What is Recovery of Tax?

The meaning of recovery of tax is that it is a fundamental process in which the tax authorities make sure that the government has the necessary funds for providing the public services and infrastructure.

In India, the Income Tax Act, 1961, governs the collection and recovery of tax by outlining the mechanisms and procedures of tax administration. It is very necessary for the taxpayers as well as the tax authorities to understand these processes. Hence, they will be able to ensure the smooth functioning of the tax system and maintain compliance with it.

Overview of Income Tax Act, 1961

The Income Tax Act, 1961, is the primary act that was imposed by the government to regulate the practices of Income Tax in India. It establishes and manages the framework of tax assessment, collection, and its recovery. The main sections that are related to the tax collection and recovery include:

Section 220: The Thai section includes all the procedures for the collection of tax dues. It includes issuing the demand notices and the situations under which the taxpayer is deemed to be in default.
Section 221: This section includes all the penalties that are imposed for failure to pay taxes according to the demand notice.
Section 222: This section gives power to the authority to take actions for the recovery of due taxes.
Sections 226 to 232: These sections provide all the mechanisms that can be used to collect the tax dues from the assessee. It also includes the authority to attract property and then recover the dues from third parties.

Role of the Central Board of Direct Taxes (CBDT)

The roles of the Central Board of Direct Taxes are given below:

CBDT is an apex body that is responsible for the administration of the Indian direct taxes.
It makes the policies, oversees the tax collection, and ensures compliance with the laws of taxes.
The CBDT issues the guidelines and instructions to the tax authorities, hence it plays an important role in tax recovery.
It also takes various steps, like research and analysis, to improve the tax administration and enhance the services for the taxpayers.

Mechanisms for Tax Collection

There are two types of mechanisms for the collection and recovery of tax:

1. Direct Tax Collection

Direct taxes are directly imposed on individuals and corporations. The primary types of direct taxes are corporate tax, income tax, and capital gains tax. There are several mechanisms involved in the collection of the direct taxes:

Tax Deducted at Source (TDS)

The method of collecting the income tax at the source of the income is known as TDS. In this method, the payer needs to deduct the tax before making the payments to the payee. For example, in companies, the employers deduct the TDS from the salaries of the employees and submit it to the government.

TDS Rates: The different rates are applied as TDS depending on the type of payment. For example, the TDS on the salaries is deducted on the basis of the applicable income tax slab rate. The TDS on the interest payments is implied at a flat rate.
TDS Compliance: All payers should obtain the Permanent Account Number (PAN) of the payee to deduct the TDS at an accurate rate. If the taxpayers fail to do so, it could result in a higher deduction rate.
TDS Returns: After deducting the TDS, all the payers should file the TDS returns. They need to mention the details of the amount deducted and deposited. Typically, this process needs to be done quarterly.

Tax Collected at Source (TCS)

There are some specific transactions on which the TCS is imposed, such as the sale of goods and services. This process requires the sellers to collect the taxes from the buyers at the time of sale and deposit the amount to the government.

TCS Rates: The rates of TCS can be different depending on the nature of the goods and services sold. For instance, the TCS on the sale of alcohol is already fixed at the rate of 1%, while the TCS on the sale of scrap is also set at the rate of 1%.
TCS Compliance: The sellers must obtain the PAN card of the buyers if they need to collect the TCS at an accurate rate. If the PAN is not available or provided, then the rates of TCS will be increased.

2. Indirect Tax Collection

The indirect taxes are imposed on goods and services. The primary indirect tax in India right now is the Goods and Services Tax (GST). The collection process of GST involves:

Input Tax Credit (ITC)

The businesses are allowed to claim the credits for the tax they paid on inputs that are used in the production of goods and services. This encourages compliance for the taxpayers and reduces the overall tax liability.

Claiming ITC: To claim the input tax credits, the businesses need to make sure that the supplier has paid the GST. Also, the purchase should only be made for business purposes. You need to present the proper documents for claiming ITC.
Reversal of ITC: If the purchased goods are returned or if the supplier hasn’t paid the GST, then the claimed ITC must be reversed.

GST Returns

The businesses need to file their GST returns on time to ensure accountability and transparency in tax collection. The returns should have the details of their sales, purchases, and collected tax.

Types of GST Returns: There are mainly three types of GST returns, and timely filing of these returns is important for maintaining compliance.
- GSTR-1 for sales
- GSTR-2 for purchases
- GSTR-3B for summary return
Late Fees: If you fail to file the GST Returns on time, then you may have to pay the late fees and penalties. It eventually increases your overall tax liability.

Recovery of Tax Dues

The recovery of income tax dues involves three processes:

1. Assessment and Demand Notices

The recovery of tax dues starts with the process of assessment. The authorities of ITD assess the taxpayer’s income and then issue demand notices according to it. The notice outlines the outstanding tax liabilities.

Types of Demand Notices

Notice under Section 156: In case of the demand for tax payment, this notice is issued because it specifies the due amount and the date for the due payment.
Notice under Section 220: This notice is issued to inform the taxpayer about the due date for the payment. It also informs about the consequences of non-payment. It also indicates to the taxpayer that they may be deemed in default if the payment is not made.

