CAG Report on Direct Taxes: The ₹22.74 Lakh Crore Question

Parliament does not need another list of high-value cases already corrected by the Department; it needs early-warning signals.

By P SESH KUMAR

NEW DELHI, August 29, 2025 — The Comptroller and Auditor General’s (CAG) Compliance Audit Report on Direct Taxes (Report No. 14 of 2025) has landed in Parliament with imposing numbers: ₹7,929 crore in tax effects, 481 audit observations, and a parade of arithmetic blunders that supposedly expose cracks in the Income Tax Department’s machinery. Yet, a closer reading shows an audit that feels more like an annual ritual than a revelation—recycling departmental data, revisiting known errors, and failing to drill into the structural malaise of tax arrears.

The headline figure of ₹22.74 lakh crore in uncollected demand—97 percent of it declared “difficult to recover”—has become a ghost statistic (inflated with further non recoverable interest on interest and penalties), haunting every Budget session but seldom dissected. In an age of faceless assessments, AI-driven tax scrutiny, and vast datasets at the CAG’s disposal, the institution’s role should be to illuminate systemic weaknesses, not simply tabulate historical lapses.

The CAG’s opening chapter reads like a statistical almanac, trumpeting a 17.8 percent surge in direct tax receipts in FY 2022–23, a ₹16.63 lakh crore bounty that has already been celebrated in Budget speeches and CBDT press notes. Corporation tax collections rose by 16 percent, personal income tax by 20 percent, refunds by 38 percent.

These numbers, impressive as they are, were already public knowledge two years ago. Parliament does not need a constitutional watchdog to recite the Finance Ministry’s achievements; it needs insight into whether the machinery that produced these numbers is efficient, fair, and resilient. All the statistics in chapter 1 are mere reproduction from CBDT with no root cause analysis. This trend unfortunately continues for the last many decades without critical review of the methodology or the usefulness of this delayed presentation of known facts.

The heart of the audit lies in 481 observations, of which 287 corporate tax cases worth ₹6,252 crore and 194 income tax cases worth ₹1,677 crore are dissected for computation lapses, irregular depreciation claims, and misapplied surcharge rates. Yet, many of these cases had already been addressed: remedial action was complete in 197 corporate tax cases and 175 income tax cases, with only a fraction left unattended.

The CAG thus finds itself confirming departmental clean-up operations rather than pre-empting them, reducing its role to a post-mortem technician rather than a forensic investigator.

What makes this timidity glaring is the tectonic shift in India’s tax administration. Faceless assessments—introduced in 2020—were supposed to end harassment, increase consistency, and use technology to eliminate bias.

This is where a Supreme Audit Institution could have been transformative: comparing error rates between old-style manual assessments and the new faceless regime, stress-testing the ITBA (Income Tax Business Application) software, and highlighting whether algorithms are catching or amplifying mistakes.

Yet, the report is silent. The audit makes no attempt to separate human error from system error, giving no answer to the key policy question: is India’s new assessment model working?

Instead, the report clings to its familiar ghost story: a mountain of ₹22.74 lakh crore in uncollected demand, with 97 percent stamped “difficult to recover.” This number has been repeated so often it has lost its sting.

Without explaining through its independent examination, why it is unrecoverable, where it is stuck, or how much is actually collectible, the figure has become background noise—scary, but meaningless.

The CAG reproduces CBDT tables without independent analysis or more critical breaking down with value addition or MIS such as-why so much of this is under litigation, why if any amount is inflated by overzealous assessments, how much has been stayed by appellate authorities, or why did the situation of entities that no longer exist, arise.

For lawmakers and citizens, such headlines offer no roadmap, only despair. Even the data quoted shows that Rs 6.63 lakh crore (30.1%) are cases where there are no assets for recovery and Rs 2.98 lakh crore (13.5%) where assessees are not traceable.

No further investigation leave alone examination by CAG that could add value in terms of identifying responsibility centres and offer lessons for improvement or suggesting what actually led to the situation.

