Faceless tax assessment scheme to show human face

The Central Board of Direct Taxes (CBDT) is reviewing the operation of its faceless tax assessment procedures to ensure field officers do not make aggressive tax demands and allow natural justice to take its course, a person informed about the discussions in the government said. The review follows an 11 August order by the Allahabad High Court giving instructions about instituting safeguards amid complaints over the system’s alleged over-reliance on data rather than human interaction.

The faceless system was introduced in 2019 in order to bring automation in the system, do away with random individual discretion by tax officials and check corruption. However, many taxpayers have complained about aggressive tax demands and about being denied a hearing to address such problems.

Hearings were an area of concern initially under the faceless system but after legal cases mounted, the government made it compulsory to grant a hearing if a taxpayer asked for one.

The court order came in a case involving Kanpur-based SR Cold Storage dating back to a disputed income for assessment year 2017-18. The person cited above said several changes have already been implemented in the assessment proceedings this year, and the faceless operation is constantly being monitored for further refining. 

 Listing some of these changes, the person said that e-verification of information has been made available to assessment officers, standard operating procedures have been introduced earlier this month, and an apex committee at CBDT is closely watching the performance of 20 committees set up across the country to look into taxpayer grievances over aggressive made far beyond returned income. “The faceless assessment system is continuously being monitored for any glitch or loopholes to be fixed,” the person said.

The court told the government to put in place systems to ensure that cross-checking of facts on its Insight data portal is not an empty formality and that field officers are held accountable if they breach the principle of natural justice. The court order highlighted a flaw in the reassessment order issued by the National Faceless Assessment Centre based on data available in the Insight portal, the tax department’s taxpayer profiling portal, about bank deposits allegedly made by the assessee. The court, which favoured the petitioner and quashed the reassessment order, is set to hear about the imposition of a cost of ₹50 lakh on the central government in the case.

An email sent to the finance ministry and CBDT on Wednesday seeking comments on the story remained unanswered at the time of publishing.

Experts said the tax department must go for human validation of data identified through artificial intelligence before issuing any notice to a taxpayer.

Rajat Mohan, a partner at tax consultant AMRG Associates, said that the tax authorities must be mindful of the technology tools’ reach, impact, inherent limitations. “Risk areas identified by big data analytics need human validation before the same is flown to a taxpayer. Re-verification of data on tax portals prior to the initiation of proceedings has emerged as an imperative need to avert violations of the principles of natural justice. Judiciary has taken a step in the right direction to curb the abuse of power by the tax officers leading to chaos in the entire tax collection system,” Mohan said.

Samir Kanabar, a tax partner at EY India, said, “Tax assessment being a complex task requires application of mind, and one cannot accomplish the same in abstract or merely relying on data.” 

“With the aggressive use of data mining and artificial intelligence in the past couple of years, the Government has been able to establish audit trails of various transactions that were earlier not possible. As a result, we are seeing a marked increase in the use of a reassessment mechanism by the tax department to bring such unaccounted income/money to tax,” said Vishwas Panjiar, Partner, Nangia Andersen LLP.

Any directive/circular issued by the Government keeping in mind the above factors will go a long way in establishing a fair and just treatment to the taxpayer while simultaneously reducing the cost of compliance in fighting frivolous litigation both of the tax department as well as the taxpayer,” he added.