Faceless assessment is probably the single most prominent initiative post-GST, which has the potential to completely change the perception of the tax enforcement machinery.
“True liberty flourishes when Governments are transparent”. India has always been criticized for bureaucratic opacity and ambiguous fiscal regulations which leaves too much room for subjectivity and bias. However, as much as minimizing regulations is important, simplifying the enforcement process and making bureaucracy accountable is equally relevant if not more. India has been gradually moving up the ladder in the ease of doing business index from 134 in 2013 to 63 in 2020 thanks predominantly to a spate of e-governance initiatives including SPICe for company incorporation, electronic MOA and AOA, single platform for reporting under FEMA, Online IEC application for cross border trade, computerization of Government departments and several other state reforms.
The case for faceless assessment is probably the single most prominent initiative, post-GST, which has the potential to completely change the perception of the tax enforcement machinery in the country, often perceived to be draconian. To begin with, the scheme envisages:
- A National e-Assessment Centre (NeAC) in New Delhi, headed by Principal Chief Commissioner of Income Tax would be set up acting as a single point of contact for assesses and assessment units.
- Eight Regional e-Assessment Centres (ReAC) would be set up at Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Pune, Bengaluru and Hyderabad.
- Each ReAC would comprise of assessment unit (AU), review unit, technical unit and verification unit.
- NeAC would issue notices and allocates the case to any Assessment Unit in ReAC through an automated allocation system.
- Any request for additional documents/evidence, search and enquiry shall be made by AU only through the NeAC and not directly to the assessee.
- Replies are sent to AU, which shall prepare the draft assessment order to be sent to NeAC and ultimately to the assessee.
- NeAC shall send the draft order to a Review Unit. In case of any modification is proposed, the NeAC shall assign the case to another AU (other than the erstwhile AU), which shall consider the modifications and finalise the assessment order.
- Opportunity of being heard shall be given to the assessee at each stage of assessment.
Apart from the obvious perks such as savings in time, cost and energy, 24×7 active infrastructure, going green and ensuring social distancing, the following advantages can be emphasised:
- The scheme marks a shift from territorial jurisdiction to dynamic jurisdiction preventing nexus between participants.
- Online transaction IDs and acknowledgment receipts are added evidence for substantiating submission.
- The case for frivolous high-pitched assessments is significantly reduced owing to collective decision making.
However the scheme, as much as its hailed for its intent and form, is fraught with practical challenges which needs to be carefully considered, including:
Resistance to change: Immediately after our Hon’ble Prime Minister announced the reform (on 13th August, 2020), the Income Tax Employees Federation expressed its disappointment to CBDT on the faceless assessment stating that:
- transfer of officers to fill newly-created posts at regional e-assessment centres was heaping extra work on colleagues left behind.
- Those officers in new posts also lacked office accommodation, necessary infrastructure, seating arrangements, and computers.
The gesture sums up the resistance to change and bureaucratic impediments in implementation.
Ability to assess digitally: Competence of the officers to understand the technicalities of the business purely based on written submissions and documentary evidence without a personal hearing needs to evolve over time. At this juncture, it is noteworthy that even under the e- proceedings scheme, lot of notices and rectification applications were redirected to the AOs for finalisation.
Need for professional assistance: With the majority of small and mid-segment tax payers and their accountants being familiar in local languages, a fully electronic assessment process would be difficult to manage, thereby forcing them to seek professional assistance which could be expensive.
Restricted response: Limiting the size of response in replies to e proceedings, has been a cause for concern but the scheme shall not be effective without any restriction either. In many cases, moderating the response to fit within the constraints would lead to an incomplete explanation and consequent action on that basis.
Maintenance of digital records: As of now, many assesses, including those liable for tax audit scheme, in Tier II and III cities, still maintain manual books of accounts. CBDT should nudge assessees to maintain documents and books of accounts in digital platforms for ease of submission and access.
Cybersecurity concerns: E-assessment Rules provide for “the use of any telecommunications software which supports video telephony” for the purpose of personal hearing without a designated preference. Concerns over security arise unless the Board releases a standard operating procedure and notifies platforms for the purpose.
Additional time for completion of assessments: The scheme provides 15 days’ time for the asssessee to respond to the initial notice. Any further notice requiring additional information shall prescribe a time frame at the discretion of the officer. Further, in case of modification in draft assessment order, an additional layer of review by a new unit would consume time disproportionately. Hence, the time for completing an assessment may actually increase, given the additional loops in the transaction.
“Phase-less” roll-out: In order minimize the downside risk, a phased implementation, similar to the “Turant Customs” scheme, which is currently being implemented in stages (Chennai and Bangalore to begin) could have been adopted. Turant Customs would be rolled out on a PAN-India basis only by December 2020 and has similar features of the faceless assessment under income tax. Such an approach would have given us an opportunity to correct when small before scaling nationally.
Perspective of the Judiciary: Comments by the judiciary in this regard, have also not helped the cause. The Hon’ble Madras High Court in a recent order (Salem Sree Ramavilas Chit Company vs DCIT ) stated that the faceless tax-assessment system “can lead to erroneous assessment, if officers are not able to understand the transactions and statement of accounts of an assessee without a personal hearing.
Impact on Post Assessment collections: Post assessment tax collection, which indicates the effectiveness of assessment procedure, has increased steadily in the past 4 – 5 years and is at an all-time high, thanks to the scientific approach towards selection of cases for assessment. The approach has been gaining ground steadily. Attempting a complete transformation through e assessment could strain collections in the short-medium term, which are already muted by more than 30%.
Transparency in fiscal enforcement was the need of the hour and any action or inaction in this regard, would have led to criticism. Despite the challenges and shortcomings, we must give it to the Government of the day for attempting such a bold and transformative initiative, the first of its kind globally on this scale, which has the potential to completely change regulatory enforcement environment in this country.
The scheme no-doubt has teething issues, but that’s true for any initiative and in time we shall certainly tide over, our track record with digitizing TDS, Tax audit, Transfer pricing etc are classic testimony to our ability to embrace change. We wish and hope that all stakeholders and participants accept the scheme and seamlessly cooperate and collaborate to make it a resounding success for the nation. Afterall “progress is impossible without change, and those who cannot change their minds cannot change anything”.
Divakar Vijayasarathy is the Founder and Managing Partner of DVS Advisors LLP. Views expressed are the author’s personal.