Business Standard

A K Bhattacharya: The rise of the taxman

Tax depts in finance ministry continue to enjoy a new-found power, aided by the support of the finance minister and his office

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An old saying popular with bureaucrats is that a state’s law and order situation goes to the dogs when the chief minister starts directly talking to his director general of police. The implication is that if the chief minister is in close contact with the head of the state’s law enforcement agency, then the latter is likely to go berserk with the heady sense of empowerment arising out of his proximity with the chief minister. In consequence, he is likely to become an unmanageable centre of power, bypassing the system, the various layers of administration and even procedures.

The other danger is that by having the ear of the chief minister, the director general of police is likely to present a much more exaggerated version of the law and order situation, so that his control over the levers of power remains intact, and indeed gets tighter. Ask any bureaucrat and he will tell you that in nine out of 10 cases, a chief minister having direct liaison with his state police chief pays the price for having messed up with the system and undermining the law and order situation.

Looking at North Block, headquarters of the finance ministry, senior bureaucrats with some understanding of administration are likely to wonder if the system has been exposed to a similar risk as a result of the increased frequency of direct dealings between the office of the finance minister and the two tax departments — the Central Board of Direct Taxes and the Central Board of Excise and Customs. The two departments are no doubt entrusted with the task of undertaking key taxation reforms, and the finance minister or his office is likely to take keen interest in their functioning. But it is not the taxation reforms agenda that has brought the tax departments closer and in direct contact with the finance minister; it is the hope that aggressive and active tax departments can bail out a government that has been under stress to raise more revenue and reduce its fiscal deficit.

This assessment could well be dismissed as a reflection of the traditional rivalry between officers belonging to the Indian Administrative Service (IAS) and those from the (IRS). Traditionally, officers have kept a tight control over all departments in almost every ministry including those where professionals at the helm could play a more effective role. For instance, IRS officers run the two tax departments in the finance ministry, but they report to the revenue secretary, who is invariably from the IAS. So, when the tax departments get close to the finance minister or his office, the IAS officers may get a little jealous and start wondering if such close connections are healthy.

But the problem the is struggling with is deeper than merely what a rivalry between two services could have caused. It is a problem of slow revenue collections growth, made worse by lack of tax reforms and a slowing economy. The pressure on the government to spend more, on various entitlement and poverty alleviation schemes, is on the rise, but revenues have stopped growing the way they did during the first four years of the United Progressive Alliance’s rule. Old-timers recall that Palaniappan Chidambaram, finance minister at that time, ignored the advice that veteran cricketers are used to offering to young batsmen in form. “Score as many runs as you can when you are in form; once you are out of form, you will regret for having missed the opportunity,” they would say.

Similarly, when the Indian economy was growing at over eight to nine per cent annually and tax revenues were naturally buoyant, the government failed to capitalise on that “form” by quickly implementing the pending tax reforms, so that the growth momentum could be maintained for a longer period. The two tax departments loved that situation. With revenues flowing in without much effort, they also became the darling of the finance minister and his office. The close and direct links between the tax departments and the finance minister and his office were established during that phase. That relationship got stronger after Mr Chidambaram moved to the home ministry at the other end of North Block and Pranab Mukherjee took charge.

However, with revenue buoyancy gone and the demand for meeting a higher revenue target becoming an imperative, the tax departments got innovative and aggressive on mobilising tax collections. The focus was relatively less on reforms, but more on how to mop up more revenue by using every rule in the tax manual. In the process, retrospective amendments became a popular tool. Those who argue that retrospective amendments have been taking place for quite some time forget that there is a difference between a retrospective change on procedures and one that is substantive. What the country has seen in the last few years is a rise in the incidence of substantive retrospective amendments, which is what has caused widespread concern.

The finance minister announced several amendments to his tax proposals while moving the in the Lok Sabha. The onus of proving tax avoidance has been shifted and the general anti-avoidance rules, or GAAR, have also been postponed. The draconian powers that the customs officials had given themselves have also been amended. But these are only cosmetic changes. The tax departments in the finance ministry continue to enjoy a new-found power, aided by the support of the finance minister and his office. The mindset is yet to change. Until that happens, India Inc’s confidence in the tax system will remain low and investments will suffer.

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