Comment Pieces

A free hand on audits = more bribes

While continuing with our series on corruption in the Commercial Tax department, in this post we examine how uncontrolled audits are conducted.

Value Added Tax is self-assessed, like Income Tax. The belief is that the tax payer has an incentive to report the truth because avoidance of tax is not worth the trouble and risk. In the VAT regime, all registered taxpayers are supposed to file a monthly return. In case the department suspects suppression of facts, then they can take up audits. Audits ought to be typically based upon random selection of cases, or on pre-identified criteria. For instance, the Reserve Bank has a system of ‘Risk based supervision’, under which bank branches are selected for audit, based on certain criteria relating to banking risks, such as the presence of high NBAs or low CRR.

In the Commercial Taxes department, however, audits are much more frequent that required. Even if there is no prior evidence of any tax avoidance, the department can take up unnecessary audits and collect bribes from people to harass them. After the bribe is paid they give a clean chit, concluding that no discrepancy has been found. Evidence of this can be found if we compare the number of cases that come up for audit in the Commercial Taxes Department as against the Income Tax Department.

Sometimes, a larger number of audits are ordered, because departments are scrambling to meet targets of tax collection. For instance, last year, all works contractors were targeted for audits. This is a win-win situation for both honest officers as well as the corrupt. The honest and effective officers are glad that tax collections improve. The corrupt are happy because they collect bribes too, side by side! The losers are the tax-paying establishments. Come to think of it, even they are not losers, we are the losers, because we ultimately have to pay a higher price as consumers – producers merely pass on the burden of corruption to us consumers.

The problem arises when the department, under pressure to collect more tax, gives a free hand to officials downstream to choose cases for audit. No criteria are set for selecting cases for audit; anything goes, as long as they bring in taxes. Such a decision, even when taken for bonafide reasons, creates situations that corrupt officials revel in. More efforts bring in more taxes, but also more bribes.

How does one control such uncontrolled auditing? We need to ask the following questions from our Commercial Taxes department: • What are the criteria on the basis of which audits were ordered? • What is the revenue increase from audited cases? • How many audited cases went up in appeal and got refunds? There are many ingenious spinoffs that generate corruption through arbitrary audits and over assessments (See boxes 5, 6 & 7)