PM Modi Details The Contours Of Three Structural Tax Reforms
Narendra Modi, India's prime minister, waves after delivering a speech during an event in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

PM Modi Details The Contours Of Three Structural Tax Reforms

Prime Minister Narendra Modi urged capable citizens to pay taxes as he introduced a mechanism for faceless assessment and appeals, and a taxpayers’ charter to reduce litigation, simplify tax filing and prevent harassment of honest taxpayers.

Emphasising the need for a simpler tax regime, the prime minister said India has seen a substantial reduction in the number of tax scrutiny cases. The proportion of tax returns scrutinised every year has fallen by a fourth—from 0.94% in 2012-13 to 0.26% in 2018-19, he said.

But the tax base, he said, continues to be low. Of a population of 130 crore, only 1.5 crore individuals file taxes, Modi said. While rolling out the reforms, he urged taxable citizens who are currently not in the tax net but can pay to come forward and contribute to nation-building by being honest, compliant and keeping accurate records.

Structural Tax Reforms

The focus of PM Modi’s address was on three structural tax reforms: faceless assessment, faceless appeal and a taxpayers’ charter directing the department to trust tax payers and avoid treating them with suspicion without any evidence. All these were announced by the finance minister in budget this year.

The prime minister has now announced the dates for the rollout of the first two and shared contours of the third.

Faceless Assessments And Appeals

While faceless assessments will become effective from Aug. 13, taxpayers can benefit from the faceless appeal mechanism starting Sept. 25, Modi said.

Scrutiny assessments involve a high level of personal interaction between a taxpayer and the jurisdictional revenue department, which leads to certain undesirable practices on the part of tax officials, Finance Minister Nirmala Sitharaman had said in her budget speech earlier this year. To eliminate such instances, a scheme of faceless assessment in electronic mode involving no human interface will be launched.

Now, scrutiny as well as appeals against them will be randomly allocated to any tax officer throughout the country. For instance, a scrutiny case of a taxpayer in Mumbai can be allocated to an officer in Guwahati and an appeal against this decision will go to an officer in a third state, Modi said. Similarly, a review of this decision will be done by officers in some other city. Taxpayers will not be required to visit tax offices and can reply to any notice electronically.

In line with the prime minister’s announcements, the Central Board of Direct Taxes has directed that all assessment orders under the Income Tax Act will be passed by the National e-Assessment Centre. There, however, are two exceptions to this—orders assigned to central as well as international tax charges have been excluded from its purview. Any assessment order which does not confirm with the revised guidelines will be treated as non-existing, it will be deemed to have never been passed, the department said in a press release.

Cases involving search and investigation, that is central charge, and international tax issues have been kept out of the faceless assessment scheme, merely because of sheer complexity of issues generally involved in these cases, for which face to face interaction may still be required, Shailesh Kumar, partner at Nangia & Co LLP, told BloombergQuint.

It will be important how tax officers handling faceless assessments understand cases based on only written submissions and a lot will also depend on the quality of written submissions filed by taxpayers, Kumar said.

Taxpayers’ Charter

The charter aims to provide a fair and reasonable treatment to taxpayers by treating them as honest and directs the department to collect the right amount of tax, Modi said.

The Ministry of Finance detailed the purpose of the charter in tweets following the prime minister’s announcement. It said:

  • The department must follow the due process of law and respect the privacy of taxpayers by maintaining confidentiality and not disclosing any information unless authorised by law.
  • Revenue department should provide complete and accurate information to taxpayers which will ensure timely decision-making.
  • The department must allow a taxpayer to chose an authorised representative of his choice, provide a fair and just system and reduce the cost of compliance for taxpayers.

The charter's emphasis on respect for taxpayers privacy and maintaining confidentiality stands out, Mukesh Butani, partner at BMR Legal, said. An absence of such categorical statements, in the citizen charter of the CBDT as it exists, have led businesses to face difficulties relating to speculative news on tax affairs of individuals and corporates coming in the public realm and impacting their right of privacy, he said.

From today’s announcement, I could see a leaf from the U.K. charter focusing on respect for taxpayers, and Canadian, South African charter which have focused upon confidentiality, secrecy and privacy as the basic tenets of common law system.
Mukesh Butani, Partner, BMR Legal

Divakar Vijayasarathy, partner at DVS Advisors LLP, agreed. The announcements could not have come at a better time, ensuring acceptance from both the taxpayers and the officials and will aid in attracting foreign capital. This should be coupled with tax certainty and other reforms like punitive measures for high pitches and fictitious assessments to derive optimum mileage, he said.

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