Transparent taxation

ECONOMY/ GOVERNANCE

Topic: General Studies 2,3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development.
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Transparent taxation

Context: Prime Minister launched the platform ‘Transparent Taxation—Honouring the Honest’ on August 13, 2020, comprising of faceless assessments, faceless appeals and a taxpayer’s charter.

What are the issues plaguing Tax administration in India?

1. High Tax Dispute ratio

• The Receipt Budget 2020-21 indicates that the amount of taxes on income which is under dispute was Rs 8 lakh crore at the end of 2018-19. This is 5.8 times the tax amount not under dispute (Rs 1.38 lakh crore)
• Of this, the corporation tax amount under dispute at the end of 2018-19 was Rs 4.06 lakh crore—4.9 times the corporation tax amount not under dispute (Rs 0.83 lakh crore).

2. High Refund: 

• A significant portion of corporation tax collected during the first quarter of a financial year is used to refund previous year’s excess collection. 
• It was about 48% during the first quarter of 2018-19 and 39.8% during first quarter of 2017-18.
• The CAG indicates in its 2020 report that “the possible reason for this higher refund could be exaggerated demands raised by the department during the previous financial years to meet their revenue collection targets.”

3. Indiscriminate usage of Appeal Process

• When it comes to appeals, tax officers needlessly pursue these at higher levels, regardless of the outcome since there is no penalty on the ITD and its officers. 
• Cases pending with the ITAT increased 2.4 times in 2018-19, to 92,205, compared to 37,572 cases in 2017-18. 
• The total cases pending at higher levels (ITATs, high courts, the Supreme Court) increased to 1.35 lakh in 2018-19 compared to 0.82 lakh cases in 2017-18

4. Long time to resolve Tax disputes

• Any tax dispute in India normally takes 15-20 years from the time an assessment is completed to the time the Supreme Court possibly takes a decision

5. Aggressive Targets leads to Tax Terrorism

• The CBDT is known to set high tax collection targets for field officers, which forces them to be aggressive in collecting advance tax, issuing inappropriate assessment orders, leading to tax terrorism,
• As a result, demands difficult to recover have been increasing year after year, and accounted for 98.8% of the total arrears of demands in 2018-19

Significance of the Transparent Taxation initiative

• Faceless assessment and appeals aim to eliminate physical interface between taxpayers and tax authorities, thereby bringing in greater efficiency and transparency to the assessment and appeal process
• This helps in reducing tax officer’s discretion
• Tax terrorism and scope for corruption is minimised
• Faceless assessment system should reduce litigation since taxpayers will no longer be attached to a specific office or territory or jurisdiction for assessments. Instead, the National e-Assessment Centre (NeAC) will be the main gateway for communication between taxpayers and tax authorities.

Way Ahead

• Clearing Backlogs: While the faceless assessment and appeal system will address the administration issues, the CBDT should focus on resolution of the high number of pending appeals before various authorities
• Publishing Progress: The CBDT should publish on its homepage on a monthly basis a report on the total number of appeals pending at the beginning of the month, disposed of during that month and the pending appeals at month-end
• Regular Monitoring: The monthly updates to be released by CBDT needs to be reviewed every month by the FM, just as the PM reviews infrastructure projects. 
• Prevent Frivolous filing of Cases: The CBDT should enhance monetary limits for filing appeals by the ITD to Rs 1 crore before ITATs, Rs 5 crore before HCs and Rs 10 crore before the SC. These enhanced limits would prevent tax officers from filing routine frivolous cases and enable judicial authorities to focus on high-value litigations.
• Ease the process for Obtaining refunds: The tax officer faces no prescribed time limit for issuing the refund. A time period of 30 days should be set for refunds consequent to such orders, and if the refund is not paid within time period interest should be levied on the refund amount

Connecting the dots:

• Retrospective Taxation: Vodafone Case