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Taxation

Transparent Taxation– India Setting the Global Benchmark for Compliance Verification

Adesh Sharma & Saksham Shrivastav

As the world adjusts to a faceless pandemic, India has introduced a major overhaul of its direct taxation regime by erasing physical interface along with jurisdictional boundaries and introducing a faceless tax assessment and appeals system in its place. On August 13th, the Prime Minister launched the new Transparent Taxation Platform, which is set to significantly revamp the levying of direct tax in India. Titled ‘Honouring the Honest’, the platform introduces three fundamental steps aimed at ensuring tax compliance by simplifying and standardizing the tax administration process. While the first measure is the release of the much awaited ‘Taxpayers’ Charter’ declaring the tax rights and obligations of taxpayers, the second and third measures are in the form of a one-of-a-kind Faceless tax assessment and appeal for all taxpayers, which dilutes all the jurisdictional limitations. As no other major economy has till now implemented a system which does away with territoriality, India’s steps can be followed by many if the newly inducted system churns out success.

While the charter and the faceless assessment have come into effect immediately, the faceless appeal system will be applicable from September 25th, 2020. To implement these changes the IT department is also going through a major overhaul, as at least 3,500 posts of assessment officers across the country have been diverted to the national e-assessment centre and the regional centres. The Platform is a part of a series of tax reforms undertaken by the Central Board of Direct Taxes (CBDT), which include moves ranging from reduction of tax rates to the extra-judicial settlements provided by the ‘Vivad se Vishwas Act, 2020.

Faceless interface: reducing the taxpayer’s banes?

Two of the three major changes that have been introduced, namely the introductions of faceless assessment and faceless appeal are in furtherance and extension to the E-Assessment Scheme launched by the Government in September 2019. Made under the powers given by Section 143 of the Income Tax Act, the scheme provided for the creation of e-assessment centres at National and Regional levels, which would conduct enquiries and verifications through an automated allocation system. The final assessment report was to be provided to the assessment officer having jurisdiction in the case for further action. The CBDT had to determine the scope of the taxpayers to which the scheme would have applied.

After the declaration of the Platform, the scheme has now been amended, changing its name to Faceless Assessment Scheme (“FAS”). With the incorporation of FAS, the government will be implementing AI while allotting the cases so that automation and randomness prevails. This would also provide an impenetrable veil between the taxpayers and the authorities, eliminating the prospects of malfeasance on both ends. One major change that has been introduced in the new procedure is that the National Assessment Centre may now complete the assessment, to the best of its judgment, of a non-compliant taxpayer who does not respond to notices; which earlier could be done only by the Jurisdictional Assessment Officer. This will result in increased compliance with orders by the taxpayers.

The earlier scheme was applicable only on certain categories of assesses to be determined by the CBDT, but its ambit has now been extended to all the taxpayers. The only cases that have been exempted from its scope are those of search and seizure, and international tax cases, which is a necessary exclusion. Finally, the same process is going to be applicable to Tax Appeals, which are currently administered by the Commissioners and Deputy Commissioners under Section 250 of the Income Tax Act, whether they arise from in-person assessment or faceless assessments. 

Faceless assessment and appeals are revolutionary steps not only in the Indian tax administration system, but in a larger global context as well. They work on the principle of dynamic jurisdiction and have abolished the need for territorial jurisdiction. The process provides for the assessment, review and finalization of tax reports to be done in three different centres, and use of Document Identification Numbers (DIN) in central issuance notices. Through these methods, and the random allocation of cases by use of technology, artificial intelligence and data analytics, the process ensures complete transparency, traceability and authenticity. This makes compliance verification far more robust than what it used to be and sets a benchmark for other nations to match up to.

