Judging effectiveness of search operations

“Search and seizure cannot be a way of life for a civilized society. It should be used in rarest or rare cases, when it is a must and where alternative measures of investigations have failed.”

— Dr Vijay Kelkar Committee Report, 2002 .

The recommendations of Kelkar task force (KTF) seem to be a far memory in our minds. Survey & Search operations (“SOPs”) are the most potent tools used by tax administration to unearth undisclosed income & assets. Whereas, survey is a milder form of proceedings, a search operation assumes seriousness and is often invoked in circumstances where there is credible evidence of tax evasion. Evidence collected during SOPs often becomes the bedrock for initiating proceedings for assessment including prosecution under the Income Tax Act (“IT Act”). Hence, the effectiveness of the SOPs as a tool of delivering justice or for taxing undisclosed income comes under sharper public scrutiny.

 

Interestingly, the KTF observed that search operations accounted for only 1 percent of the tax collections and underlined its ineffectiveness. Despite sweeping powers (to the tax administration for conducting the search) to enter premises, break open lockers, detain people, seize assets, record statements etc., the effectiveness of the system as a tool for dealing with errant tax payers is questionable. This has been due to ineffectiveness of assessment procedure pursuant to search or survey, lack of adequate training, inherently vulnerable revenue administration and the quality of legal defense to perpetrators.

REFORMING SURVEY & SEARCH OPERATIONS
As fallout of the KTF recommendations, the Government enacted reforms by discontinuing the concept of ‘block assessment’, which provided for an assessment of undisclosed income for block period of 6 years at 60 % tax rate. Assessment orders passed under the block assessment regime were either being struck down or significantly diluted by the appellate authorities. The amended law ushered taxability of such undisclosed income at ordinary rate of tax with power to reopen assessments for 6 years. Also, the focal point under the new regime is on the ‘total income’ concept rather than undisclosed income. Further, adequate safeguards for granting authorization of such operations besides a comforting message by the Finance Minister to exercise search power sparingly went a long way in shoring up confidence and trust level between the government and tax payers.

Recent drive for gearing up search operations and generally raising surveys have raised eyebrows and left corporates wondering whether there is any back tracking on reforms & commitments or is this a knee jerk reaction on part of the administration to shore up tax collections by building fear in minds of the tax payers.

No data is available to gauge the effectiveness of survey and search operations in enhancing tax collection or improving compliance .As a starting point and measure of transparency, it would be useful if the government releases such data pertaining to increase in tax collections under the new search scheme. The information should cover actual tax collection as against the demand which would suggest gaps between them. This will bring to light the degree of success as appellate authorities tend to reverse material portion of demand raised by the lower authorities as a result of assessments pursuant to such operations. In fact, the Central Board of Direct Taxes (“CBDT”) last fortnight releasing its collection strategies for financial year 2011-12 highlighted need for speedy disposal of tax disputes where the Courts or Tribunals have stayed the collection of taxes.

While there can be no doubt that SOPs are intrusive procedures which tend to invade privacy of a taxpayer, the law provides checks and balances for sanctioning of SOPs to prevent misuse of wide administrative discretion. The effectiveness of safeguards however will come under question where SOPs are sanctioned in a routine manner.

CORPORATE GOVERNANCE AND STIGMA OF SEARCH
The modus operandi adopted during the search or survey operations is often criticized to be coercive. Given the media attention, SOPs are widely covered and reported. In an era of emphasis on corporate governance, combined with greater accountability towards various stakeholders such employees, investors, business partners, clients etc, SOPs are frowned upon as a slur on corporate image and performance.

The Citizens’ charter of the Government contains rights of the person being searched such as the right of insisting on identification of the search party, right to have a witness, right to medical attention, right to timely meal, right to be entitled for copies of the seized records etc. However, there is nothing that entitles the taxpayer to insist on measures to clear its name, if incriminating evidence is not found. At times, a routine survey operation gets reported as search operation! Shouldn’t the Citizens’ charter include right to confidentiality?

Keeping pace with tax reforms, this is an opportune moment to reform the procedures to build greater confidence of trust with the business community, who contribute most to the exchequer. Here are few prescriptions:  

• Whistle blowers providing vital information are protected and adequately rewarded;
• The Citizens’ charter should insist that the Revenue publishes the result of a verdict in favor of the taxpayer to vindicate its position; 
• Given the stigmatic nature of operations, accelerated system of redressal should be followed. Measures such as direct appeal to the Tribunal should be considered; 
• Penalty and prosecution to be more stringently followed to serve as a deterrent to erring taxpayers; 
• Appropriate training and counseling of the search and survey officials to avoid highhandedness and the focus to stay on recovering incriminating evidence rather than extraction of statements, unwarranted detention etc; 
  Concerted efforts to maintain the secrecy of operation and any interaction with the media should be discouraged and; 
• An ombudsmen to address grievances arising out of survey or search to ensure accountability of administration

The law makers will have to make a fresh assessment of the recent developments and consider sanction of such operations with greater sensitivity keeping in mind interests of compliant tax payers, promoters and investors, particularly for listed companies. A consultative dialogue with the businesses could put in place a regime on survey and search to meet the intended purpose.

(The author is Chairman of BMR Advisors and was assisted by Sriram Seshadri. Views are entirely personal).