Importance of responding timely: All taxpayers must respond quickly to all the demand notices to avoid legal action and penalties. If you ignore these notices, then there will be consequences for this, which also includes recovery proceedings.

2. Modes of Recovery

There are several modes of recovery available for the tax authorities, including:

Tax Recovery Officers (TROs)

The TROs are responsible for the collection of tax dues from the taxpayers. They are authorised to start the recovery proceedings against defaulters.

Role of TROs: TROs have certain powers, such as issuing recovery certificates, attaching properties, and taking legal actions to recover the dues. They play an important role in enforcing tax compliance on the payers.
Recovery Certificate: After the demand notice has been issued, and it has not been complied with, the TRO is allowed to issue a recovery certificate to start the recovery process.

Garnishee Proceedings

It includes the process of recovering the tax dues from third parties. These third parties should owe money to the taxpayer. For instance, if the taxpayer has an account in any bank, then the tax authorities can issue a garnishee order to the same bank in order to recover the owed tax amount.

Process: The tax authorities issue a notice to the third party and instruct them to withhold the payment due to the taxpayer and remit it directly to the government. In this process of recovering the dues, there is no need for confrontation with the taxpayer.

Attachment of Property

In case of some of the tax arrears, the tax authorities have the ability to attach the property of the taxpayer, which includes his bank accounts, assets, and properties, to recover the tax dues.

Procedure: The tax authorities inform the taxpayers about the action to be taken by issuing a notice of attachment. The attached property of the taxpayer can be sold by the tax authorities to recover the tax dues. This method is usually used last when all the other recovery methods have failed already.

3. Legal Procedures for Recovery

Tax authorities have the power to start the legal proceedings to recover the due taxes. There is a significant role of the Income Tax Appellate Tribunal (ITAT) in solving disputes related to the recovery of income tax.

Filing Appeals against Tax Demands

The tax authorities have the specific powers under which they can start the legal proceedings to recover the due taxes. The ITAT plays a very important role in solving the disputes of tax-related matters.

Steps to File an Appeal: Taxpayers must submit Form 35 along with the necessary documentation and fees. The ITAT will schedule a hearing to review the appeal.
Time Limit for Filing Appeals: The taxpayers have to file their appeals within 60 days from the date of receipt in case of a demand notice.

Consequences of Non-Compliance

If the taxpayers fail to comply with the recovery orders, then it can lead to severe consequences. It includes various penalties, interest on unpaid taxes, and legal action taken by the tax authorities.

Penalties: The authorities from the Income Tax Department impose different penalties for non-compliance. They include interest and fines on the amount of tax dues.
Legal Action: If the taxpayer continues the non-compliance again and again, it can result in the attachment of assets and properties. Also, the tax authorities can start criminal proceedings in case of willful default.

Challenges and Tax Collection and Recovery of Income Tax

The tax authorities face many challenges despite many established mechanisms for tax recovery and collection:

Economic Factors: There could be many economic reasons why the taxpayer failed to pay the dues. It leads to increased tax arrears. There are many businesses that also struggle to meet their tax requirements during challenging economic situations.
Complexity of Tax Laws: The tax laws are very complex to understand for all taxpayers, which sometimes confuses them, resulting in non-compliance, unintentionally. Many of the taxpayers find it very difficult to navigate through the complexities of the tax regulations.
Taxpayer Compliance: Due to a lack of understanding or awareness of tax obligations among the taxpayers, it becomes very challenging to maintain tax compliance. Most of the taxpayers are not even aware of the consequences of non-compliance, which leads to unintentional defaults.
Fraud and Evasion: Tax evasion and different fraud practices can cause many challenges to the tax authorities. Substantial expertise and resources are needed to identify and prosecute the tax evaders.
Administrative Inefficiencies: There are many administrative inefficiencies, such as Bureaucratic hurdles, that can cause friction in the process of effective tax collection and recovery efforts. There will be compliance issues if the authorities face delays in processing and communication.

Practices for Effective Tax Collection and Recovery of Tax

To improve the tax collection and recovery of tax, there are several practices that you can implement:

Streamlining Recovery Processes: If the authorities improve efficiency in tax recovery processes, such as utilizing data analytics and automating certain procedures, it can lead to better outcomes. They can also use the technology to track the defaulters and streamline conversations.
Dispute Resolution Mechanisms: The tax disputes can be resolved by establishing an effective dispute resolution mechanism, which also helps in reducing the tax burdens on authorities. It can include arbitration, mediation, or other alternative methods for dispute resolution.
Taxpayer Education and Awareness: The authorities can enhance tax compliance by educating the taxpayers about their tax obligations. They should also make them understand the importance of filing taxes on time. They can arrange the workshops, seminars, and informational campaigns to achieve this task.
Regular Audits and Assessments: To identify potential tax evasions and ensure tax compliance, the ITD should conduct audits and assessments regularly. This proactive approach can help in preventing many tax arrears from accumulating.
Collaboration with Financial Institutions: If the Income tax authorities collaborate with banks and financial institutions, then it can enhance the recovery process. For example, banks can help in identifying the accounts with tax dues and facilitate the proceedings for a garnishee notice.