JUNE 18, 2014

By TIOL Edit Team

"THE Indian tax administration is at its nadir. A fundamental and deep reform is urgently called for. There is no time to lose if investment is to be revived and its full potential reached, and an eventual tax revolt through capital flight or other direct protests is to be averted."

This alarming observation has not been made by an industry association or any frustrated tax payer. This is the conclusion drawn by the Tax Administration Reform Commission (TARC) in its first report captioned 'Tax Administration Reform in India-Spirit, Purpose and Empowerment', which was made public by the Government on 16th June 2014.

As the report was submitted to Finance Minister Arun Jaitley on 30th May, he and his budget-making team in the Ministry has had adequate time to ponder over TARC's recommendations.

We expect Mr. Jaitley to take a definitive stance on TARC's recommendations in his eagerly awaited, maiden budget speech for which a date is yet to be announced. The degree to which Modi Government embraces tax reforms would show its political will to bring in good days (aache din) for the tax-payer and the public at large. After all, aache din can be sustained by robust growth of tax revenue.

TARC recommendations ranging from initiatives for customer (taxpayer) focus to merger of Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) are rational. They ought to be accepted without any hesitation.

Experience shows that Government appoints a committee to process the recommendations of any reforms panel instead of taking a direct and timely call. This processing committee, which is often inter-ministerial, shoots down several recommendations of the reforms committee, accepts certain recommendations in principle without any definitive time-frame for action. The balance recommendations are pursued for implementation.

While this committee-on-committee approach might be justified in taking a call on contentious issues, there is no reason to follow this line of action on TARC's recommendations as they are key to accelerating economic growth and generating entrepreneurial and work opportunities.

We see no hitch straightaway implementation of TARC's several recommendations such as avoiding retrospective amendments as a principle, following collaborative and solution oriented approach to settlement of tax disputes, bringing in clarify in law and procedures through adoption of internationally accepted best practices based process and launch a special drive by both CBDT and CBEC to review and liquidate cases currently clogging the system by setting up dedicated task forces for that purpose.

There is also merit in TARC's recommendation that the current practice of raising tax demands irrespective of merits should be discontinued. It is also rational to expect CBDT to put in the public domain a national database of the non-profit sector to bring transparency.

TARC's recommendation that the income tax authorities should provide pre-filled tax returns to all individuals is pragmatic and consumer-friendly. The taxpayer will have the option to accept the tax return as it is or modify it. In either event, the filing process would be completed with the submission of the tax return electronically.

No one can find fault with TARC's call for regular benchmarking of performance of CBDT and CBEC with that of tax administrations in other countries. We hope Modi Government would be the first to embrace International Monetary Fund's (IMF's) Tax Administration Diagnostic Assessment Tool (TADAT) when it is launched in 2015. TADAT, currently deployed on pilot scale, is a comprehensive, standardized approach for assessing performance of tax administrations across the globe.

We commend TARC's suggestion that "The two Boards must embark on selective convergences immediately to achieve better tax governance, and, in next five years, move towards a unified management structure with a common Board for both direct and indirect taxes, called the Central Board of Direct and Indirect Taxes."

This proposal, in one form or the other, has been made by previous committees and not acted upon by the Government. Integrated, single tax administration, backed with full autonomy, is a win-win solution both for the exchequer as well as for the honest taxpayer. It is a losing proposition for only powers that be love discretion and crooked tax payers that are always fishing for regulatory loopholes and complexity.

To bring home the importance of governance structure in collection of taxes one needs to refer to an Asian Development Bank's (ADB's) study on Institutional Arrangements for Tax Administration in Asia and the Pacific that was released in December 2013.

The study concluded that "The average tax revenue per GDP ratio in 2010 for the seven countries with the ministry directorate model was 9.2%, and the same figure for the nine countries with the semi-autonomous body model was 16.8%."

One aspect of reforms that has not been addressed adequately is the rampant corruption in tax administration. We would take TARC's call for strengthening of preventive vigilance to the level of electronic surveillance The interface between tax officials, taxpayers and intermediaries should be put be always under regular surveillance. This is the best way to prevent corruption and revenue leakages.

Simultaneously, we would recommend liberal incentive-based salary structure for all tax officials. This should be a transparent system to prevent cornering of benefits by a few or to prevent abuse of the incentive system.

Both carrot and stick should be deployed effectively to clean up the system and restore the credibility of tax administration in the eyes of the public.

TARC is right in turning the heat on the Government by stating that its recommendations should be considered as a package and not on a pick-and-choose mode. The latter approach would not work. It suggests that in that case it would be better to set aside the recommendations in toto and reconsider them at a future date when India may be ultimately ready to make serious changes that are needed but is not up to facing them as of now.