Reforms in Tax - A taxpayer’s wish list

[Excerpts of my speech at Conference on India 2.0 as a part of 37th SKOCH Summit at India Habitat Center, New Delhi September 2014] 

 “The only two things certain in life are taxes and death”. Why was taxes compared with morbidity and death and taxmen considered a villain? Because tax was considered legal extortion. The expected role of taxman was to make life difficult for those who don’t comply. The tax laws were complex and complicated that even genuine taxpayers ended up making mistakes. Instead of being an enabler catching these mistakes was the prime focus of the department. Complexity of the tax law was a aid in this enforcement by terror and a tool for the corrupt.

The modern tax department is attempting a shift in its focus. The shift is towards being an enabler, making it easy and convenient for the genuine taxpayer to comply.

This is one of the tectonic shifts that are happening in the environment for the tax administration. There are more. The quantum leap in the volume of trade and commerce in the economy is resulting in exponential growth in taxpayers and taxable transactions. The globalisation leading increased international trade and e-commerce are adding to complexities to tax administration. In India the impending transition to a nationwide transition to Goods & Service Tax (GST) is another big shift expected in the near future. (Though this near future shift has been eluding us for years, we hope it will fructify this time)

In this increasing complexity and exploding volume the challenges are manifold for the tax administration especially with shift in their focus and the attendant reforms it is attempting.

Let us take a look at some of the expectations the taxpayer have with respect to these reforms.

Simple, Up-to-date, consistent information online

To begin with the taxpayer expects simplification of laws which are easy to understand and comply with limited exception and a nationwide standardisation. We also expect comprehensive information available online. Today many of the tax administrations in our country have web portals and have made extensive information available online. But they often come with a caveat along the following lines. “The department does not claim this to be up-to-date or comprehensive. The taxpayer is expected to keep himself abreast of all latest notifications and amendments and the department is not responsible for any fashion for any error and omission in the information available in this site”

We need to go forward in our information dissemination. We need you to guarantee that “what is not published on our portal does not exist” I am not suggesting a utopian model. Many regulators and law enforcement bodies in the world have already reached this level of sophistication.

Will it be possible to publish your interpretation of confusing provisions very clearly? In this manner it would also be consistent in its dealing with the taxpayers across the country.  It could help in reducing the rent seeking behaviour of many assessing officers who attempt to interpret for their convenience.

Don’t ask for same information again and again

Various tax departments in the country ask the taxpayers same financial information multiple times. Can you establish a mechanism to collect financial information from the taxpayers once and share the same among them as needed? Only in case in which it needs additional information for specific investigative purpose it should contact the taxpayer again to provide the same.

Can we think about standardisation of data format?

Different tax authorities today specify different data formats and technology specific forms to submit the data. Could you consider establishing a technology agnostic data format like XBRL for collection of data? This would also require a standard taxonomy being developed for all financial reporting for various tax departments if not for all other regulators who require the same financial information.

Avoid calling me in person and when you call please don’t make me wait

Can you consider establishing processes that could avoid physical visits for routine matters? Tax payers should be able to interact with the officers over phone or mail for routine matters. Even when they are required to visit for some clarification they should be given advance intimation of the documents and information they have to bring and should give them appointment to and adhere to the agreed time and avoid making them wait.  

Can I pay tax from my account in my bank?

In this day and age of electronic connectivity can you allow me to pay all my taxes from my account of choice instead of asking me to open accounts in different banks by different tax authorities

What I am hoping are not impossible to be met. But it needs a change in mind-set. We can hope that we will reach there one day

To make a crooked stick straight, we need to bend it the contrary way. - Michel Montaigne

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. 

Lessons from Tax Information Network - IT Enabled Compliance and Enforcement

One of the greatest expectations with regard to any new invention or technology is the belief that the world is waiting for it with open arms and an eager welcome. The reality is often the exact contrary. There are hardly any new ideas, art or solutions that were given an immediate and enthusiastic reception when they were first introduced. This is true of the incandescent bulb Edison invented or telephone by Alexander Graham Bell or the introduction of demat trading in Indian capital market.

They all began with a sense of euphoria among a few who introduced it, accompanied by a buildup of media expectation followed by disappointment that the concept has not caught on like wild fire. It took some time for the import of the idea to percolate down, from the few early adapters to the public at large, through a gradual process of churning among a whole host of people and processes.

The same is true for Tax Information Network (TIN) that has been established by NSDL on behalf of Income Tax Department. The core of TIN is creation of a consolidated tax ledger for each taxpayer giving the complete details of tax deducted (withholding tax) on his behalf by all deductors (entity withholding tax) and the tax deposited by him directly with the banks.

