The finance minister has set up the TARC under the chairmanship of Parthasarathi Shome. It has a 12-point agenda spanning issues from improving human resource practices of the tax administration teams to deepening and widening the tax and taxpayer bases.
The genesis of the TARC can be traced to the philosophy that the government had professed to follow in shaping its tax policy, namely clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution
Even before the TARC, the government started a scheme called Wednesday meetings where Dr Shome and his team attended meetings with industry bodies and revenue officials to discuss and highlight matters in tax laws that are ambiguous and lead to uncertainty. The objective: industry would get to know revenues viewpoint on these matters.
The setting up of the TARC and the Wednesday meetings should be seen as aspects of the overall tax administration policy of the government and it will be surprising if they are ends in themselves. A closer examination of this supposed broader tax administration policy brings one face to face with the overarching philosophy of non-adversarial model of tax administration.
Everybody wishes to have a non-adversarial tax administration and it embraces all other aspects, namely clarity in law, stability of regime and fair dispute resolution mechanism. For it is only when the administration has at least these three good attributes does it command respect of the taxpaying public and only then can it become non-adversarial.
In international tax terminology there is usage of the terms collaborative approach or cooperative approach of tax administration. This is currently being considered by many jurisdictions as the right approach to follow for improving the efficacy and efficiency of tax administration. For example, the recently published Base Erosion and Profit Shifting (BEPS) report of the Organisation for Economic Cooperation and Development (OECD) notes a clear trend in relationship between tax administrations and large businesses away from a purely adversarial model towards a more collaborative approach.
It seems the collaborative/cooperative approach is an essential ingredient of the non-adversarial tax administration. How does the non-adversarial approach differ from the traditional adversarial approach The adversarial approach is all about each party (taxpayer and tax administration) acting in a sequence of action and reaction, where the tax administration questions and the taxpayer answers. As against this, the cooperative approach capitalises on the relationship between taxpayers and the revenue. At each step there is interaction, in a spirit of enquiry, between the taxpayer and the tax administration, with the objective that any major issue is agreed and closed beforehand within the legal parameters.
The following are instances of the symbiotic relation between tax administration and taxpayers in other countries:
*At times of liquidity crisis, the revenue may modulate advance tax demands to closely approximate to the taxpayers final tax liability. In some countries (Chile) advance tax payable is pegged to a percentage of current year sales, with provision for downward adjustment if preceding years sales were below certain threshold. Accelerating the issuance of refunds is an essential element of this programme.
*The financial crisis that hit east Asia in 1997 raised concerns in the Inland Revenue Authority of Singapore (IRAS) that liquidity problem associated with the crisis could lead many companies to accumulate large amounts of tax arrears. Accordingly, the IRAS established a special programme to give eligible taxpayers extra time to pay their tax liabilities. The IRAS officials believe that the special debt programme helped improve taxpayers perception of the fairness of the tax system, leading to better compliance.
*The Australian Tax Office cash economy strategy provides for a balanced set of measures to improve compliance in the cash economy, including communication measures, incentives to encourage self-service, targeted assistance, strategic alliances with key industry associations to identify compliance problems arising from various factors such as ambiguous laws, complex forms and procedures, unreasonable time limits and develop working solutions. The revenue closely collaborates with software manufacturers so that accounting software packages comply with all tax obligations.
*The New Zealand Internal Revenue Department launched an industry partnership programme in February 2002 to implement a relationship-based approach to tax administration that would help SMEs in selected cash economy industries to comply with their tax obligations. Partnerships were formed with some 15 industries. It was seen for five partnership industries that the programme had raised tax return filing rates and lowered tax arrears in the industry groups.
*In January 2009, the South Africa Revenue Service (SARS) and the Banking Association of South Africa signed an accord that establishes a framework for coordination between the parties in order to improve levels of tax compliance, discourage unlawful tax avoidance arrangement and enhance services.
These instances highlight that good tax administration has to be founded on a spirit and form of partnership between the taxpayer and the tax administrator.
Indias law and established systems and processes provide a framework for good tax administration.
Many of the standard international compliance practices are already in place, though not without teething troubles. The TARC and the Wednesday meeting scheme, expectedly, will go a long way in bridging the communication and trust gap between the taxpayers and the tax administration. Both these forums promise to bring taxpayers and the tax administration on a common platform where they can seek to address their respective concerns on the basis of dialogue and deliberation. This is in contrast to the traditional approach where the two parties see each other on different pedestals and often in the courts.
The TARC and Wednesday meeting scheme, therefore, holds the promise to open up a new vista in the collaborative compliance model in tax administration.
The author is associate director, Direct Tax, PwC India