The much awaited report of the Tax Administration Reforms Commission (TARC) has been released. Parthasarathi Shome, who chairs the TARC, and his team have done a commendable job in their in-depth coverage of all the relevant issues and in holding a mirror in front of the tax administration with a constructive objective of recommending concrete and practical changes in the tax administration.
Customer focus: The report notes the randomness and uncertainty in raising tax demands, the rudeness and abrasiveness of the tax officers towards taxpayers, and the inconsistency in demands made on tax matters without accountability which has severely affected the investment climate in India. It unequivocally calls for a fundamental reform with a clear finding that there is no time to lose if investment is to be revived and its full potential is to be reached. There is a need to bring customer focus at the centre of the functioning of tax administration for which enough funds must be allocated in line with the global practice of spending at least 10% of the budget on this function.
Structure and governance of tax administration: TARC has recommended a common Board for both direct and indirect taxes starting with convergence for large taxpayers by setting up of a large business service unit (LBS). It calls for abolition of the post of revenue secretary to empower the Board of taxes and the income-tax department to carry out their responsibilities efficiently. It further recommends setting up a governing council with members from outside the government at the apex level to oversee the functioning of the two Boards. An Independent Evaluation Office (IEO) should be set up to monitor the performance of the tax administration and promote accountability. Finally, the common tax policy and analysis (TPA) unit comprising tax administrators, economists and other specialists should be set up for proper tax policy formulation. These are all salutary recommendations that will go a long way in re-energising the senior-most levels of tax administration, restoring faith in the capabilities of the talent available to the tax administration and also restoring the faith of honest taxpayers in the fairness of the tax administration.
People function: TARC has hit the nail on the head by observing that tax staff are not empowered to take independent or correct decisions for fear of retribution and vigilance and, therefore, the exclusive objective becomes ‘protect the revenue’. It observes that unrealistic revenue targets are set regardless of the condition of the macro economy, noting fully well that the tax dispute will not pass the test of judicial processes. The commission has suggested a complete overhaul of recruitment and evaluation practices of tax administration staff to ensure that a unidimensional criteria, like revenue maximisation, is not prevalent to assess performance. This will need a complete change in the mindset of the top level management and is desirable to achieve the objectives of fair play and transparency.
Dispute management: TARC rightly notes that getting the handle on dispute management is crucial for retrieving stakeholder confidence and for saving much needed staff and financial resources of the tax administration. It clearly recommends that retrospective amendments should be avoided as a matter of principle and that the fundamental approach should be collaborative and solution-oriented. It makes an important suggestion to launch a special drive for review and disposal of all current disputed cases clogging the system by setting up dedicated task forces to complete the exercises within one year. It then goes on to suggest that the Dispute Resolution Panels (DRPs) should have full time members to address the corporate cases of residents as well as indirect taxes in addition to non-residents. It also advocates establishing more members on benches across the country of the Authority of Advance Ruling (AAR). It calls for a statutory introduction in the legislation for arbitrary reconciliation as also the increase in the number of benches of the Settlement Commission to enable settlement of disputes at any stage with the taxpayers. There is a pressing call for strengthening the alternative dispute resolution mechanisms which will surely reduce the plethora of disputes that routinely find their way to the Tribunals and the courts around the country.
Internal processes and ICT use: The report makes some very useful recommendations for overhauling of the key internal processes of registration, tax payments, scrutiny assessments and tax deduction at sources as well as refunds. In addition, the report advocates extensive use of information and communication technology to share data and best practices, e-governance and transparency and significantly increase the level of automation in the tax administration.
The report is prefaced with an excellent quote from the book The Monk Who Sold His Ferrari by Robin Sharma, essentially to remind us that we first need to imagine and change our mindset towards the reality we want to achieve and not be bogged down by past legacies. TARC has has a candid look at the ills plaguing the tax administration without pussyfooting and made some eminently desirable recommendations, which will result in improving the tax-to-GDP ratio by ensuring that honest taxpayers are not unduly harassed and are encouraged to continue to comply with the law. Implementation of these recommendations will also simultaneously ensure that dishonest taxpayers get undue extra attention which they deserve from the tax administration by suitably empowering the tax administration with use of technology and global best practices. Indeed, if the government acts on these recommendations, it will ensure that the monks get to keep their meagre belongings and not get these expropriated by the aggressive tax administration, whereas the capricious taxpayers do lose their Ferrari and pay their rightful share of taxes to the government.