This consolidated tax ledger is expected to help the tax department to ensure that the tax credit given to the taxpayer is indeed against funds received into the government coffers.

This also aids the taxpayer to verify, well in advance, whether the deductors and the banks have done their jobs properly to reflect a complete view of his tax credits in the tax ledger. Such a comprehensive tax statement can remove the need for the taxpayers to collect Form 16s (Certificates giving details of tax withheld from the entity withholding the tax) from all the deductors who have deducted tax for getting credit of all the TDS.

TIN was inaugurated in January 2004. First challenge was to put in place the systems, procedure and infrastructure for the 13000 odd tax collecting bank branches for uploading to the TIN central system, details of the tax challans (for tax payment instrument identification) on a daily basis.

The second challenge was to establish a nationwide network of facilitation centres to interface with the taxpayers and also an online facility for the deductors to furnish their returns directly. (This infrastructure had to take care of the difference in ICT infrastructure of the large and small companies across the country)

The central system was also to be equipped to match the TDS returns with the challan details (details of tax payment instruments) so that the tax ledgers giving the details of all incomes and tax deducted could be created.

Establishment of infrastructure is the easier part. But ensuring high degree of compliance and data quality is an uphill task of enablement, education, feedback and enforcement. It needs conviction, patience and discipline. It also requires ability to keep the big picture in mind and taking one incremental step at a time to reach the ultimate goal. It is easy to lose heart or get impatient on the way and run after quick-fix solutions.

Like any other project that attempts significant transformation, TIN is also confronted by such woes. There were many who were ready to condemn this. This crowd consisted of many varieties. Some of them were taxpayers and taxmen getting scared of the increased transparency and the resulting ‘loss of flexibility’ in tax compliance and tax enforcement. Some were those who felt that they lost the lime light in this new initiative. There was turf war and professional jealousies. Then there were those who were simply impatient and felt disappointed that the change did not materialize like the transformation of Cinderella and they were too eager to keep tinkering which was sometimes counterproductive.

The encouraging thing is that in spite of these, the project is going forward. This was possible only on account of the diligent and patient efforts by some of the officers of the department. The Directorate of System being the nodal agency for this project naturally took the lead. Many officers of the department from the field also played active role. Office of the Principal Chief Controller of Accounts and the Reserve Bank were some of the other agencies who extended helping hand.

One of the most significant initiatives by the department in this direction was the efforts it took to garner support from the taxpayers in improving the compliance and data quality.

TIN provides an online facility for the taxpayers to view a comprehensive view of their tax credits over the net. But many taxpayers were unaware of this and many did not feel it important to refer to this as they continued to get their credit on the basis of the certificate provided by the deductor.

The department decided to address this issue in a taxpayer friendly fashion. It commenced forwarding of the tax credit statement by email and letters for the current and past year directly to the taxpayer with explanation on what to do to ensure that all the eligible credits have been accounted.

This has helped to educate the taxpayers that in future they may have little difficulty in getting tax credit if they ensure that their tax credit statement is correct and complete.

Similarly the reminder letters that TIN forwards to the deductors have helped those forgetful souls about their responsibility under the law to deposit tax deducted and file returns. The central system of TIN where all the returns were consolidated made it easier for the Department to track the defaulters and take appropriate action.

Inconsistency letters sent by TIN to the deductors is helping the deductors to identify their mistakes and to take necessary precautions to prevent such errors in future. It also reminded those deductors who paid TDS but did not file returns and those who filed returns but did not deposit tax. This information is also available online helping the deductors to rectify their errors.

This is a total cultural change for the department. For the first time, instead of sending notices, the department is communicating with the taxpayer feedback on information related to tax credit it has with respect to each taxpayer. Advising him to verify whether it is correct and rectify errors, if any, much before the department look at these details with the eye of an enforcer and start taking actions.

These movements towards transparency and more automated enforcement have helped the tax collection effort of the government. As per newspaper reports, in the last three years (Till 2008) the direct tax collection grew by more than 30% per year overtaking the indirect tax collection first time in history. The contribution of these efforts in strengthening the tax administration was acknowledged in a public function in August 2008 by Shri P Chidambaram who was the Finance Minister of India.

I am sure that co-coordinated efforts from various stakeholders can help to provide a tax administration system that is efficient, effective and provides high standards of service to taxpayers, at the same time, collects the revenues required by law to fund necessary public services.