Make `Seamless, Painless, Faceless’ tax system work

Generally speaking, taxpayers in India can be of three types- those who consider paying taxes as their duty to the nation and do so promptly and completely; those who pay their taxes by taking some chances on the provisions of the Income Tax Act (ITA); and, those who firmly believe that the ITA is a figment of someone’s imagination.

Tax officers can also be classified into three categories - those who follow the provisions of the ITA and Rules in letter and spirit; those who are a bit liberal with the taxpayers in terms of interpreting the provisions; and, those who agree with the taxpayers stance without working up a sweat.

It is a fact that only in extremely rare cases, the taxpayer and the tax officer belong to the same type or category. The moment taxpayers and tax officers of different types get together, it results in litigation, disputes and settlements.

On August 13, Prime Minister Narendra Modi made an announcement that will completely change the manner in which taxpayers will be assessed. He stated that the ongoing reforms being made by the government aim at making the tax system “Seamless, Painless and Faceless”.

The Seamless system works to resolve the problems of a taxpayer instead of entangling him further. By being Painless, everything from technology to rules should be simple. The Faceless system will ensure that there is no need for a direct contact between the taxpayer and the Income Tax Officer in all matters of scrutiny, notice, survey or assessment.

The Faceless assessment is being structured in such a manner that both the taxpayer and the tax officer will not know who will be their assessing officer and taxpayer, respectively. While this is indeed a laudable move, the devil would be in the implementation. Tax officers all across the country would need to be trained on the nuances of both small and large tax assessments.

Tax officers in smaller towns would need to be educated on the complexities of tax assessment of large companies. The Central Board of Direct Taxes (CBDT) has clarified that international taxation assessments will not be faceless. On their part, some taxpayers would need to gear up their use of technology since they would be the primary contact for correspondence. They may still need the assistance of their tax consultant to respond to queries asked.

A significant amount of time, money and resources would be needed to pull this off successfully. It will take some time for both the parties to get used to faceless assessments as the taxpayer would fear that his assessment would be allotted to a trigger-happy officer while the tax officer would worry that he would not know the nitty-gritty of all the taxpayers that are given to him.

Painless assessments are the dream of every taxpayer. However, thanks to a complex ITA and a vast set of Income Tax Rules, painless assessments are easier said than done. The first step towards a painless assessment would be to simplify the ITA and Rules. Here too, much work needs to be done.

Budget 2020 introduced an equalisation levy (also called Google tax) on e-commerce operators. Since the day of the Budget, affected taxpayers have been seeking clarity through FAQs on whether the levy would be on the gross amount or net amount but the CBDT has categorically stated that there is no need for any FAQ since the provisions are as clear as they can be. It is only a matter of time before a clarification is given but the developments reflect how much needs to be done to make assessments painless.

Tax Charter

In Budget 2020, the finance minister had made a reference to a tax charter. In his announcement, the prime minister gave some more information on this. The taxpayer is expected to be honest and compliant, be informed, should keep accurate records, know what his/her authorised representative is doing and respond, and pay taxes in time.

In turn, tax officers would be inter-alia, fair, courteous and give a reasonable treatment to the taxpayer, will hold their authorities accountable and will preserve the confidentiality of the taxpayer. Though the Charter sounds like the prescription for a perfect marriage, it would be really useful if this brings about a change in the culture of both the taxpayers and the tax officers.

This change in culture has to be brought about by publishing cases where the charter has worked and how. It is only then that taxpayers would gain some confidence as there are still quite a few taxpayers who never smile when they pay their taxes. It is for those who smile while paying their taxes that Transparent Taxation - Honouring the Honest scheme has been introduced.

In an effort to reduce litigation, the government increased the threshold limits for filing appeals before the Appellate Tribunal, High Court and Supreme Court in August 2019. The prime minister also stated that tax scrutiny cases have reduced from 0.94% to 0.26% in the last six years. Tax settlement schemes keep getting introduced ever so often. Income tax rates were also rationalised and appear to have settled at a sweet spot. Despite this, Modi gave out worrying statistics - in a country with a population of 130 crores, a paltry 1.5 crore people pay taxes.

The announcements made by Modi have been with an intention to make taxpayers comfortable. What the CBDT should ensure now is that the Honouring the Honest Scheme is implemented at the ground level seamlessly. Past experiences have shown that there is a huge disconnect between announcements made and actual action taken.

Due to this, after a couple of years, the buzz around the scheme dies down forcing the government to think of yet another scheme. Since most taxpayers in India depend on tax consultants for advice and assistance, maybe there should be a scheme for honouring the honest tax consultant - this may solve many tax imbroglios.

(The writer is a Bengaluru-based tax expert)