Reforms in Tax Administration

[This is an excerpt of my speech at the Central Excise Day Celebration published by Chief Commissioners of Central Excise and Service Tax Mumbai and Western India Regional Council of The Institute of Chartered Accounts of India. February 2014]

The fundamental role of tax department always has been to raise revenue for the government. Over the recent past there has been fundamental shift in the working of tax administration. Tax administration is attempting see its role as an enabler in helping the citizen to comply with the tax laws than an enforcer extracting funds. Thus it has been trying to achieve balance both in taxpayer service and in enforcement. Towards this it has to give equal importance to making tax avoidance painful and making tax compliance easy.

Today’s rapidly changing environment is adding further complexities in tax administration. Growth in international trade and commerce driven by globalisation is a major contributor to this complexity. Goods and services are produced in one country using inputs from a number of other countries and consumed in a third set of countries. The management and ownership of these entities are also spread across the world. Identifying the taxability and fair computation of taxes become a cumbersome and complicated matter. 

The other challenge is related to taxing of online transactions. With the trade happening completely in the virtual world there is a need to revise and refine the laws and rules for fair tax computation and easy and practical enforcement. Similarly, the development of tax shelter products and use of tax havens is another challenge, which emanates from globalization. The new technology solutions and boundaryless commerce open new avenues of frauds and tax evasions to the unscrupulous

Tax Reform has to be seen from this paradigm shift in landscape.

There are various factors that should be taken into account in this reform process They include:

a.      Simple tax system to facilitate administration and reduce compliance cost: It has been proven across the world that simple tax systems will improve compliance and make tax administration more efficient. A simple tax system will have few taxes, limited number of rates for each tax and limited exemptions. Forms and Procedures would be simple. Information required on tax forms would be kept to a minimum and readily available from taxpayer’s books and records. Taxpayers, to the extent possible, may not be asked to present data that would require them to keep special records for tax purposes.

b.      Taxpayer Communication: A well thought out communication strategy is a key element of taxpayer service by making information available to and addressing concerns of the taxpayers and business community

Objectives of Communication Strategy: The broad objectives are           

                                                          i.             Complete coverage: Ensure communication reaches all potential taxpayers

                              ii.           Uniform understanding: Ensure there is uniform understanding of  Laws and compliance across all taxpayers

                                 iii.             Mobilise taxpayers community for registration and voluntary compliance by preparing an environment to overcome  apprehensions at the taxpayer’s end

                                               iv.            Sustain the momentum: Reassure and amplify positive experiences of registration and voluntary compliance to interest and excite large taxpayer community to follow suit

Channels: Today multiple channels are available to reach the citizen. The department should have a well thought out strategy to use these multiple channels instead of just limiting to statutory publication in official communiques..

In addition there should be a channel to provide reliable answers to frequently asked queries and doubts that would be generated by the public awareness campaign

c.       Taxpayer Service: The quality of taxpayer service will be a significant determinant of the taxpayer compliance. Taxpayer services shall adopt a customer centric approach and shall foster to establish the following:

                                            i.             Consistency of service between what is expected by taxpayer and what is perceived by tax authority.

                               ii.             Translation of service expectations into service specifications

                                                iii.             Adherence to service specifications consistently during service delivery

                             iv.             Consistency of service delivery with taxpayer communications

The elements of taxpayer service will include:

Taxpayer Rights and Obligations: Taxpayers rights and obligations and the procedures for redressal of their grievances could be explicitly declared and published and adequately communicated

Ease in compliance: The policies, forms and procedures relating to compliances could be easy to understand and easy to comply with.

                                             i.      All key administrative processes including the procedure for taxpayer registration, tax payment, filing of tax returns/ grievances/ appeals and applications for rulings etc could be automated, reducing the need for manual intervention by the taxpayer and the tax administration to the barest minimum.

                                                ii.     The tax department should allow taxpayers opportunities to provide feedback relating to administrative policies and procedures.

                         iii.      The department could continuously strive to refine administrative processes from the Taxpayers’ perspective so as to minimise compliance burden

Service Level Standards: The department could publish service standards with respect to various services to taxpayers like assessment, grievance resolution, refunds and be accountable to honour these service standards. The extent to which these levels are achieved may be made a part of performance measurement for the department and it may be made available in public domain.

