Transparent taxation: Why India needs an efficient tax system

In recent years, tax compliance and administration has not been an active topic on which Prime Ministers (PMs) have addressed the nation. That changed on the morning of August 13, when Prime Minister Narendra Modi announced measures towards contact-less tax assessment and appeals.

This was alongside a taxpayers' charter - under the flagship "Transparent Taxation - Honoring the Honest" platform. These measures had earlier been mentioned in the Union Budget 2020 by the Finance Minister. Details arrived post the announcement by PM Modi.  

So, what has happened and why? Firstly, the interface between the taxpayers and the tax administration has been made anonymous and online. The stated objective is eliminating close proximity between the taxpayers and the tax officers - with an intent to promote greater honesty, reduced litigation and ultimately to improve the ease of doing business.

The contact-less, referred to as faceless, scheme of tax assessment will be applicable to all taxpayers across the country with immediate effect. Secondly, this will involve complete reliance on artificial intelligence for selection of tax filings for undertaking tax assessment. The only exception being serious frauds, major tax evasions, sensitive and search matters, international tax, Black Money Act and Benami Property.

Also Read: PM Modi announces Taxpayers' Charter; what is it?

The tax department will now need to factor in multi-level reviews and disbursal of audit locations. This could possibly lengthen the time and effort for a tax assessment. Will it be arduous and error-prone for the tax officer to audit the documents without recourse to the personal attendance and in-personal explanations by the taxpayers?

We will soon know, as the tax department is to complete by mid-September 2020 the faceless assessments of cases selected through notices issued in October 2019. Given that less than 0.26% of the tax files are selected for audit, and that less than 4.18% of the population files tax returns, the audited population is quite limited.  

Similar to faceless assessment, the introduction of a similar framework for appeals was announced with effect from September 25, 2020.  

The tax regime in India has been plagued with instances of high pitched tax assessments. This behavior is often attributed to tax collection targets that field inspectors have to deliver annually. The outcome is an over-burdened and long drawn appeal system, where the success rate of the tax department has been less than 30%.

The collective outcome is a lot of effort and pain for limited outcome on revenue generation. The ongoing reforms are holistically designed to reduce tax litigation, and if the multi-level audit process eliminates the tax collection pressure on field inspectors, then the structural reforms needed for efficient tax administration will happen.  

The global tax landscape has been witnessing exponential changes, with tax administrations around the world continuously upgrading their old tax administration systems or replacing them with new ones, in their constant endeavors to capture and process taxpayer-specific information, data and financial transactions on real-time basis, using data analytics, data mining and artificial intelligence tools.

Also Read: Taxpayers' charter: Only select officials to sanction, conduct income tax surveys

Besides, 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.  

The next reform pertains to unveiling of a Taxpayers' Charter, complete with the tax department's commitments and duties of the taxpayer, which has revamped the Citizen's Charter of 2014. Similar to the taxpayer charters of developed economies such as the United Kingdom (UK) and Australia, the Indian Taxpayers' Charter assures the taxpayers of fair, courteous and reasonable treatment from the income-tax department.

While the intention of introducing the charter is certainly noble, its efficacy towards creating a better and people-friendly tax system will primarily depend on its implementation, legal status and enforceability.

Also Read: Taxpayers' charter silent on assessee's legal right, implementation

What next?

India has been making efforts to align its tax administration to keep up with the advancement of technology and reduce latency. In the recent past, India has implemented reforms such as digitising the filing of returns, payment of taxes, submission of grievances, reporting of tax transactions (Form 26AS), tracking and requesting of tax refunds, introduction of online compliance portals for validation of data, GST-N portal and GST e-invoicing, etc.

India's current efforts in restructuring its tax system, along with its technology initiatives to achieve a completely automated data exchange and data assessment, should eventually eliminate the need for compliance - something similar to what HMRC, the tax administration department of UK, is trying to achieve through its Making Tax Digital initiative. These developments also require taxpayers to assess their organisational readiness to respond to the accelerating digitisation of the tax administration.

(Gokul Chaudhri is a Partner and Amit Bablani is a Director with Deloitte Touche Tohmatsu India LLP.)