Limca book of records has no specific entry for the highest tax demands! Else, a Rs32,000 crore (US$4bn) provisional tax demand eminently qualifies to top the list!
There is no intention to analyse the merits of the issue giving rise to this unprecedented sum as a potential tax demand, dubbed dubious by all the tax experts.
Yet, a couple of important issues arise for discussion, irrespective of whether this matter progresses to the courts, or stands withdrawn as demanded by the software industry which seems to be mainly impacted by this move.
The first aspect is the system that exists within the goods & services tax (GST) department to deal with potential issues which may be industry, business model, or product-specific and the manner in which such out-of-the-ordinary issues are handled.
Industry-specific issues have been part of the indirect tax system as they existed at different points in time. They were central to the disputes in the erstwhile Central excise law and also under the sales tax system.
GST was premised to get away from such a nuanced way of assessing taxes, by adopting a broad-brush system of limited rates which is agnostic to products and the users.
The system of credit was intended to do away with disputes on rates and timing of tax payment, as all taxes cascade finally into a single tax at the consumption point.
Surprisingly, such has not been the case as issues that dominated the pre-GST regime still seem to plague the system.
Another change that was legitimately expected was the uniformity in the method of assessing the taxes, across the country which was absent in the former system.
It was held out that a taxpayer whether in Jalandhar or Jolarpet will pay the same level of taxes in a particular transaction or a type of business.
The latest notice may be an astronomical amount that has become the talking point in the country overshadowing many other current topics, but it is not an isolated one as newspaper reports of recent times show many other cases where high demands have been raised.
The other part to the autopsy on the subject is that most notices have landed in corporations with the best of systems and processes to pay taxes and with such general governance record, that one would fear to allude to any potential avoidance motives.
The central question to seek an answer to is: Why are surprise and shocking tax demands raised on businesses that have been following the same model of transactions, tried and tested over many years under the laws of taxation that always existed?
More annoyingly, why do the tax authorities wait for an eternity, till the expiry date arrives for the notice period and ambush a taxpayer with amounts that, on the face of it, are outrageous?
If a business has been around for many years and is doing practically the same type of activity, what constrains the tax department from bringing up the controversial areas upfront and seeking a response from the taxpayer, even before the tax year ends?
A five-year window is only a facility to utilise where a tax event was beyond detection in the normal course and crops up unexpectedly when some other investigation happens.
Leaving aside the fact that courts do not allow such farfetched time limits to be invoked in cases where the tax payer maintains a transparent process for the tax department to identify the taxable transaction, the effort of having to approach the court and the intermediate disruption to the business are a needless punishment inflicted on businesses that seek to comply and act responsibly.
In many instances, the notices are issued to satisfy the audit process that intrudes into the functional domain of the tax assessment and adopts its own interpretation and second guess the view of the tax officer and turn it upside down!
The key question is: If the entire spectrum of specialists on the subject opines that a particular transaction is not taxable and also where the transaction is neither unique nor unknown, what process would the tax department have followed to issue a belated notice and rake up the matter?
It is important to fix the responsibility on someone at the highest level for such an action where the amount involved is staggering and the authority chooses to act at leisure after many years have passed, just when the limitation is set to operate.
Isn’t it a serious dereliction of duty to delay such an action?
The system seems to have little accountability with mounting over-dues in the collection of disputed and undisputed demands as shown in the budget documents annually.
One of the fastest-growing fiscal indices is the uncollected taxes of the Union government!
At 15.9% compounded annual growth rate (CAGR) in the decade between 2014 and the latest year, the total disputed and undisputed taxes of Rs4.92tn (direct taxes of Rs4.14tn and commodity taxes of Rs0.78tn) has grown to an impressive number of Rs21.3tn!
While fiery debates take place on fiscal measures that do not even come within three decimal points of this outstanding amount of Rs21.3tn, there is hardly any discussion noticed in the parliamentary discourse questioning the government on the manner demands are raised and (not) collected.
The other side to this subject is how far do the board and audit committee (AC) of even well-governed corporations focus on issues relating to tax compliance and identification of the potential problem areas and the communication to the shareholders on key tax risks that a business confronts.
The tax-related risks are rarely spelt out in specific terms, but couched very generally as seen in the case of Infosys itself.
The above mitigation steps contemplate ‘regular connect with authorities’ as a way of resolving issues. Did the company actually engage in regard to the matter under dispute?
While processes exist to obtain tax certainty, the reticence to use the avenue of advance ruling or similar mechanisms to achieve clarity is due to the lack of trust in the objectivity and neutrality of the process.
Large corporations in multi-locations carry many challenges and risks in compliance and the lack of specificity to highlight major potential areas of controversy makes shareholder communication quite vague and pointless.
There is a great deal of onus on the audit committee which is tasked to oversee the existence of due process, to achieve full compliance with all regulations, especially taxation.
Whenever a new business transaction is initiated or a change in law arises, the audit committee should have a method to understand if the operational parameters are duly tweaked to achieve due compliance.
GST introduction was a major change in the tax system. It was necessary that the audit committee of major companies spent more than the usual time devoted to such compliance matters to seek assurance on complete compliance as well as not letting leakage of eligible benefits.
Audit committees largely go by the assurance of the operating management on such matters and initiating an independent review is often viewed as an intrusion by them.
Wherever legal opinions are taken to support any position adopted, the duty of the audit committee is to closely look at such cases and have a separate discussion with the statutory auditors to ascertain their independent assessment.
In most companies, the audit committee meets only once in each quarter primarily for considering the financial results for the period.
An overcrowded agenda, with a disproportionate time spent on the financial statements themselves, which often stray into discussion on the operations and the business, leads to little focus on issues like potential tax traps.
Consequently, the focus on compliance, especially areas of potential litigation or controversy, gets under-emphasised, unless the statutory or the internal auditors bring it up as part of their presentation.
How does a shareholder or an outsider assess the functioning of the audit committee in any company? Annual reports share little information on such matters except give details of the members of the committee and the number of meetings held, and the broad area of the operation of the committee.
In a rare exception, Infosys appears to be the only company that puts out the activities carried out by the audit committee during a financial year in its annual report.
The latest one, reported for FY23-24, is extracted below and should interest professionals who serve on corporate boards and audit committees.
A perusal of the work scope of the AC, disclosed in all the years since 2017, when GST was brought in, has no reference to GST as an area or activity that engaged the attention of the committee.
However, drawing any conclusion from a scrutiny of what is disclosed in the annual reports may be hasty as it is possible that a review of GST may have been done as a routine compliance checking, or the management may have provided due assurances on the level of compliance.
Though the items mentioned in each year are largely repetitive, except a one-off item like buyback of shares or evaluation of acquisitions, Infosys should be commended for making this disclosure which no other company of a similar size seems to, based on a random check.
It also appears that Infosys’ AC meets more often than other peer companies. A comparison of Infosys and TCS is given here.
While merely holding extra meetings may not be suggestive of better quality, it cannot be negated that Infosys’ AC seeks to distribute the agenda over a greater number of meetings in a purposeful manner to ensure a more focused discussion on matters other than approval of the quarterly financial results.
Instances like the present one are a pointed reminder to the AC in any company on how it should stay alert and probe proactively on potential problem areas, and for the board to improve its communication of the risk areas in more specific terms to the shareholders than in an ambiguous language usually employed.
UPDATE: In a regulatory filing, Infosys says it received and responded to a pre-show-cause notice issued by DGGI for the period July 2017 to March 2022. "The Company has now received a communication from DGGI closing the pre-show cause notice proceedings for FY17-18. The GST amount as per the pre-show cause notice for this period was Rs3,898 crore."
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
