A New Tax Pact

Context:  An economic contraction this year will deal a severe blow to tax collections. 

Measures to achieve tax compliance in India: Compliance is achieved through a fine balance between enforcement and encouragement.

Government Initiatives to Boost Tax Compliance

• Taxpayer’s charter to build trust and increase transparency between the administration and the taxpayer.
• It helps in reducing compliance costs in administering tax legislation, holding its authorities accountable and publishing a periodic report of service standards
• Faceless assessment to divest and distribute the functions of a single assessing officer so that assessment is carried out in a fair manner.
• It seeks to further automate the case selection and the distribution function of the assessing officer among various units located outside the jurisdiction of the taxpayer.

Issues with tax compliance in India

• Low taxpaying population: While enforcement-driven measures have been implemented, the taxpaying population has remained at a fraction (6%) of the total population.
• Complex process: Perceived complexity can discourage individuals from filing returns.
• For, E.g. This could reflect simply in the difference between the number of taxpayers and the returns filed — the former exceeds that latter by around 20 million.
• Limited enforcement of charter: A charter does not necessarily translate into law.
• It remains, as in many countries with exceptions such as Germany, a document that lists the standards that the tax department imposes on itself.
• Abolition of the post of tax ombudsman: in 2019, the cabinet approved the abolition of the quasi-judicial post, reduced accountability.
• Corruption and Delays: Taxpayer’s grievance that the assessment process is often bogged down by corruption and delay.
• Limitations of faceless assessment: which does not apply to search and seizure cases, and cases related to tax evasion and international taxation.
• Tardy dispute resolution: There is evidence of inconsistent and delayed decisions often culminating in the poor success rate of the tax department at various levels of dispute.

Way Forward

• Faceless assessment must not undermine the concerns of taxpayers
• Taxpayers must have an opportunity to explain their case in person. 
• Ensure efficiency in case selection and consistency in assessment to bring fair, impartial and a time-bound tax dispute resolution.
• The charter must be backed by legislation to enforce its compliance.
• Tax ombudsman can ensure that some of the standards of tax charter are met. 

Conclusion: Swift coordination among various tax units can smooth the functioning of the new tax system.