Retrospective and large tax and non-tax demands are a widely discussed ease of doing business concern in the Indian context. There are recurrent examples of such demands by taxation authorities and other government entities.
Consider this news report about hikes in lease amounts on two major properties in central Delhi.
The union government has revised the annual ground rent for land leased to several prominent five-star hotels in New Delhi — from thousands or lakhs of rupees a year to crores each — leading to at least two such hotels, The Imperial and The Claridges, to challenge the move in the Delhi High Court… The Land and Development Office (L&DO) under the Union Ministry of Housing and Urban Affairs in March this year issued demand notices for Rs 177.29 crore for The Imperial and Rs 69.37 crore for Claridges as revised ground rent from 2002 and 2006, respectively, until now. This, the L&DO said, was calculated with the rate of Rs 8.13 crore for The Imperial and Rs 3.85 crore per year for Claridges, an increase from the current rate of Rs 10,716 and Rs 8.53 lakh, respectively. The rates were 5% of the property value of the plots in 2002 and 2006, respectively, the L&DO notices said…
The 7.938 acre-plot on Janpath Lane on which The Imperial is situated was given on perpetual lease by the British to S B S Ranjit Singh with effect from April 8, 1932, with the lease dated July 9, 1937. The annual ground rent was to be revised after 30 years… In the case of Claridges, the 2.94 acre-plot of land on Aurangzeb Road, now known as Dr A P J Abdul Kalam Road, was given to Lala Jugal Kishore on November 12, 1936 on perpetual lease.
Several factors might have gone into the decision taken by the L&DO. I can think of some of the following factors commonly observed in such cases.
For a start, the current lease rents are so evidently tiny compared to the annual profits made by these commercial properties much less their value. Second, the L&DO’s actions would have been triggered by some deviations from the conditions in the perpetual lease agreements, and/or infirmities in the lease transfers, and/or lapses in the lease renewals and rent increases. Third, in most such cases, the parties indulge in bad-faith stone-walling and vexatious litigations to delay proceedings or indulge in fraud. Four, it’s also most likely that the leaseholders engaged in some irregular or even illegal action(s) (originating in the deviations, infirmities and lapses mentioned above) that were brought on record at some time and the process of addressing it/them had been initiated (perhaps years back). The final demand would have been the culmination of this administrative process.
Finally, in most such cases there’s also the issue of some enthusiastic official pursuing the case zealously and expediting its disposal. Most often, this zealousness is accompanied by some or all of the four other factors.
The newspaper report does not give any clue about which of these are relevant to the two commercial properties.
From a reading of just the newspaper report, there are at least three problematic issues here.
1. The sheer magnitude of the increase in demand is staggering - 8,12,900% for The Imperial, and 4413% for Claridges. Such astronomical increases for any statutory or commercial fees are hard to justify.
2. The retrospective application of these levies is equally problematic.
3. The finalisation of any such demands without following an elaborate process of consultations and a protocol without the permission of the next higher authority or the government itself is deeply disturbing.
Such egregious demands are common among direct and indirect tax departments. It works something like this. One income stream of suspected tax evasion is detected, and tax is levied on that stream for the assessment year. The assessee is then retrospectively examined and tax demand is raised as late as law permits. This tax demand often ends up being in multiples of the assessee’s revenues or income itself. Worse still, similar suspected evasions across all other similarly placed assessees are identified and demand is raised. Finally, seeing one tax official do this, others join the fray and raise demands against their assessees. A massive tax bill vests on the assessment ledger of the tax department. Some assessees challenge the tax demand in courts. The whole demand gets locked up in litigation for years, even decades.
It would be useful to analyse the history of such demand recoveries across government agencies - local governments, tax authorities, and so on. I suspect that a historical analysis of the actual realisations of such tax demands raised by agencies like the CBIC and CBDT in India will reveal negligible realisations.
It’s therefore important that we address this problem by promulgating certain principles for the raising of demands by officials.
Instead of pussy footing around the problem and issuing vague guidances that only add to the confusion on interpretation, it’s important to address the problem head-on and issue clear and direct guidance on this problem. It might be required to have omnibus principles like prohibitions on raising tax and non-tax revenue demands which lead to an increase of more than X% in the demand, or which are Y% of the total revenues (or Z% of the profits), or after N years of the assessment becoming due. The values of course will vary across sectors and departments (tax to local governments). These explicitly articulated principles should become integral to any agency that collects tax and non-tax revenues.
Given the aversion in the executive to assume the administrative risk with decisions involving likely revenue loss (and large amounts at that), it’ll be necessary to capture these as legislative statutes.
This will surely be exploited by unscrupulous businesses and individuals in collusion with officials and politicians. Therefore there should be a mechanism of escalations for demands above these values. The escalated authorities considering such demands should be mandated to apply the principles of ability to pay and the business risks posed by them. In cases of newly discovered assessment lines, the assessment should be levied only with the approval of the highest competent authority (and not any delegated authority).
This should be complemented with the certainty of administrative actions against errant officials whose omissions and commissions led to the revenue leakages that necessitated the retrospective assessments.
As an illustration of translating this intent to action, I have blogged here outlining some actionable principles in the context of GST administration.
No comments:
Post a Comment