Reliable and up- to-date taxpayer information

                                                              i.      Provide taxpayer information (self)services – a real-time convenient online login-based secure access to taxpayer on its registration details (e.g., legal full name, physical address, date of incorporation, industrial sector), tax payment history, status of returns, refunds, etc, specific communications from the department  and with an online facility for query and grievance handling.

                                                            ii.      Up-to-date information relating to law, procedures and regulations could be made readily available to taxpayers in a simple and coherent manner through a mix of identified channels including online modes.

                                                          iii.      The department could consistently deliver quality information and respond to inquiries and requests from taxpayers in an accurate and timely fashion to  help  them meet  their obligations;

                                                           iv.      The department could aim to resolve Taxpayer queries at the first point of contact, avoiding the need for subsequent contacts on the same subject

Assured confidentiality and privacy of taxpayer information

                                                              i.      The department should use taxpayer information only to the extent permitted by law;

                                                            ii.      Privacy of taxpayer information will  be  protected  to  a  level consistent with the standards applicable to comparable public and private sector organisations such as banks

Time bound Grievance redressal A Grievance Redressal Mechanism to be made available to taxpayers for time bound redressal of grievances.

Education: Continuous education of various stakeholders is critical for any tax administration. Therefore it is imperative to have a focused effort in educational initiatives that creates an ecosystem to help augment the department’s capacity to maximise the outreach.

Certification Program: The department could consider establishing a certification with programs tailored for finance professionals responsible for tax compliance, tax agents etc. This will help in ensuring a certain level of learning and provide a bench mark to measure level of expertise.

d.      Enforcement and Compliance Management: Simple tax system, ease of compliance, self-assessment and high quality taxpayer service will make compliance painless and incentivize compliance. Equally important are means to make non-compliance painful which is an equally important lever for better compliance.

                                            i.      A robust compliance management mechanism will identify the risks associated with non-compliance, and strategies should be developed to mitigate and counter those risks.

                                          ii.      These may involve interventions by way of profiling risk, auditing, developing third-party information sources, general anti-avoidance efforts, prosecution and proposals for legislative change.

                                        iii.      The department should monitor compliance activity to detect and deter noncompliance.

Development of information system to counter risk to revenue

A well designed information system with the provision to receive and integrate financial data from diverse sources and develop risk profiles using data mining and other profiling techniques will be the main feature of compliance risk management strategy. The department could take steps to integrate the taxpayer data in different tax systems. It could also take steps to identify data sources in public domain and define legal framework to access to key third Party information (like database of ministries/departments dealing with corporate affairs in the country, relevant databases of regulatory authorities in the sectors of interest, etc)

Tackling Tax Fraud

The department could adopt a zero tolerance policy for tax frauds. For this purpose it should-

                                 i.            Design and implement efficient strategies to deal with organised tax evasion and fraud and prosecute under criminal law persons found involved in fraudulent activities. In such cases it will use powers of search of business premises and arrest of suspects.

                               ii.            Tax frauds require specialised multi-disciplinary investigation skills including tax investigations, computer forensics, and criminal investigations etc. Therefore, the department may set up specialised Enforcement Unit having the necessary skill sets for investigation into tax fraud and recovery of difficult tax debt.

                              iii.            The findings of investigations into tax frauds could also be used for re-determination and recovery of evaded tax liabilities.

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e.      People In the current environment with fast-paced change in the business domain and technology tools it is important that the department has cohesive strategy to attract, develop and retain resources with the relevant skill set so as to provide competent and trained managers and staff with high professional and ethical standards. It should also provide continuous skill up-gradation of its employees. This could  to a great extent limit incentives and opportunities for rent seeking and inappropriate behaviour

Emphasis will have to be placed on proper and continual training and development of the personnel for achieving professional competence for dealing with the complex issues in the legal landscape. Training programs should lay emphasis on behavioural aspects involved in dealing with taxpayers with courtesy, fairness, and consideration..

The tax administration thus should evaluate these dimensions on a regular basis and reform the tax administration if it has to stay relevant and effective.