Likely a Bridge Over Taxing Waters

Context: The Transparent Taxation (TT) initiative with faceless assessment and appeals and a taxpayer charter will help in attracting substantial foreign investments.

3 Pillars of the TT system:

1. Faceless Assessment
2. Faceless Appeals
3. Taxpayers’ Charter

Positives of the TT scheme

• Contactless assessment will minimise the human interface and will improve tax compliance. 
• Corruption depends on the human interface and the misuse of arbitrary powers by taxmen.
• Reduces personal bias and its attendant consequences.
• The reduced tendency of setting high pitched targets.
• Avoid Tax Evasion: Technology-enabled assessment will ensure that income does not escape tax assessment.
• TT will ensure the adoption of technology by both taxpayers and the revenue department.
• Accountability through Charters: Reiteration of taxpayer charter principles and their effective monitoring will be key to the successful implementation of TT.
• Charter derives its effectiveness from the Income-Tax Act hence many of its broad principles need to be embodied in the Act.

Problems in Indian Tax Regime 

• Share of direct taxes in total tax revenues is abysmally low.
• Nearly 66% of the total tax collection comes from indirect taxes that are borne by the rich and poor alike.
• Delays in resolving tax disputes have been a concern in attracting foreign investments.
• The Authority for Advance Rulings (AAR) has a 5-6-year pendency. 
• Advance pricing agreement takes 3-4 years to resolve. 
• Evolve and implement an effective mechanism to resolve disputes and provide certainty to the taxpayer
• Tax officers make high-pitched tax assessments in their zeal to meet collection targets. 

Way Forward: Ways to Increase Direct Tax Collections 

• Check Tax Evasion: By cleaning up the Goods and Services Tax (GST) records, which generates audit trails to income currently escaping tax. For E.g. -->
• The gross value addition at the firm level can be used to estimate the value added by each production unit and its distribution to taxable entities.
• Data analytics must be used to track the production chain ending in tax-evaded goods.
• Electricity bills and employee provident fund payouts must tally with the claimed production and value-added levels.
• Widen the Tax Base: Extend the reach of formal finance, make small units keep books and bring these into the tax net. 
• Use of universal reverse charge, so that buyers can pay tax on their purchases directly to the government while recognising the vendor on whose behalf the tax is being paid.

• Ensure Coordination: The reconciliation of filings on direct taxes, indirect taxes with other regulatory authorities will be critical. 

Conclusion: Effective implementation of TT initiative and increasing the share of direct taxes will hopefully bridge the trust deficit and provide confidence to taxpayers.