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Friends, in the present tech-savvy times, we all may be fascinated about the new modern techniques of accounting, auditing and taxation like the cloud computing, forensic auditing, digital taxation, artificial intelligence etc. but not many of us may be aware about our robust, glorious and meticulous origins of the accounting, auditing and tax administration systems prevalent in our ancient India, which infact were characterised by their natural and original intelligence and learning contrary to the modern-day times of artificial intelligence and machine learning.

Today, on July 1, 2023, as we are celebrating the 75th Chartered Accountant’s (CA) Day, to commemorate the glorious founding of the Institute of Chartered Accountants of India (ICAI), and the accounting profession in India, let us enrich ourselves from our rich accounting, auditing and taxation heritage of our ancient India.

The genesis and origins of the full fledged and watertight accounting and auditing control systems that were thoroughly present in ancient India can be traced back to as old as fourth century BC, in the ‘Kautilya’s Arthaśāstra’.

Kautilya, the advisor and mentor of King Chandragupta Maurya wrote the Arthaśāstra, a Sanskrit treatise on material welfare, administration and political strategy at the end of the fourth century BC.

In Chapter No. VII of ‘Adhikaran’- II (Volume 2), of his ‘Arthaśāstra’, Kautilya defines, refers to, and uses several important concepts of business, accounting, and auditing that are of interest to modern chartered accountants also.

Accounting

Arthaśāstra’s description of accounting concepts in many cases parallels their modern accounting use. There is evidence of periodic budgets for revenues and expenditures, fixed and variable costs, manufacturing accounts, non-financial information, and of work-in-process and finished goods inventories. Distinctions are made in (the degree of detail in) accounting for high and low valued goods.

Arthaśāstra suggests separation of the superintendent of accounts in location and hierarchy from the executive authority. Limitations of the king in disciplining his officers is also recognized in the recommendation that the projects which are important sources of revenue should be supervised by officers who the king would not mind penalizing (i.e., are dispensable) (verse 2.7.4).

Arthaśāstra uses a lunar calendar with adjustment for compatibility with the solar calendar. Arthaśāstra recognizes the principle of materiality by recommending that minor offenses should be tolerated (verse 2.7.41).

It also recognises the interesting concept of profit arising from increase in price of merchandise at the time of sale and suggests that it “manifests an awareness of general or specific price changes but also refers explicitly to potential profits accruing from those changes. In modern parlance one would speak of fictitious holding gains” (pp.137-138).

Arthaśāstra suggests that good financial reports must be prepared for the arrangement of subject matter, connection or relevance, completeness, sweetness, exaltedness and lucidity (verse 2.10. 6 – 12). It recognizes the centrality of treasury to the state and recommends that it be the first concern of the king.

Audit and Review

The records-cum-audit office maintains comprehensive records from each department as well as ongoing projects, informs the work officers of various departments and undertakings about the specified dates when they must submit the accounts and balances for audit (verse 2.7. 3-5), and ensures the integrity of the records and information provided by the work officers of the operating departments and their accounts officers. It must check each entry of receipt for the time, place, amount, source, name of recorder, and recipient, and similarly the expense and balance entries must be checked. (verse 2.7.31-33). All such appointments are made by a royal order.

Arthaśāstra sets out a framework based on clear definition of accounting concepts, and uniform standards but recognizes that the framework is not sufficient to prevent wrongdoing. The proper implementation of rules by the responsible officers who are above favoritism or vindictiveness creates faith in the system. Officers should be carefully selected for their knowledge, expertise and character, given the importance of the treasury (verse 2.7.10). Even when people are carefully selected, their actions should be constantly reviewed, departments should have many heads, and they should not be given permanent tenure (verse 2.9.31). It defines penalties and fines for preventing various kinds of wrongdoing that shortchange the treasury. Finally, Arthaśāstra suggests an intelligence network to watch over the activities of the departments (2.7.9) and ascertain whether officials are living beyond their means (verse 2.9.12). It lists forty ways in which government officers can be derelict in their duties which cause the depletion of the treasury (verse 2.8.4 – 18).