If anything, this “97 percent” statistic cries out for an anatomy lesson. India’s litigation pipeline is notorious for clogging the system, with a significant share of demands tied up in multi-year disputes across the CIT(A), ITAT, High Courts, and Supreme Court. Yet the CAG doesn’t quantify these bottlenecks or evaluate whether schemes like Vivad se Vishwas have reduced the burden.

It is a startling missed opportunity because, unlike journalists or Parliamentarians, the CAG has full access to PAN-level data, appellate records, and recovery logs. The watchdog has chosen to bark loudly without sniffing out the trail.

Contrast this opacity with other tax administrations. In the United States, the IRS doesn’t just report a lump sum of unpaid taxes; it publishes a detailed “Collection Activity Report,” breaking down the inventory by age, action taken, and recovery status.

In FY 2024, it reported $566 billion in unpaid assessments—about 11 percent of annual collections—and disclosed that $120.2 billion was actually collected during the year. In Britain, HMRC’s Annual Report offers similar transparency: total tax debt stood at £44.6 billion in March 2024, 5.1 percent of revenues, alongside explicit write-off figures (£5.6 billion) and explanations linking debt spikes to insolvencies.

These reports do not glamourize numbers; they dissect them, giving policymakers ammunition to design solutions. India’s audit, by contrast, waves a terrifying statistic like a talisman and offers no scalpel.

This lack of analytical depth is especially troubling in a faceless-assessment era. Algorithms and randomised team structures were meant to reduce discretion, but they also create new challenges: accountability diffusion, software-driven miscalculations, and a taxpayer experience mediated entirely by portals.

A forward-looking audit should use statistical sampling to measure whether faceless assessments deliver their promised fairness and efficiency, and whether ITBA’s validation rules are strong enough to prevent cascading computational errors. Instead, the CAG remains locked in a case-centric model, offering Parliament a scrapbook of high-value cases—₹1,034 crore in omitted Dividend Distribution Tax here, ₹571 crore in misapplied surcharge there—without quantifying systemic exposure.

Materiality further undermines the narrative. ₹7,929 crore in tax effect is a minuscule 0.47 percent of direct tax collections, and much of it is not liquid revenue but theoretical exposure. Incidence of errors in assessments examined was 5.87% which does not, by itself give any MIS value.

By focusing heavily on illustrative cases, the audit risks becoming an expensive validation exercise rather than a strategic tool. If the CBDT already knows and acts on most errors, what is the added value of a constitutional audit that simply reprints those findings?

To remain relevant, the CAG must pivot from being a historian of tax blunders to a sentinel of fiscal risk. Its comparative advantage lies in access and independence. It alone can triangulate data from CBDT systems, appellate forums, enforcement logs, and PAN-level trends to paint a true picture of tax administration health. A genuinely modern audit would quantify litigation backlogs, map recovery rates over time, benchmark India’s arrears problem against global peers, and identify software vulnerabilities before they metastasize. Instead of reproducing CBDT’s dashboards, the CAG could publish a Tax Recovery Index—a living metric that distinguishes collectible demand from hopeless claims and provides Parliament with actionable intelligence.

Until then, these annual reports will continue to resemble elaborate photocopies: precise, well-formatted, and ultimately toothless. They risk losing relevance at a time when taxpayers expect transparency, Parliament expects value for money, and technology has made granular, near real-time analysis not just possible but essential.

The ₹22.74 lakh crore figure will haunt budget debates as it always has, but without the CAG turning numbers into insight, it will remain nothing more than a ghost story told every August and 2 years too late.

Audit more than a ledger of past mistakes

The CAG’s compliance audit should be more than a ledger of past mistakes; it should be a predictive radar for systemic weaknesses. That means moving from post-mortems to analytics, segmenting findings by assessment model, quantifying litigation-induced revenue lock-ups, and identifying ITBA’s blind spots.

Parliament does not need another list of high-value cases already corrected by the Department; it needs early-warning signals. Drawing from global best practices, India’s audit reports should evolve into dashboards that measure efficiency, fairness, and fiscal risk, transforming the CAG into a strategic partner in tax governance rather than a glorified scribe.

(This is an opinion piece, and views expressed are those of the author only)

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