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Impact of 1000% Surge in Tax Defaults on India’s Economy

The Soaring Tax Defaults and Litigation in India

India is grappling with a substantial surge in tax defaults and the ensuing elevated litigation, with the quantum of defaults skyrocketing by a staggering 1000 percent over the past eight years, as per data compiled by Moneycontrol from various Union Budgets.

As of FY23, the unpaid tax notices demand amounts to a staggering Rs 9.08 lakh crore compared to Rs 80,003 crore in FY14. Notably, of the total amount, notices accounting for Rs 4.23 lakh crore were issued less than two years ago, with Rs 2.13 lakh crore from notices sent between two and five years ago. Furthermore, nearly Rs 1.43 lakh crore of taxes remains unpaid even after a decade.

Escalating Defaults

The escalating defaults are primarily attributed to the complexity and frequent changes in the law, posing significant confusion and compliance challenges for businesses, as highlighted by Alay Razvi, Partner at Accord Juris. This complexity has particularly impacted small and medium enterprises (SMEs), creating unintentional defaults.

Moreover, tax notices being dispatched to companies under the Insolvency and Bankruptcy Code (IBC) have emerged as another major cause of defaults. The moratorium on regulatory proceedings provided under the IBC has not shielded insolvent companies from receiving demand notices, contributing significantly to the outstanding tax dues figures.

Amit Singhania, founder of Areete Law Offices, noted that the tax due pertaining to IBC companies significantly contributes to the outstanding tax dues figures. The enforcement of such tax demands against the officers in default proves to be a prolonged battle for revenue authorities.

Unpaid Taxes Breakdown

The bulk of the defaults are on the direct taxes side, with unpaid corporate tax demands amounting to around Rs 3.97 lakh crore, followed by ‘taxes on income other than corporate tax’ with defaults totaling Rs 4.81 lakh crore. Notably, this category encompasses disputes regarding capital gains and transfer pricing.

Litigation on the Rise

Besides the surge in defaults, tax litigation has witnessed a sharp increase, with disputed amounts more than doubling to Rs 12.2 lakh crore in FY23 from Rs 5.03 lakh crore in FY14. The lion’s share of litigations lies within the realm of direct tax, with approximately Rs 6 lakh crore worth of litigation in corporate tax matters and another Rs 4.5 lakh crore under the ‘taxes on income other than corporate tax’ head.

Disputes over Goods and Services Tax (GST) accounted for a comparatively lower amount at Rs 2,317 crore, but experts anticipate a significant surge in the upcoming year due to the influx of GST notices sent to various companies in the past year. Additionally, disputes over customs, union excise, and service tax accounted for Rs 22,077 crore, Rs 49,367 crore, and Rs 99,939 crore, respectively.

Looking Ahead

The rise in tax notices can be attributed to the extensive digitization of data, enabling immediate identification of discrepancies and prompt issuance of notices, as emphasized by Ankit Jain, partner at Ved Jain & Associates. As the government continues to focus on collecting tax returns online and processing them digitally, a comprehensive data cross-referencing approach has been adopted, flagging inconsistencies in income, expenditure, and purchases.

The alarming rise in tax defaults and litigation underscores the urgent need for a comprehensive review of tax policies and their enforcement, in order to address the complexities and challenges faced by businesses. Moreover, measures to streamline the taxation framework and alleviate compliance burdens, especially for SMEs, are imperative to mitigate unintentional defaults and alleviate the burden on the revenue authorities.

India’s Foreign Exchange Reserves Reach Record High of 642.292 Billion US Dollars

India’s foreign exchange reserves soared to a record high of 642.292 billion US dollars, marking the fourth consecutive week of growth, as per the latest data released by the Reserve Bank of India (RBI). The data revealed a substantial increase of 6.396 billion dollars in the past week, following a noteworthy surge of $10.470 billion in the preceding week.

The RBI’s data indicated a notable rise in India’s foreign currency assets (FCA), the largest component of the forex reserves, reaching USD 568.386 billion after climbing by USD 6.034 billion. Additionally, the data showcased a surge in India’s gold reserves from USD 425 million to USD 51.140 billion over the week.

Comparing the data to the previous year, it was evident that India accumulated approximately $58 billion in foreign exchange during the calendar year 2023, which stood in stark contrast to the preceding year’s cumulative slump of $71 billion in forex reserves, according to the RBI.

Although India’s foreign exchange reserves previously reached an all-time high in October 2021, a subsequent decline occurred, largely attributed to the increased cost of imported goods in 2022. This decline was also linked to the RBI’s periodic intervention in the market to counter the uneven depreciation of the rupee against a strengthening US dollar. The central bank undertakes such interventions, including the sale of dollars, to manage liquidity and prevent a sharp depreciation of the rupee.

The RBI closely monitors the foreign exchange markets and intervenes solely to maintain orderly market conditions by curbing excessive volatility in the exchange rate, without specific reference to a predetermined target level or band.

Foreign exchange reserves, also known as foreign exchange reserves (FX reserves), are assets held by a nation’s central bank or monetary authority, primarily in reserve currencies such as the US Dollar, and to a lesser extent, the Euro, Japanese Yen, and Pound Sterling.

Economic Survey: Chief Economic Advisor says, economy is witnessing V-Shaped Recovery

The Economic Survey tabled in the Parliament projects India’s real GDP to record a 11 per cent growth in Financial Year 2021-22 and nominal GDP to grow by 15.4 per cent, the highest since independence. Chief Economic Adviser K. Subramanian said, V-Shaped Recovery is due to Resurgence in High Frequency Indicators such as Power Demand, Rail Freight, E-Way Bills, GST Collection and Steel Consumption.

He said, during high uncertainty, policy should minimize large losses. The CEA said, early intense lockdown saved lives and helped faster recovery. Mr Subramanian said, hence, India announced discretionary measures in unlock phase as part of Atmanirbhar Bharat Package.

Illustrating that India’s debt is sustainable, Mr Subramanian noted that even if India were to have the real GDP growth rate as low as 3.8 per cent each year from Financial Year 2023 to Financial Year 2029, the debts will still come down. He said, India has a track record of having adopted expansionary fiscal policy focussed on infrastructure spending and there is a need to replicate the same.

The Economic Survey highlights potential of public investment, especially in a slowdown. It called for fiscal policy to support growth and stressed the need for rethink in fiscal rules.

The Chief Economic Adviser said, India must continue to focus on growth, so that we expand the pie, enabling redistributive policies that lift people out of poverty. He said, small levels of increase in public spending on health care can have a non-linear impact and result in a very large decrease in out-of-pocket expenditure by typical families on health care.

The CEA said, Economic Survey shows Ayushman Bharat has led to improved health outcomes saving lives and livelihoods and resulting in various direct and spillover effects. India is to become the Fastest Growing Economy in next two years as per the International Monetary Fund (IMF). India is to have a Current Account Surplus of two per cent of GDP in financial year 2021, a historic high after 17 years.

Tag: INDIA ECONOMY