Before the smoothening out of the process, however, certain hurdles will be encountered. The tax officials might face difficulties in achieving their tax targets in the faceless system, there will be no scope for in-person negotiation or mediation for tax settlements, and the complex tax cases will be difficult to dismantle solely through written records. However, the long-term benefits will lead to a robust and much wider tax base and administration system. When a step similar to e-assessment was taken in the United States through the IRS Reform Act of 1998, in-person audits decreased by a huge margin, but there was a steady increase in the assessment per audit and the total revenue; as well as in the positive image of the Internal Revenue Service. Since FAS is built upon e-assessments and takes it to the next step, it is safe to say that the new scheme holds a lot of promise.

Taxpayers’ Charter: catching up with major economies

With the inclusion of the Taxpayers’ Charter, the government has laid down commitments of the Income Tax Department, and the respective expectations from the taxpayers. Though the charter is proclaimed as being the first codification of the rights and duties of taxpayers, similar attempts have been made previously as well. The Income Tax Department’s Citizen’s Charter of 2014, which itself was a revamp of an earlier 2010 charter, was in the same vein. It was meant as a declaration of the department’s vision, mission and standards of service delivery. However, the present Charter differs from the previous ones, since this time the Central Government has itself mandated the CBDT to publish and abide by the Taxpayer’s Charter, by insertion of Section 119A in the Income Tax Act through Section 64 of the Finance Act, 2020. This marks the first time any such charter has derived its authority from the Income Tax Act itself, thus granting it a stronger and a more abiding legal status.

By comparing the present charter with the previous one, it can be seen that a major promise made by the Department is to treat all the taxpayers as honest, respecting their privacy and confidentiality, and providing them an authorized representative of their choice. It also calls for holding its authorities accountable for their actions, and providing the citizens an impartial and fair review and appeal mechanism. This might come as a great deal of relief to the honest taxpayers as they would no longer be subjected to unrequired scrutiny. On the other end of this spectrum however, the taxpayer is expected to pay all his dues honestly and within time.

India is now amongst the few major economies which have incorporated a taxpayer charter in their direct tax legislation. For instance, such a charter is a legal requirement under the Finance Act of the United Kingdom, which must include the behaviours and values which the government aspires from the authorities and the taxpayers. Similarly, the rights and obligations of Australian taxpayers have been outlined in the Australian Taxpayers’ Charter. In both instances, research has shown that the charters have had an overall positive impact on the tax administration of the countries. They have been favorably accepted by the taxpayers as well the tax officials, and play a major role in the formulation of finer policies. If the present Charter is successfully implemented at both levels, India will also reap the same benefits from its application. 

What the scheme has in store for the post-Covid economy

Since, mostly all the governments across the globe have been bleeding financially, India is also not immune to the ill effects that the pandemic has had on the economy. With initiatives like ‘Aatma Nirbhar Bharat’ finding a priority in the current fiscal year, the government with this present tax overhaul has taken another step in the direction of pumping up the economy post the pandemic. In the post-Covid economy, revenue earning is one of the most important areas that the government needs to focus upon, without proving it to be a burden on the citizens and corporations. It is for this  reason that the government is planning to widen its direct tax base. To take the economy uphill, countering tax evasion and easing and standardizing the process is of utmost priority. The government plans on to achieve this through the new jurisdiction-less tax assessment and appeal regime. What would also be eliminated would be the corrupt practices on both the ends. This would also bring in the much-needed revenue that would have otherwise never gone into the government’s treasury. Tedious litigation is also something that is expected to be done with the implementation of FAS. Also, by introducing a faceless process/system, through an AI driven system, the government would not just be saving the time and resources of the taxpayers, but the authorities as well. This would directly streamline the efficiency of the department. This would also lead to assessments being guided by a collective wisdom rather than individual prudence. Since the whole idea behind introducing this scheme is to reward and incentivize honest taxpaying, the government is keen on having a more inclusive tax base, which currently stands at 1.5 crore, so as to increase the revenue exponentially. With these sweeping changes, India’s compliance verification in direct taxation has taken a constructive turn that has the potential to become a key contributor in the days to come.

The authors are 3rd year, B.A.LL.B. (Hons.) students at National University of Study and Research in Law, Ranchi.

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