Memorandum or Mirage: CAG–CBDT MoU and the Stakes for Tax Audit

The real litmus test of the MOU will be when CAG teams walk into CBDT’s data rooms and return with findings that ruffle feathers. Anything less, and this document will be remembered only as another footnote.

By P SESH KUMAR

NEW DELHI, September 25, 2025 — The recently announced Memorandum of Understanding (MOU) between the Comptroller and Auditor General (CAG) and the Central Board of Direct Taxes (CBDT) carries promise on paper, but the true test lies in practice. India’s tax department has historically resisted scrutiny, keeping CAG at bay in sensitive areas such as search and seizure operations, international taxation, transfer pricing, and examination of the sustainability of ‘additions’ made in scrutiny assessments.

Unless the MOU translates into genuine cooperation and timely access to records, it risks becoming just another decorative document, forgotten in the archives of routine government signings.

The Background: A Marriage of Unequals?

MOUs are often sold as the magic wand of coordination, but in India’s fiscal oversight space, they have an uneven record. CAG has inked many such understandings with regulators and departments in recent months, projecting them as breakthroughs in inter-institutional cooperation.

We have instances of MOUs with IITs, IIMs, ICAI and IAAD’s very own IPAI not long ago. Yet, the hard truth is that MOUs without teeth rarely bite. CBDT, the keeper of India’s direct tax fortress, has been among the most guarded in opening its vaults. Its reluctance goes back decades, with officers treating audit queries as irritants rather than instruments of accountability.

The VDIS (Voluntary Disclosure of Income Scheme) audit of 2000 stands out as a textbook case. When CAG sought to examine records of the Scheme, CBDT stonewalled, refusing to part with files, despite a provision in the rules.

What should have been a historic evaluation of one of the largest amnesty schemes in independent India turned into a frustrating lesson in how departmental defensiveness can blunt constitutional oversight. The echoes of that reluctance still ring.

The Rationale: Why an MOU Now?

The rationale for the MOU rests on two converging pressures. First, the government’s own narrative of transparency and digitization—CBDT prides itself on faceless assessments and appeals, artificial intelligence–driven risk profiling, and seamless online refunds. If the tax department can use technology to showcase efficiency, it should logically open its systems for audit validation. Second, international commitments—from BEPS (Base Erosion and Profit Shifting) to DTAAs (Double Taxation Avoidance Agreements)—make India’s tax administration a global stakeholder.

Without CAG’s stamp of credibility, India’s claims of fair and robust tax enforcement remain open to doubt.

Simply put, the MOU is an attempt to formalize cooperation. But formality without functionality means little.

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The Expectations: Beyond Lip Service

What exactly should the MOU deliver? At the bare minimum, CAG should expect:

1. Unfettered Access to Systems: Without CBDT opening its IT backbone—be it CPC Bengaluru for returns processing, ITBA for assessments, or Insight for risk management—audits will remain superficial.
2. Audit of Effectiveness, Not Just Accounts: It is not enough to check whether taxes are booked correctly. The real audit questions lie in whether prosecutions deter evasion, whether transfer pricing adjustments stand in appellate scrutiny, or whether search and seizure operations yield sustainable outcomes.
3. Time-Bound Replies: CBDT has perfected the art of delay, with replies to audit paras hanging in limbo for years. The MOU must carry enforceable timelines.
4. Cultural Change in Field Formations: Assessing Officers need to recognize that CAG is not a threat but a constitutional partner. Unless the “urgency” of cooperation percolates downward, nothing changes on the ground.

Without these, the MOU will be one more showpiece in CAG’s cupboard.

The Missing Protocol: Closing the Loop on Reassessments

One of the most corrosive outcomes of unresolved CAG–CBDT disagreements has been the routine reopening of assessments. Audit observations often translate into reassessments—even when the jurisdictional Assessing Officers or Chief Commissioners of Income Tax privately admit that they do not agree with CAG’s interpretation of law. Hundreds of cases are kept alive in this fashion, causing avoidable harassment to taxpayers and adding nothing to the exchequer when most re-openings collapse at appellate stages.

This cycle thrives because there is no binding closure mechanism. CBDT issues circulars, CAG persists with its conventions, and Assessing Officers find themselves trapped between two elephants. The result is a paper war where files move endlessly, but finality is elusive.

In fairness, it is wrong to dump such micro-disputes on the Public Accounts Committee (PAC). The PAC’s role is to examine tax policy issues and systemic lapses, not to adjudicate whether a single deduction under Section 80-IA or a transfer pricing adjustment was rightly claimed.

The way forward is to revive and strengthen the earlier system where the Department of Legal Affairs (Law Ministry) gave an authoritative ruling in cases of difference. A binding tripartite protocol—with CAG, CBDT, and the Law Department as stakeholders—should be enshrined in the MOU or its annexures.

Once the Law Department pronounces on a specific case, both CAG and CBDT must accept it as final. This will not only reduce litigation but also restore a sense of fairness for taxpayers who currently face endless uncertainty. Without such a protocol, the MOU risks perpetuating the same stalemates that have defined CAG–CBDT interactions for decades.

The Risk: Another Paper Tiger

The danger is obvious. Unless CAG insists on measurable deliverables, this MOU will join the growing pile of agreements that make headlines on signing day and vanish thereafter. CBDT officers have little incentive to allow an external body to question their judgment, especially when performance metrics are tied to revenue collection rather than accountability. The asymmetry between CAG’s constitutional mandate and CBDT’s administrative control cannot be bridged by pleasantries alone.

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Way Forward: Turning MOU into a Tool of Accountability

If the MOU is to live up to its billing, CAG must:

Insist on Data Access Clauses: The text should clearly guarantee direct, unhindered access to core IT systems—no cherry-picking of data by CBDT.

Identify Priority Audit Themes: From BEPS compliance to the effectiveness of faceless assessments, CAG must set out areas of audit focus where systemic insights, not routine bookkeeping, are expected.

Publish Audit Impact: Reports should go beyond tables of additions or deletions. They must narrate whether CBDT’s much-publicized reforms are actually working.

Bind Dispute Settlement to Law Ministry: Incorporate the tripartite mechanism as a closure device, bringing finality to interpretational disputes and saving PAC bandwidth.

Invoke Constitutional Authority: If CBDT drags its feet, CAG must remind it—and Parliament—that Section 16 of the DPC Act gives CAG the right, not merely the courtesy, to audit revenue receipts.

The real litmus test of this MOU will be when CAG teams walk into CBDT’s data rooms and return with findings that ruffle feathers. Anything less, and this document will be remembered only as another footnote in the long saga of guarded tax administration.

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

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