Transparent taxation: Laying the foundation for an efficient tax regime and lauding the honest taxpayer

Preface

On 13 August 2020, the Prime Minister launched the 'Transparent Taxation -- Honouring the Honest' platform. It focused on improving tax transparency, ease of compliance and accountability.

As part of the launch, three important reforms were announced -- the Faceless Assessments, Faceless Appeals and a Taxpayers Charter. These reforms are in line with the Union Budget proposals of 2019 and 2020.

Interestingly, on the same day as the launch, the Government also proposed certain measures to widen the tax base by: a. Expanding the scope of transaction reporting; and, b. Proposing mandatory tax return filing for specified taxpayers.

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1. Faceless Assessments

Background

The Finance Minister in the Budget speech of July 2019, acknowledged that "existing system of scrutiny assessments in the Income-tax Department involves a high level of personal interaction between the taxpayer and the Department, which leads to certain undesirable practices on the part of tax officials."

Accordingly, a faceless tax assessment scheme was proposed to be implemented to counter these drawbacks of a physical scrutiny assessment.

On 7 October 2019, the tax administration launched the 'Faceless Assessment Scheme'. It contained detailed guidelines on the procedural aspects of e-assessment as well as a mechanism to facilitate serving of tax notice, recording taxpayer replies and rendering assessment orders.

What changes?

On 13 August 2020, the Prime Minister announced major reforms to the faceless assessment scheme. Here are the highlights of these reforms:

• Enhanced scope to cover all tax assessments -- regular scrutiny assessments, best judgment assessments, etc.
• Assessments through other means to be invalid
• Intrusive survey actions by tax administration no longer permitted. Can now be conducted only by the Investigation or TDS wing, with the approval by Chief Commissioner of Income-tax or above
• Assessment selection through AI and data analytics
• Tax notices to be issued centrally with a Document Identification Number
• Territorial-based assessment abolished. Assessment cases will be randomly allocated to tax officers located anywhere in the country
• Team-based approach for assessments and review. Centrally managed and controlled through the National e-assessment Centre, assessments will now be allotted to Regional e-assessment Centre who can seek assistance from the technical unit and verification unit, on a need-basis.

Exceptions to the above:

Cases relating to International Tax, Serious frauds, Major tax evasion, Sensitive and Search matters, Black Money Act and Benami property

Our comments

The new scheme brings a paradigm shift in rendering tax assessments which was riddled with unfair practices, fear and harassment. The most important feature of the reforms is that it is now mandatory to render all assessments under the faceless scheme.

In the new scheme, a faceless central team now takes centre stage in controlling and managing all assessments. This has two key takeaways: a. there is no scope for individualistic/biased assessments as all assessments will undergo a review/approval of the national e-assessment centre before being issued to the taxpayer; and, b. technical, factual submissions and arguments will now be the only tool for a taxpayer to defend the tax treatments/actions adopted.

No doubt, the new scheme is a game-changer for tax assessments; however, its success would depend on quick resolution of procedural/ integration issues, building a seamless infrastructure that includes the positives of a physical assessment, and more importantly, on how it integrates with the Taxpayers Charter.

2. Faceless Appeals

As part of the Transparent Taxation platform launch, the Prime Minister also announced the facility of Faceless Appeals for all taxpayers across the country. Faceless Appeals will take effect from 25 September 2020.

The key features include:

• Random allotment of appeals to any appellate officer in the country
• Identity of the appellate officer hidden
• No requirement for physical visits/interaction with the officer
• Team-based approach for decision making

Exceptions to the above:

Cases relating to International Tax, Serious frauds, Major tax evasion, Sensitive and Search matters, Black Money Act and Benami property

Our comments

The features announced are more in line with the faceless assessment scheme such as random allotment of appeals, team-based approach, etc. Faceless appeals promote unbiased resolution of issues by enhancing the focus on the tax dispute rather than on the taxpayer. However, a more comprehensive assessment of the proposal can only be made once the detailed guidelines on the same are issued/notified.

3. Enhanced Scope of Transaction Reporting

Background

In the Budget Speech of 2019, the Finance Minister proposed to implement 'pre-filled' tax returns as a measure to ease compliance. It was announced that the details for tax returns will be sourced from taxpayer’s transactions with various authorities, such as banks, stockbrokers, travel agencies, etc.

