The Financial Express

A strong customer-focus will change the way taxpayers, especially foreign investors, look at tax administration

The Tax Administration

Reforms Commission’s (TARC) first report is an incisive assessment of the existing tax policy, particularly its functioning and the key behavioural aspects with reference to the ‘risk averse’ approach of the administration. Besides recommending a slew of bold reform measures to align the tax policy with contemporary best international practices, the report has been critical of the current practices and how their evolution over the past decade has not kept pace with reforms in other segments of the economy. The commission was exclusively mandated to review application of tax policies and laws in the context of global tax practices and recommend measures to enhance efficiency and effectiveness of tax services. Six focus groups constituted by the commission, comprising experts from the tax administration and other tax professionals, undertook in-depth analysis of various aspects of the terms of reference and made recommendations after intensive discussion with stakeholders including the field officers and taxpayers. Having participated in focus group debates, I can vouch for the non-partisan approach coupled with the candour with which field officers highlighted the challenges they face in their day-to-day functioning.

At the macro level, the TARC findings reveal the alarmingly vulnerable state of the tax administration, calling for immediate fundamental reforms in the organisational structure and setting down medium- to long-term objectives for ushering in strategic and structural reforms to enable a world-class service experience for the taxpayer under a unified management structure. Unlike expert committees in the past, which focused upon tax policy, the TARC report unequivocally emphasises upon administrative practices and its significance on holistic implementation (what the commission vehemently describes as fully implementable solutions, provided the legislature and the executive demonstrate strong willpower). It has opposed any form of cherry-picking.

From a structural and governance standpoint, delineation of the functional and financial autonomy for two boards of central taxes, CBDT and CBEC, is a huge step forward in restructuring the revenue functions of the government (the department of revenue). I have no hesitation in concurring with the commission’s recommendation to reorient the role and enhance autonomy for two boards, paving the way for the evolution of a unified management structure for all central taxes under CBDT and CBEC. Such convergence can be initiated in the form of selective immediate integration of common functions (e.g., human resource, vigilance, infrastructure and logistics, compliance verification, etc) and steadily culminating in a complete integration over next five years. The underlying philosophy of integration of functions is driven by combination of factors including making efficient use of government resources and avoiding duplication from a taxpayer-compliance standpoint. Proposal to institutionalise a Governing Council, headed by the chairperson of the board of central taxes, will strengthen governance and transparency standards. Setting up of a Tax Council to develop common tax policy, analysis and legislation for all taxes shall bring harmony in tax policy, besides separating it from implementation.

The commission’s prescription for evolving a strong customer-focus can cause a huge change in how the tax administration is perceived, particularly for global investors. This transition can be achieved in phases, beginning with centralising taxpayer-focused administration in the form of Large Business Services (LBS) which will be operated jointly by CBDT and CBEC; in phase two, this can be followed by replacing territory-based jurisdiction by function- and industry-specific jurisdiction for all taxpayers. Digitisation of the revenue department’s functioning would facilitate transition to a more responsive and taxpayer-friendly administration. Clearly, the administration is under-invested as far as our IT needs are concerned. Another area which may require overhaul is the ‘people function’ under the revenue department. Revenue officers’ over-cautious approach to decision-making, whether under the pretext of avoiding vigilance or retribution or simply to meet tax revenue targets, has led to frivolous tax demands and avoidable disputes clogging the system. The commission’s recommendation to develop a code of ethics for the revenue officer is another significant qualitative reform measure; to encourage revenue officers to make meritorious assessment, a proactive approach to preventive vigilance is a sound idea.

As regards the dispute resolution and management reforms, I believe the commission’s recommendations are comprehensive and proposes structural shift in the resolution framework. To minimise the volume of disputes, the commission recommends doing away with retrospective amendments as the first principle. I have no doubt that this fundamental tax policy shift alone could go a long way in restoring the administration’s lost pride and inspire stakeholders’ confidence in India’s macro-growth story. To avoid disputes on issues of interpretation, the Boards are recommended to release interpretative statements which would be binding on field officers. I strongly endorse recommendations for legislating ‘arbitration and conciliation’ as chief alternate dispute resolution (ADR) mechanism and, at the same time, wide-basing the reach of existing ADR forums such as the AAR, the DRP and the Settlement Commission. Moreover, a collaborative and solution-oriented approach to replace the largely prevalent egregious behaviour of the taxman with the taxpayer could help fix fundamental flaws at the ground level.

The most important bit of the commission’s report is it’s the manner in which its recommendations have been bucketed into implementable steps and milestones, ranging from the immediate actions in the current financial year (subject, of course, to the government’s acceptance of the report) to medium- and long-term framework, for the next decade at the end of which India can hope to flaunt a world-class tax administration. Enhanced focus on taxpayer service, through an independent vertical within the revenue department—with a Parliament-approved budget—is a forward-looking initiative towards overhauling the current regime. At the policy level, a behavioural shift shall be necessitated in law-making to refrain from legislating retrospective amendment.

Beyond the TARC’s ideation, strong-willed determination and keenness at the highest level of policy-making to embrace the transition holds the key to world-class tax administration set-up. This means not just political acceptance but a firm commitment on part of the executive to implement the TARC recommendations. This would first entail the desire to accept the current state of affairs as flawed and a desire to change it. It will be interesting to see if the commission’s report features in the forthcoming budget. It would be an important indicator of the strength of the new government’s resolve on tax reforms. For now, I see the writing on the wall.

The author is managing partner,BMR Legal and was member of the TARC focus-group. Views are personal