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The new rules such as on faceless assessments will bring transparency in the tax administration. Mint
The new rules such as on faceless assessments will bring transparency in the tax administration. Mint

Modi's bold taxation reform for nation building

  • The government's new measures that allow for anonymised assessement will enhance transparency and efficiency of the tax system, which would help bridge the trust-deficit and contribute to nation building.

Prime Minister Narendra Modi’s call for belief in people’s honesty and fundamentally reforming the tax system to make it more people-centric reflects the government’s vision of a new governance model. He, along with finance minister Nirmala Sitharaman, has reinforced that the future of tax reforms will be based on trust, transparency and technology. In this direction, the faceless e-assessment scheme (FAS), faceless appeals and the taxpayers’ charter are transformational initiatives, which will bring greater efficiency, transparency and accountability in tax administration.

The efforts towards reforming the tax administration started a few years ago with the introduction of e-assessments conducted over email and through a portal. These were done by the jurisdictional tax authority and the identity of the officer was known to the taxpayer. The new FAS, launched in 2019, goes a step further by using artificial intelligence for automated, randomised allocation of cases such that the identity of the tax official is not known to the taxpayer. It completely changes the traditional concept of territorial jurisdiction and makes it dynamic, so that an assessment of a taxpayer based in Mumbai can be concluded anonymously by a tax authority based in Kolkata. This is a novel mechanism not found in any of the known jurisdictions and can become a global benchmark for compliance verification. Together with faceless appeals, to be introduced from 25 September, the new system truly changes the taxpayers’ experience.

By eliminating frequent personal interaction between taxpayers and the tax department, FAS significantly minimises malfeasance. It saves precious time and resources of the taxpayers that were earlier spent on multiple visits to the department, filing hard copies of bulky submissions and completing formalities.

The scheme, which is system-driven and provides an audit trail, is unbiased and fully transparent. The formal process of giving show-cause notice through the National e-assessment Centre (NeC) ensures that the taxpayer has sufficient time to provide information, instead of responding to last-minute demands for information and unexpected additions in the assessment. Tax authorities now conclude assessments based on the documents on record and binding judicial precedents. This makes the process more scientific and avoids undesirable outcomes for either parties. Moreover, the scheme’s review process minimises instances of high-pitched and unreasonable additions.

Since the launch of the scheme in September 2019, 8,700 out of 58,000 cases have been concluded. The Central Board of Direct Taxes (CBDT) has directed that all assessments henceforth will be passed by NeC, except for centralised group cases (search cases) and assessments with international charge (generally, involving non-residents).

For the tax department, the division of tax authority between assessment, verification, technical and review units will lead to functional specialisation, efficient use of resources and quality assessments. Assessment orders will be more thought through as they will be guided by collective wisdom instead of individual discretion. More than 3,100 tax personnel are already engaged in implementing FAS and a fair distribution of work among all personnel should ensure smooth functioning of the scheme.

Even as the government is working towards addressing the potential challenges, a few areas will be critical to realise the full benefit of the new scheme. Key among them is the voluminous online submission and explanation of intricacies of business models. It will require high quality and clarity in communication on behalf of the taxpayers to avoid any misunderstanding and unnecessary litigation. Small taxpayers, particularly, will need to equip themselves to make use of the FAS.

Secondly, given the number of taxpayers and their detailed online submissions, the digital process under the scheme will need huge capacity-building and a robust systems support to drive it.

Further, the multiple units, while providing functional specialisation, must maintain close and effective communication between them for an all-rounded review of cases.

So far, cases under FAS have been small one or those involving limited scrutiny. Its true effectiveness will be tested when larger and complex cases like transfer-pricing assessments are undertaken and litigation is reduced. Although assessments of non-residents with international charge will currently not be faceless, clarity is required on how transfer-pricing assessments of residents, generally carried out by international charge, will be conducted.

Like faceless assessments and appeals, the taxpayer charter is a significant expression of intent towards preventing taxpayers’ harassment. The charter makes the tax department more accountable for its actions, including providing timely decisions, collecting the right amount of tax, respecting taxpayers’ dignity, time and privacy. With the taxpayers’ charter formally in place, India joins countries like Australia, Canada, France, New-Zealand, South Africa and the United States in providing a fair, transparent and efficient tax system.

Modi has urged every citizen to be a part of nation-building by coming forward as an honest, fearless taxpayer. On its part, the government has been working on ways to reduce the compliance burden of taxpayers, reduce litigation and bridge the trust-deficit gap. After the implementation of the goods and services tax, the taxpayers’ charter, faceless assessments and appeals will be the next reforms to reshape India’s tax administration.

The author is chairman, CII National Committee on Taxation, and chief executive officer, EY India

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