Taxation

Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. According to the Arthasastra, each tax was specific and there was no scope for arbitratiness. Precision determined the schedule of each payment, and its time, manner and quantity being all pre-determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were determined on advalorem basis. The import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls, road cess, ferry charges and other levies were all fixed. Kautilya's concept of taxation is more or less akin to the modern system of taxation. His over all emphasis was on equity and justice in taxation. The affluent had to pay higher taxes as compared to the not so fortunate. People who were suffering from diseases or were minor and students were exempted from tax or given suitable remissions. The revenue collectors maintained up-to-date records of collection and exemptions. The total revenue of the State was collected from a large number of sources as enumerated above. There were also other sources like profits from Stand land (Sita) religious taxes (Bali) and taxes paid in cash (Kara). Vanikpath was the income from roads and traffic paid as tolls.

He placed land revenues and taxes on commerce under the head of tax revenues. These were fixed taxes and included half yearly taxes like Bhadra, Padika, and Vasantika. Custom duties and duties on sales, taxes on trade and professions and direct taxes comprised the taxes on commerce. The non-tax revenues consisted of produce of sown lands, profits accuring from the manufacture of oil, sugarcane and beverage by the State, and other transactions carried on by the State. Commodities utilised on marriage occasions, the articles needed for sacrificial ceremonies and special kinds of gifts were exempted from taxation. All kinds of liquor were subject to a toll of 5 precent. Tax evaders and other offenders were fined to the tune of 600 panas.

Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system should be made more stringent and the king could also raise war loans. The land revenue could be raised from 1/6th to 1/4th during the emergencies. The people engaged in commerce were to pay big donations to war efforts.

For ready reference of our Readers, the relevant extracts from the ‘Kautilya’s Arthaśāstra’ propounding the well laid out and thoroughly meticulous accounting and auditing systems in our Ancient India, are being translated and reproduced below.

“CHAPTER VII. THE BUSINESS OF KEEPING UP ACCOUNTS IN THE OFFICE OF ACCOUNTANTS.

THE superintendent of accounts shall have the accountant's office constructed with its door facing either the north or the east, with seats (for clerks) kept apart and with shelves of account-books well arranged.

Therein the number of several departments; the description of the work carried on and of the results realised in several manufactories (Karmánta); the amount of profit, loss, expenditure, delayed earnings, the amount of vyáji (premia in kind or cash) realised, —the status of government agency employed, the amount of wages paid, the number of free labourers engaged (vishti) pertaining to the investment of capital on any work; likewise in the case of gems and commodities of superior or inferior value, the rate of their price, the rate of their barter, the counterweights (pratimána) used in weighing them, their number, their weight, and their cubical measure; the history of customs, professions, and transactions of countries, villages, families, and corporations; the gains in the form of gifts to the king's courtiers, their title to possess and enjoy lands, remission of taxes allowed to them, and payment of provisions and salaries to them; the gains to the wives and sons of the king in gems, lands, prerogatives, and provisions made to remedy evil portents; the treaties with, issues of ultimatum to, and payments of tribute from or to, friendly or inimical kings,— all these shall be regularly entered in prescribed registers.

From these books the superintendent shall furnish the accounts as to the forms of work in hand, of works accomplished, of part of works in hand, of receipts, of expenditure, of net balance, and of tasks to be undertaken in each of the several departments.

To supervise works of high, middling and low description, superintendents with corresponding qualifications shall be employed.

The king will have to suffer in the end if he curtails the fixed amount of expenditure on profitable works.

(When a man engaged by Government for any work absents himself), his sureties who conjointly received (wages?) from the government, or his sons, brothers, wives, daughters or servants living upon his work shall bear the loss caused to the Government.

The work of 354 days and nights is a year. Such a work shall be paid for more or less in proportion to its quantity at the end of the month, Ashádha (about the middle of July). (The work during) the intercalary month shall be (separately) calculated.