As a first step towards this goal, the Government introduced the Annual Information Statement (AIS) vide Section 285BB of the Income-tax Act, 1961 and Rule 114-I of the Income-tax Rules, 1962. The AIS (also known as the new Form 26AS) subsequently notified in May 2020, is a comprehensive statement containing financial transactions and other relevant information about the taxpayer.

Currently, it captures the following information of a taxpayer:

• Tax deducted or collected at source
• Specified financial transactions
• Payment of taxes
• Demand and refund
• Pending proceedings
• Completed proceedings
• Any other information (such as DTAA benefit, etc.)

Under specified financial transactions, the Government has mandated the authorities concerned to report the following annual aggregate high-value transactions of a taxpayer:

• Cash deposit of Rs. 10 lakhs or more in any savings account
• Purchase of bank drafts or pay orders in cash for Rs. 10 lakhs or more
• Investment of Rs. 10 lakhs or more in fixed deposits
• Investment exceeding Rs. 10 lakhs in RBI issued pre-paid instruments
• Cash deposit/withdrawal in a current account exceeding Rs. 50 lakhs
• Cash consideration of Rs. 2 lakhs or more for sale of goods or services
• Foreign currency expense above Rs. 10 lakhs
• Credit card payments above Rs. 10 lakhs
• Purchase of immovable property with guidance value of above Rs. 30 lakhs
• Investment in shares, bonds, mutual funds above Rs. 10 lakhs
• Share-buy backs above Rs. 10 lakhs
• Cash deposits above Rs. 2.5 lakhs during de-monetisation period

Proposed measures

The AIS serves as a tool to widen the tax base and ensure no income escapes tax. With this intent, the Government has now proposed to enhance the scope of reporting by seeking information on a wide range of financial transactions. These include:

• Payment of donations/education fees above Rs. 1 lakh per annum
• Electricity consumption above Rs. 1 lakh per annum
• Domestic business class air travel/foreign travel
• Payments to hotels above Rs. 20,000
• Purchase of jewellery, painting, white goods, etc. above Rs. 1 lakh
• Deposits/credits in current account above Rs. 50 lakhs
• Deposits/credits in non-current account above Rs. 25 lakhs
• Payment of property tax above Rs. 20,000 per annum
• Life insurance premium above Rs. 50,000
• Health insurance premium above Rs. 20,000
• Share transactions/D-mat accounts/Bank lockers

Additionally, it is now proposed to introduce mandatory tax return filing for the following specified persons:

• Persons having bank transactions above Rs. 30 lakhs
• All professionals/businesses having a turnover of above Rs. 50 lakhs
• Persons paying rent above Rs. 40,000

Our comments

The enhanced scope of reporting serves a dual purpose: a. Widens the tax base as more and more transactions are reported to the tax administration; and, b. Enables pre-filling of tax returns as the financial information is now captured in a single statement.

Taxpayers now have to be mindful of their transactions and the impact it will have on their India tax outflows. Armed with the comprehensive information under the AIS, tax scrutiny assessments are likely to more in-depth with an aim to fish out any undisclosed information/under-reported income.

With each new step, the Government is taking measures to curb tax evasion and improve transparency in the system.

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4. Taxpayers Charter

Background

The concept of implementing a Taxpayers Charter to enhance trust and improve efficiency in the tax administration was first announced in the Union Budget of 2020.

While speaking on this subject, the Finance Minister stated, "An important aspect of both ease of living and ease of doing business is fairness and efficiency of tax administration. We wish to enshrine in the statutes a “Taxpayer Charter” through this budget. Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind."

This laid the foundation for the Taxpayers Charter, which was launched by the Prime Minister on 13 August 2020.

What it means

The Charter contains a 14-point commitment of the tax administration towards taxpayers. It serves as an ethos for the tax administration as it looks to build trust and fairness in its operations.

Here is an essence of these commitments:

Fair-play 

1. Provide a fair and just system
2. Adopt a fair, courteous and reasonable approach
3. Treat the taxpayer as honest
4. Collect correct tax amount and provide complete and accurate information
5. Information confidentiality and respect taxpayer privacy
6. Enable representative of choice

Service efficiency

1. Establish service standards and periodic reporting
2. Ensure accountability
3. Provide facility for complaints, appeal and review
4. Timely decisions and reduce cost of compliance

Our comments

With just 1.5 crore taxpayers, India has one of the lowest tax bases in the world. Adding to these woes is the constant harassment of honest taxpayers by the administration.

The Charter, if implemented in its true spirit, will go a long way in improving the country's growth prospects and promoting better interplay between the administration and the taxpayer.