In need of cash, Finance Ministry chases nearly Rs 8 lakh crore billion in elusive back taxes

New Delhi: India's Finance Ministry is asking for regular progress reports from tax collectors and has set a date for an amnesty to pay off arrears on undeclared domestic assets, as the government intensifies efforts to meet its ambitious deficit target.

A series of announcements in recent weeks aims to streamline tax collection in a country where the tax-to-GDP ratio, at 16.6%, is among the lowest among emerging economies. Only about one in 18 earning individuals pay tax.

Arrears now amount to some $117 billion (nearly Rs 7.8 lakh crore), roughly four times what they were six years ago.

Yet one tax official estimated only 15-20% of that was realistically recoverable, with many major debtors simply unable to pay. Even the lower target would take years to achieve, he said, given India's sluggish legal process.

Tax officials may go increasingly after entities they think can pay, with possible repercussions for long-running disputes between the government and companies such as Vodafone and Cairn Energy. The need for money is pressing.

In the federal budget, Finance Minister Arun Jaitley stuck to an ambitious pledge of reducing the fiscal deficit to 3.5% of Gross Domestic Product (GDP) from 3.9%, and improved tax collection could help meet that target.

"The finance minister asks almost every week how much tax arrears have we recovered," said a senior Finance Ministry official, requesting anonymity as he was not authorised to speak to the media on tax issues.

Hasmukh Adhia, the top bureaucrat in charge of revenue and a long-time aide of Prime Minister Narendra Modi, is driving the effort, officials said. Adhia did not respond to an interview request.

"The government has to recover the arrears in any case from the taxpayers from whom it is due," Finance Ministry spokesman D S Malik said.

BIG SPENDER

Jaitley faces big spending demands, including paying for a 24% wage hike for nearly 10 million government employees and pensioners this year.

Tax arrears amount to about 6% of India's $2 trillion (nearly Rs 13.30 lakh crore) gross domestic product (GDP) and are more than the government's market borrowing target of $90 billion (nearly Rs 5.98 lakh crore) this fiscal year.

In the fiscal year 2015-16, authorities recovered nearly $5.2 billion (nearly Rs 34,594.3 crore), according to tax department data as of February 29. But they also raised new tax demands of over $18 billion (nearly Rs 1.19 lakh crore).

Some current and former Finance Ministry officials said they were reluctant to reach settlements or write off losses even when it was clear the money was lost, fearing political retribution and corruption investigations.

Instead, they said they made new demands for back taxes to be paid, raised targets and left others to clean up the mess. One official said he did not know of a single decision to write off a major tax demand in the last 10 years.

Modi's government is trying to modernise the system, tax experts said.

For example, tax officials have been told to not appeal tax tribunals' decisions involving dues of up to 1 million rupees, and Jaitley has offered to settle outstanding tax disputes out of court, although it comes with conditions. He has promised not to invoke a contentious rule on retrospective taxes, at the heart of a bruising dispute with Vodafone, in future.

"We want people to clean up their taxation issues," Jaitley said last month while warning of "sleepless nights" to evaders using offshore accounts.

He also offered a three-month amnesty to taxpayers, starting June 1, to pay off taxes on undeclared domestic assets.

A similar scheme announced last year to declare foreign assets yielded recovery of less than $1 billion (nearly Rs 6,652.75 crore) in extra taxes.

Amit Maheshwari, a Delhi-based corporate tax consultant, said the government could do little to settle past tax disputes, but was trying to reduce future litigation.

"The government is trying to project an investor-and taxpayer-friendly regime."

BIG SUMS

Some Rs 4.4 trillion in outstanding tax dues are owed by companies and the remaining Rs 3.3 trillion by individuals, tax department data obtained by Reuters show.

Last year, the government told parliament that just 17 people owed the government Rs 2.14 trillion, with each more than Rs 10 billion in arrears.

Among them is Hasan Ali Khan, a businessman who raised racing horses for a living. In 2007, tax officials raided his offices in Maharashtra state for not filing returns since 2001 and charged him with tax evasion and money laundering violations. They also slapped a back tax demand on Khan of nearly Rs 370 billion.

After a nearly decade-long battle, which saw Khan imprisoned for more than four years, the tax tribunal cut his liability to 30 million rupees. In the ruling on February 29, the tribunal said tax authorities did not have evidence of his income to back their demand and should reassess his case. Khan was not available for comment. His lawyer said he planned to appeal the new tax demand.