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For faceless tax scrutiny to be successful, tax rules ought to be drafted with clarity

Unfortunately, in our Indian tax system, legal disputes ensue because tax laws are not drafted with clarity and are hence misused by tax officers. Such litigation adds to cases in the country’s already overburdened courts.

Written by Rajesh M. Kayal |
Updated: July 26, 2019 8:02:11 am
nirmala sitharaman, nirmaNirmala Sitharaman, income tax, income tax collections, Nirmala Sitharaman on tax collection, direct tax revenue, Taxpayer budget 2019, TDS Budget 2019, Budget announcements taxpayers, Income tax slabs budget 2019, indian expressala sitharaman budget, union budget 2019, union budget sitharaman, gdp figure budget, sitharaman finance minister, Finance Minister Nirmala Sitharaman. (Express Photo: Prem Nath Pandey)

An important announcement in the finance minister’s budget speech pertains to the introduction of a system of faceless tax scrutiny assessment. Such an assessment is commendable because in the first place, it means that the assessing officer would not know the taxpayer’s identity and would use only the online filing, and technology platform, to scrutinise the details of the tax payer. Second, there won’t be any personal interaction between the tax payer and the tax officer. This step aims to eliminate corruption in the tax department. However, there are questions over whether faceless scrutiny can end the harassment of taxpayers.

For faceless tax scrutiny to be successful in all respects, the most important rule is that tax rules ought to be drafted with utmost clarity. Unfortunately, in our Indian tax system, legal disputes ensue because tax laws are not drafted with clarity and are hence misused by tax officers. Such litigation adds to cases in the country’s already overburdened courts. Take for example section 115BBDA. Under this section, dividend of more than Rs 10 lakh received by a resident tax payer from domestic or other companies is taxable. However, the online assessment order makes the dividend received by a non-resident taxable as well; dividends from mutual funds are also taxable. Online rectifications are rejected, leaving taxpayers with no option but to file a tax appeal and then wait for years to get justice. Even a brochure issued by the tax department to clarify the issue of taxing non-residents wrongly mentions that such people have to pay tax for a dividend above Rs 10 lakh.

One can give a number of such examples. In the past, section 80HHC was the best example of misinterpretation of tax provisions by tax officers. It meant that almost every taxpayer who availed benefits under the section had to undergo litigation on various grounds. Such cases took years to settle. It is, therefore, more important to draft tax rules with clarity before embarking on faceless tax scrutiny.

The tax department should be more taxpayer friendly. The department’s object should not be to maximise tax revenue by making unlawful additions to the taxable income of tax payers or by denying them timely tax refunds. Even though we follow the online tax assessment system, tax payers are not issued large refunds in time. One receives an assessment order or an order giving effect to tax appeals but refunds are issued at end of the financial year — that too without interest from the date of the order to the date of the issue of refund. So before resorting to faceless scrutiny, it would be desirable to make the current online assessment more taxpayer friendly.

Last year, the CBDT issued a circular stating that the commissioners of appeal will be rewarded for issuing more orders in favour of the department than those in favour of the taxpayers. This was totally uncalled for. It could be construed that the intent of this circular was to pass more unfavourable orders against taxpayers without considering their legality. It is important to fix accountability of tax officers and ensure that they pass assessment orders according to the tax statutes.

In an earlier article in this paper, (Ease of doing investments for NRIs, November 24, 2017), I had written, “It is not easy for NRIs to sell their property in India. After finding the buyer, they have to get a tax clearance under section 195 or 197 for each sale transaction before registering the sale deed. Such deals often fall through due to delay in securing tax clearance.” To avoid harassment of NRI taxpayers, a circular was issued setting a time limit of 30 days to issue a clearance certificate. The process also allowed the submission of online applications with required papers. But that has not been of much help, because of the corruption in the department and the unfriendly attitudes of tax officers. Taxpayers are issued online notices to submit affidavits or papers, which are not relevant to the determination of the tax or the TDS amount.

A person registering a sale deed without obtaining a tax clearance certificate — by accepting a token amount — can be subject to harassment. For example, the tax department can raise an objection for receiving a token amount without the deduction of tax. The tax payer is ultimately left with no choice but to approach the tax officer personally.

At present, tax scrutiny assessments are done online. Tax payers receive notices asking them to submit irrelevant details and papers. They are issued notices stating that the required details have not been submitted in time. Tax payers could be subject to penalty, prosecution or an income tax survey. Even senior citizens are not spared. Facing the threat of a survey, the tax payer approaches the tax officer personally to manage the assessment. Faceless scrutiny will definitely put an end to corruption as the personal interaction between a taxpayer and tax officer will not happen. But before that, the government must ensure that tax officers do not pass unlawful orders online. Tax statutes too need to be drafted with clarity.

This article first appeared in the print edition on July 16, 2019 under the title ‘Making anonymity work’. The writer is a chartered accountant.

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