Claims of tax exemption on farm income have attracted the attention of the Comptroller and Auditor General of India (CAG), which has called for greater efforts to check tax evasion in this key area.
In an audit report of the revenue department tabled in Parliament on Tuesday, the government’s statutory auditor said claims of tax exemption on farm income have been allowed by the department based on “inadequate verification or incomplete documentation" in more than a fifth of the 6,778 cases it has looked into.
The CAG report also flagged the issue of abuse of tax exemption granted to charitable trusts and institutions which has resulted in assessees whose activities were not ‘charitable’ in nature getting the tax benefit. Abuse of tax relief given on agriculture income and on the earnings of charitable trusts have been two areas the income tax department has been battling for some time.
In May, the Central Board of Direct Taxes (CBDT) had proposed a new audit format requiring religious and charitable trusts to be more open about their affairs. It had also proposed new rules that require these institutions to make more detailed disclosures about their transactions.
The CAG report comes at a time the CBDT is finalizing a new direct tax code that seeks to make income tax law simpler and in sync with the global best practices. A task force drafting the code is expected to give its report by 16 August, CBDT said on Wednesday.
The CAG said that among the farm income exemption claims it looked into, exemption was granted in hundreds of cases where land records were not available or proof of farm income was not available in terms of ledger account or invoices. “As such, it was not possible to determine whether the system in place was robust enough to ensure that assessees were being allowed exemption for agricultural income, only after adequate examination in the process of assessment," said the CAG report. The statutory auditor also suggested that the tax department needs to re-examine all cases where exemption has been allowed as agricultural income above a certain threshold, say ₹10 lakh, to ensure that the tax benefit has been allowed only to eligible assessees, and is based on appropriate documents and their verification. The CAG has also flagged the rising number of pending appeals at various platforms, an issue the task force working on the direct tax code will address in its report.