Tax raids, and not just on Tapsee Pannu, are a bad idea

Finance minister Nirmala Sitharaman may well have a point when, in the context of the furore over tax raids on filmmaker Anurag Kashyap and actor Tapsee Pannu, she asked why there wasn’t a similar reaction when the two were raided in 2013. Apart from the issue of why any action by a BJP government has to be justified by whether or not the Congress did the same thing when it was in power, the real question – that the FM did not shed any light on – is what the outcome of the 2013 raids were; how much undeclared income was found and how much tax was paid on this? While there is no such data publicly available for individual cases, the CAG has done some analysis at the aggregate level; and even though the CAG says – in its 2020 performance audit of search and seizure – “search and seizure is a very powerful tool available to Income Tax Department to unearth any concealed income or valuables and to check the tendencies of tax evasion”, the data presented suggest the exact opposite is true. The data suggests search and seizure and survey – raids in popular parlance – serve little purpose and are best kept to the absolute minimum, if not abolished altogether; more so since, in any case, the taxman has a lot more data on individuals and companies from so many sources including, now, even GST transactions.

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Apart from the CAG’s performance audit of raids, the other report to look at is the one – also in 2020 – on direct tax collections. The second report points out that, in 2018-19, for instance, Rs 12.9 lakh crore of taxes were collected from individuals and corporations. Take the data in the report from FY15 to FY19 and, if you assume an average effective tax rate of 20%, it turns out the income shown by individuals and corporations in this period was Rs 253 lakh crore. Juxtapose this with the amount of income that the 50,877 raids claim to have unearthed during this period – this includes the amount the assessees are supposed to have admitted to during these operations – and it turns out that, between FY15 and FY19, just 0.5% was added to the income of assessees. Given the message that tax raids send out of the taxman being unfriendly, surely such a small increase in income levels is not worth the trouble? Indeed, the same CAG report points out that 82% of the total income and corporation tax is collected – 90% if you include, as you should, cesses and surcharges – by way of TDS or voluntary measures like advance tax and self-assessment tax.

Even so, if the taxman’s intervention, by way of regular assessments or through search and seizures, adds 10% to the income of individuals and corporations, this is a big amount. There are two issues here. One, as the CAG notes, of the Rs 12.3 lakh crore of tax dues in FY19 – primarily the result of assessees challenging tax orders – only a little over one percent is actually collectible; all of which makes you wonder what the point of most of the additional tax assessments is. In the case of raids, the CAG took a sample from the assessments that were completed after the raids between FY15 and FY18. It found that, for 84 groups where the raids had resulted in an addition of Rs 24,966 crore to their income, less than a fourth of this remained after the cases had been through just the CIT(A) and ITAT appeals processes. Some part of the very poor performance, as the CAG points out, is due to poor paper work by the taxman, but it is quite clear that tax raids serve a limited purpose – more so given the vast information sources already available to the taxman – when it comes to unearthing undisclosed income.