‘Is transparent taxation the panacea for tax terrorism?’
26th Oct, 2020
The Income-tax Act, 1961 (the Act) was amended in 2019 to introduce the concept of faceless assessment and in 2020 to provide for statutory recognition of a tax-payers’ charter and an enabling provision for faceless appeals. The “Transparent Taxation-Honouring the Honest” platform was launched on 13 August 2020, covering the aforesaid aspects.
What is Transparent Taxation?
- A transparent taxation regime is a pre-requisite for growth in every country and it assumes much more importance in a country like India where the phrase “tax terrorism” got coined for the country’s tax administration.
- While these initiatives do make an attempt to do a makeover of the tax administration by putting in place a structure for transparent taxation, questions, however, can be asked about its intention of “Honouring the Honest”.
- When you want to honour someone, you make him feel special and the transparent taxation scheme does not do that.
Tax structure in India
- In India, the Tax structure is a three tier federal structure.
- The central government, state governments, and local municipal bodies make up this structure.
- Article 256 of the constitution states that “No tax shall be levied or collected except by the authority of law”.
- · The Tax structure in India consists of 3 federal parts:
- Central Government
- State Governments
- Local Municipal bodies
- Taxes are determined by the Central and State Governments along with local authorities like municipal corporations. The government cannot impose any tax unless it is passed as a law.
Types of taxes
Taxes are classified under two categories namely direct and indirect taxes:
- Direct taxes: Direct taxes are levied on individuals and corporate entities and cannot be transferred to others.
- Example: These include income tax, wealth tax, and gift tax.
- Indirect taxes: Indirect taxes are not directly paid by the assessee to the government authorities. These are levied on goods and services and collected by intermediaries (those who sell goods or offer services).
- Example: Value Added Tax (VAT), Customs duty, Octroi, Excise duty, Service Tax
Goods and Service Tax (GST):
- As a significant step towards the reform of indirect taxation in India, the Central Government has introduced the Goods and Service Tax (GST).
- GST is a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India and will subsume many indirect taxes levied by the Central and State Governments
- Faceless assessment is faceless tax scrutiny which eliminates the interface between the taxpayer and the income tax department.
- Under this system, the selection of a taxpayer will be done only through systems using data analytics and AI.
- Moreover, territorial jurisdiction will be abolished, and the draft assessment order, the review and the finalisation will take place in different cities. Cases will be also be automatically allotted on a random basis.
- Further, there will be no need for the taxpayer to visit the income tax office or the officer.
- Additionally, the appellate decision will be team-based and reviewed and any assessment, other than the exceptions to the faceless scheme, will be invalid.
- Under this system, appeals will be randomly allocated to any officer in the country and the identity of officers handling the appeal will remain unknown.
- There will also be no need to visit the officer or the office. The appellate decision will further be team-based and reviewed.
- Exceptions to this will be cases of serious frauds, major tax evasions, Black Money Act, Benami property etc.
What will this new scheme do?
- The scheme removes the physical interaction between the actual Assessing Officer (AO) and the taxpayer.
- For the taxpayer, it is only the National e-Assessment Centre (NeAC) which will be the contact point and all correspondence will take place between the taxpayer and the NeAC.
- The NeAC will, in-turn, allocate the case based on an automated allocation system to an Assessment Unit (AU) under the charge of a Regional e-Assessment Centre.
- The AU can then seek assistance of other specialized units i.e. the Verification Unit (VU) and Technical Unit (TU), for the purposes of assessment.
- The scheme also has an in-built mechanism of a review of the order by a separate Review Unit (RU).
Global Tax Landscape
- The global tax landscape has been witnessing exponential changes, with tax administrations around the world continuously upgrading their old tax administration system.
- Most European countries are implementing the standardisation of exchange of accounting data such as Standard Audit File for Tax (SAF-T) [Luxembourg, France, Portugal, Netherlands, Norway etc]
- Latin American countries are adopting transactional level reporting through e-invoicing (Mexico, Chile, Brazil, Peru etc) and Public System of Digital Bookkeeping (SPED) [Brazil]
- Australia is applying computer assisted verification/e-audit, and also many countries and tax organisations are contemplating the use of internet of things (IoT), blockchain technology for automation of data exchange and compliance.
- The reforms will place India amongst the frontrunners of the facilitative tax administration system.
Merits of the Scheme
- Friendly system: With the implementation of the scheme, the waiting time at the tax office is going to be a thing of the past.
- Safe game for the payers: The taxpayer is not exposed to the whims and fancies of the Assessing Officer (AO).
- Increase in quality assessments: This scheme is going to increase the quality of the assessments manifold. With the support of the technical unit, the verification unit and the review by the review unit, the AO can actually do a quality assessment.
- Proper consideration: For the taxpayer, it gives the confidence that the response being submitted by the taxpayer is considered by an independent specialized unit set up for that purpose.
- Trust building: The mechanism of a review by the RU gives comfort that the order being passed has been reviewed thoroughly and would not have any frivolous additions.
Downside of the Scheme
- Increase in appellate proceedings: It could get more intrusive and investigative as there would be specialized units looking at the whole assessment process which, in turn, could lead to an increase in appellate proceedings.
- Decision on mere written submission isn’t correct: Assessment proceedings are quasi-judicial proceedings and to let the authorities decide whether the case merits an opportunity for oral submissions is not correct. Mere written submissions cannot substitute a face-to-face/oral hearing.
- Rise in disputes: The whole aspect of service of notice on the registered account of the taxpayer on the portal, through emails and messages, is bound to raise disputes.
The overall aim and effort of the scheme is to make India’s tax system smoother. The tax administration will work to solve the problem instead of engaging every taxpayer – attempting to simplify the process and ensuring it doesn’t matter who is paying tax and who is the tax officer. The reforms are aimed at bringing about more trust, fairness, transparency, efficiency, accountability, ease and convenience and therefore, more compliance.