A government officer, not caring to know the information gathered by espionage and neglecting to supervise the despatch of work in his own department as regulated, may occasion loss of revenue to the government owing to his ignorance, or owing to his idleness when he is too weak to endure the trouble of activity, or due to inadvertence in perceiving sound and other objects of sense, or by being timid when he is afraid of clamour, unrighteousness, and untoward results, or owing to selfish desire when he is favourably disposed towards those who are desirous to achieve their own selfish ends, or by cruelty due to anger, or by lack of dignity when he is surrounded by a host of learned and needy sycophants, or by making use of false balance, false measures, and false calculation owing to greediness.

The school of Manu hold that a fine equal to the loss of revenue and multiplied by the serial number of the circumstances of the guilt just narrated in order shall be imposed upon him.

The school of Parásara hold that the fine in all the cases shall be eight times the amount lost.

The school of Brihaspathi say that it shall be ten times the amount.

The school of Usanas say that it shall be twenty times the amount.

But Kautilya says that it shall be proportional to the guilt. Accounts shall be submitted in the month of Ashádha.

When they (the accountants of different districts) present themselves with sealed books, commodities and net revenue, they shall all be kept apart in one place so that they cannot carry on conversation with each other. Having heard from them the totals of receipts, expenditure, and net revenue, the net amount shall be received.

By how much the superintendent of a department augments the net total of its revenue either by increasing any one of the items of its receipts or by decreasing anyone of the items of expenditure, he shall be rewarded eight times that amount. But when it is reversed (i.e., when the net total is decreased), the award shall also be reversed (i.e., he shall be made to pay eight times the decrease).

Those accountants who do not present themselves in time or do not produce their account books along with the net revenue shall be fined ten times the amount due from them.

When a superintendent of accounts (káranika) does not at once proceed to receive and check the accounts when the clerks (kármika) are ready, he shall be punished with the first amercement. In the reverse case (i.e., when the clerks are not ready), the clerks shall be punished with double the first amercement.

All the ministers (mahámáras) shall together narrate the whole of the actual accounts pertaining to each department.

 Whoever of these (ministers or clerks) is of undivided counsel or keeps himself aloof, or utters falsehood shall be punished with the highest amercement.

When an accountant has not prepared the table of daily accounts (akritáhorúpaharam), he may be given a month more (for its preparation). After the lapse of one month he shall be fined at the rate of 200 panas for each month (during which he delays the accounts).

If an accountant has to write only a small portion of the accounts pertaining to net revenue, he may be allowed five nights to prepare it.

Then the table of daily accounts submitted by him along with the net revenue shall be checked with reference to the regulated forms of righteous transactions and precedents and by applying such arithmetical processes as addition, subtraction, inference and by espionage. It shall also be verified with reference to (such divisions of time as) days, five nights, pakshás, months, four-months, and the year.

The receipt shall be verified with reference to the place and time pertaining to them, the form of their collection (i.e., capital, share), the amount of the present and past produce, the person who has paid it, the person who caused its payment, the officer who fixed the amount payable, and the officer who received it. The expenditure shall be verified with reference to the cause of the profit from any source in the place and time pertaining to each item, the amount payable, the amount paid, the person who ordered the collection, the person who remitted the same, the person who delivered it, and the person who finally received it.

Likewise, the net revenue shall be verified with reference to the place, time, and source pertaining to it, its standard of fineness and quantity, and the persons who are employed to guard the deposits and magazines (of grains, etc.).

When an officer (káranika) does not facilitate or prevents the execution of the king's order, or renders the receipts and expenditure otherwise than prescribed, he shall be punished with the first amercement.

Any clerk who violates or deviates from the prescribed form of writing accounts, enters what is unknown to him, or makes double or treble entries (punaruktam) shall be fined 12 panas.

He who scrapes off the net total shall be doubly punished. He who eats it up shall be fined eight times.

He who causes loss of revenue shall not only pay a fine equal to five times the amount lost (panchabandha), but also make good the loss. In case of uttering a lie, the punishment levied for theft shall be imposed. (When an entry lost or omitted) is made later or is made to appear as forgotten, but added later on recollection, the punishment shall be double the above.

The king shall forgive an offence when it is trifling, have satisfaction even when the revenue is scanty, and honour with rewards (pragraha) such of his superintendents as are of immense benefit to him.”

Wishing You All a very Happy & Glorious 75th CA Day!!!