The ₹21.3 lakh crore tax demands that will elude the government

According to revenue secretary Sanjay Malhotra, this will lead to the closure of 1.1 crore pending demands amounting to ₹3,500 crore. This is a tiny fraction of the overall pending tax demands in the system.

As of March 2023, outstanding tax demands amounted to ₹21.3 lakh crore – equivalent to about 70% of the government’s 2024-25 revenue receipts – and much of this is unlikely to be recovered. This covers both direct taxes (income tax paid by individuals and companies) and indirect taxes (for example, on services provided).

Between March 2022 and March 2023, total taxes sought by the government from taxpayers surged from ₹15.8 lakh crore to ₹21.3 lakh crore— more than the combined increase over the four previous years. Corporate and income tax account for over 90% of such ‘raised but not realised’ taxes (the government’s term for tax demands that have been imposed but from which no actual revenue has come in).

A broad classification of this is ‘amounts under dispute’ and ‘amounts not under dispute’. The spike in 2022-23 was mainly driven by the latter, which accounted for 42% of outstanding demand in March 2023, up from 23% a year earlier. In this category, tax demands rose sharply across all lengths of pendency between March 2022 and March 2023.

Written off?

Interestingly, taxes under this ‘undisputed’ category, and with a duration of just one to two years, have risen by over ₹2 lakh crore within a year, with corporate tax alone accounting for over 50% of it. In other words, between March 2022 and March 2023, the government decided that an extra ₹1.11 lakh crore of corporate tax demands was, in effect, unrecoverable. The main reasons for tax outstanding under this category, according to the government, “are no assets or inadequate assets for recovery, assessees are not traceable, etc."

It is not known which companies or which sectors contributed most to this deficit. Regardless, much of it will never be recovered. In its audit report relating to direct taxes for 2020-21, the government’s auditor, the Comptroller and Auditor General (CAG), noted that the income tax department classified more than 98% of “uncollected" demand (including amount disputed as well) as “difficult to recover".

Disputed taxes

A major challenge for the government is that corporate and individual taxes imposed but disputed have been rising, with a big bump in such disputes in recent years. About 60% of corporate tax disputes relate to cases less than two years old, with another third of cases arising between two and five years prior. Collectively, well over half the amount of taxes under dispute is under two years old.

Cases under dispute are locked in various legal forums. In the case of individuals, this could pertain to how a certain head of income is recognised for tax purposes. In the case of companies, it can cover tax write-offs, how an asset is depreciated or accounted for, related-party transactions, sale of assets and how capital gains is recognised, among other things. A high-profile case is the retrospective tax that was levied on Vodafone for buying Hutchison Essar India.

Write-off

Under income tax law, a taxpayer looking to dispute the amount demanded can first raise an appeal against the Commissioner of Income Tax (Appeals) or CIT (A), and then against the Income Tax Appellate Tribunal. Further appeals can be made in high courts and the Supreme Court.

According to a CAG audit report, the amount locked up in appeals with the CIT (A) rose three-fold in one year from ₹8.83 lakh crore in March 2020 to ₹24.64 lakh crore in March 2021. As the report noted, this amount “locked up" is “more than the total revenue receipts of the government of India in 2020-21." Amounts locked up in upper levels of appeals such as the ITAT, or the high court/Supreme Court was around ₹4 lakh crore as of March 2021. Much of it will be a write-off.

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