What Kind of Tax Risks Affect Tax Authorities ? How do they deal with it?
By Saifuddin Takulla
If you thought tax risks are faced only by tax payers, then you must think again. I can say from experience that even the Governments, revenue authorities and tax officials face tax risks all the time. From tax evaders. However, the difference is, tax officers have the might of the law with all the enabling powers to compel compliance. But still, risks exist.
For instance, Cenvat credit is allowed to manufacturers and service providers on capital goods, inputs and input services. The quantum of credit availed at the national level is significant. There are risks involved here. The risks are mainly because there is no counter-check of the credit availed with the tax authorities at the supplier’s end to confirm if tax was actually paid against invoices on which credit is taken. It should be noted that there is no IT system to do this internal verification as it is done in direct taxes to confirm TDS payments. So credit is allowed against lakhs of excise and service tax invoices and other prescribed documents but the check is only a physical one. That too it is done by the audit department much after the credit is availed. In most cases, it would be sample checks only and not of all documents.
Further, the fact there is only a single debit entry is made by the supplier at the end of the month/quarter against possibly innumerable invoices issued during the month/ quarter makes things more difficult to verify. For instance, earlier credit on cement was rare as it was generally not eligible for credit since it was not an input for the manufacture of the goods. This has changed now. So what is being suggested here is that to prevent fraudulent documents or credit, the actual payment should be cross-verified with the authorities at the supplier’s end. At least for the invoices which carry a higher credit amount.
The other point relating to tax risks the revenue faces is the huge number of cases which get dropped by APPELLATE AUTHORITY/ CESTAT/ COURTS. This indicates that the orders are flawed. If consistently wrong orders are passed, then this behaviour become questionable. Why does this happen? Whether it is negligence on the part of the officers who belong to Class I cadre who issue the Show Cause Notices. There must be greater accountability of particularly senior officers in Class I who issue notices. While delegating the work to subordinate officers, they should also apply their mind and ensure that the notices are correctly issued and no gaps are left for escape.
If notices issued are consistently dropped by higher authorities, then either the notice should not have been issued at all or the notices are wrongly issued with shortcomings. This may be because of over-delegation to subordinate officers who formulate the SCNs. Even if this is done, proper application of mind by the officer can ensure that the Department does not cut a sorry figure by losing so many cases.
Senior officers in Class I are expected to have a better and wider perspective and knowledge and this should be used when settling the draft notices pointing out flaws, guiding and coaching the subordinates. They are also expected to be aware of the legal precedents in similar cases to ensure loose ends in investigation or evidences etc. are properly included when making out cases against tax evaders. In fact there are some cases of even CLANDESTINE CLEARANCES which get dropped because of faulty SCNs, incorrect or incomplete investigations and inadequate evidences to support. Mostly this happen because it didn’t receive the right attention for the senior officers when issuing the notice.
There should be a clear accountability for the success or failure of the investigation and the outcome of the case. This should be fixed on the senior officer Class I officer who has jurisdiction. The accountability for the success rate of adjudication and appeals should be fixed and guidelines issued by the Board. This is not just for SCNs any issues which if dealt with properly by the right person has the potential to lead to a scams.
If these issues are high lighted and given wide coverage the functioning of Government Department will improve.