratio of 1:1 and abolished the weightage rule. This 1:1 ratio was once again violated during the 2001 cadre restructuring of the department as around 1,000 ITOs were given adhoc promotion as assistant commissioners and were conferred IRS to fill the newly-created and vacant posts at the level of assistant commissioners. This was contested in various courts by direct recruits and the case is still pending in the Supreme Court. Direct recruit IRS officers won’t allow the promoted IRS officers to become members of the IRSA. Thus promoted IRS officers continue to remain members of the ITGOA even after being conferred IRS cadre and don’t hesitate in participating in strikes and hartals conducted by ITGOA and ITEF.

The faulty organizational setup which further aggravates this animosity is that the ITOs (with pay scale of Rs 9,300–34,800 and grade pay of Rs 4,800) are not subordinate to the Assistant Commissioners (with pay scale of Rs 15,600-39,100 and grade pay of Rs 5,400) or the Deputy Commissioners (with pay scale of Rs 15,600-39,100 and grade pay of Rs 6,600). An ITO reports directly to an Additional Commissioner or Joint Commissioner as does an Assistant Commissioner or a Deputy Commissioner. This system is unique to the IT department. Which is why an ITO considers himself to be equal to an Assistant Commissioner or a Deputy Commissioner even though he/she is actually a subordinate officer by virtue of his/her pay and status. The fact that the same Assistant Commissioner or Deputy Commissioner who is his colleague may become his boss in the future won’t deter an ITO for now as all three are designated Assessing Officers.

This condition can be explained by taking IPS as example. Imagine a situation where the DSP, ASP and SP report to the same DIG and the APARs of all the three – DSP, ASP and SP - are written by the DIG. There will be no law and order in a district in such a situation as the DSP and ASP are not subordinate to SP and hence will not listen to him. This is exactly the situation in the IT department. This system has to be immediately rectified to restore order. The post of the ‘Income Tax Officer (ITO)’ has to be re-designated as ‘Senior Inspector’ or ‘Deputy Assistant Commissioner’ or ‘Vice Assistant Commissioner’ and made subordinate to an Assistant Commissioner or Deputy Commissioner. This change in nomenclature also makes sense as all officers of the IT department are generally referred to as ‘Income Tax Officers’ by the general public, which they actually are. The IRS Recruitment Rules have to be immediately amended to rectify all the flaws in the organizational setup and the sooner it is done, the better it is.

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 collected by the tax authorities, there is hardly any meaningful analysis of such data for lack of personnel. 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 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 government hierarchy. Affairs of the state cannot be managed without according due importance to revenue services.  When Chanakya aphorizes in the Arthashastra, ‘kosha moola dandah’, he makes the important point that treasury and its flows are the sources of a government’s might. It’s 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. 

(The writer is an Indian Revenue Service (IRS) officer currently posted as Assistant Director of Income Tax (Investigation) at Hyderabad. The views expressed here are those of the writer and not of the government.)

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Posted By: Piyush | Pune | September 20th 2013 | 20:09
Dear Sir, what is your expert opinion on a system wherein we reduce the income tax gradually to zero and increase taxes on goods and services at the production level to cover up for the revenue. Since consumtion by even the tax evaders would always be there, so revenue received would be high and there would be virtually no black money in system

Issue Dated: Feb 5, 2017