By Sandeep Bhalla

India has moved up in the Ease of Doing Business (EoDB) rankings from 100th in 2017 to 63rd in 2020 owing to several efforts made by the government, and it must continue to undertake similar moves for improving India’s EoDB ranking. Over the past few years, one of the key objectives in the Union Budgets has always been the ease of doing business in India. In line with this objective, GST was implemented, and faceless assessments, appeals, and digitalisation are being focussed on, along with an attempt to provide single window clearance wherever possible.

The World Bank conducts an annual assessment of 190 economies, ranking them on how easy it is to do business in a country based on the following ten parameters:

  1. Starting a Business,
  2. Registering Property, 
  3. Dealing with Construction Permits, 
  4. Getting Electricity, 
  5. Getting Credit,
  6. Paying Taxes, 
  7. Trading Across Borders,
  8. Protecting Minority Investors, 
  9. Enforcing Contracts and,
  10. Resolving Insolvency.

While evaluating the parameter of Paying Taxes, the World Bank considers various factors, such as the time, total tax and contribution rate, the number of payments necessary for a local medium-size company to pay all taxes, the efficiency of post-filing processes etc. Some of the good practices suggested by the World Bank are as follows:

  • Offering electronic filing and payment
  • Keeping it simple: one tax base, one tax
  • Adopting self-assessment as an effective tool for tax collection
  • Effective tax administration through risk-based audits

Based on these factors, India’s performance when compared with both its peers and with the best-in-class, reveals that paying taxes takes up more than 250 hours in India compared to 140 hours in New Zealand, 138 in China and 191 in Indonesia. These parameters provide a measure of the scope for improvement.

Also Read

Reduction of corporate tax from 30% to 25% has transformed India over the last two years, but here are a few more suggestions on improvement of the tax administration in India for improving its EoDB rankings:

1. Time limits for CIT(A) appeals:

The finality of tax assessments/appeals within a reasonable period is a prerequisite for instilling certainty and building trust with the taxpayers. Currently, most of the actions of the Department are governed by limitations prescribed under the statute, but there is no strict time limit under the Income-tax Act for passing the appellate order by the first appellate authority. This has led to nearly 5 lakh pending cases at the CIT(A) level as on February 28, 2022, as per the CBDT’s Central Action Plan. Hence, it is urged to provide a strict time limit for disposal of appeals by the CIT(A). The announcement in Budget 2023 of deploying of Joint Commissioners for the disposal of appeals is a welcome initiative, but it would still take an average of more than three years to dispose of the pending appeals. This action of the government needs to be combined with the amendment in section 250 of the Income-tax Act directing the CIT(A) to pass the order within some prescribed timelines.

2. Rectifications, recovery of demands and powers to stay recovery:

It is quite common to see demands being raised due to non-granting of TDS credit, MAT credit, some arithmetical/clerical error in providing set-offs, etc. In such cases, taxpayers can file a rectification petition. However, many times it takes years of follow-up to get credit of taxes/ TDS, and particularly of amalgamated entities, which results in irrecoverable demands outstanding in the IT Portal for a considerable time. Although the Income Tax Act mandates rectification orders be passed within six months of the applications, it is rarely being adhered to. With a lot of these processes being centralised to CPC, the average time taken for passing of rectification orders would be anything between two to three years. Also, even for such cases where the rectifications are pending, a stay of the demand recovery is left at the discretion of the Assessing Officers under section 220 of the Income Tax Act, which many times officers insist to collect 20% of such demands. While there are a host of judicial precedents that echo staying demand recovery while rectification petitions are pending, but such relief is only available to the few who knock on the door of the Court pleading for a stay! Hence, it is urged that section 220 of the Act be amended to make the stay of demand directory/automatic in cases involving pendency of rectification petitions. 

3. Time to abandon re-assessments once taxpayers are subjected to thorough scrutiny under Faceless regime:

Historically, re-opening of assessments by Indian tax authorities for several years has always been a hanging sword on the taxpayers under the Act. India was amongst the first countries to introduce faceless assessments wherein an Assessment Unit (‘AU’) is assisted by a Review Unit (‘RU’), a Technical Unit (‘TU’) and a verification unit. A point to ponder over is whether there is still a need for routine reassessment provisions, at least in cases a complete scrutiny has already been carried out. Also, it may be noted that four separate Commissioners are already involved in the making of assessments since each such AU, TU, RU and VU is headed by Additional/Joint Commissioners as per the mandate of section 144B(4). Reassessment proceedings are meant to be exercised on an exceptional basis and cannot be seen as a second chance to rectify an assessment. Instead of tinkering with the assessment timelines time and again, it is urged that the Government may consider a slightly longer window for concluding the assessment once and for all, in a faceless manner, without the avenue being kept open for re-opening the assessment. This will build confidence within the taxpayer and investor community.

Keeping pace with the trends globally, it would be interesting to note that in the US, the IRS tries to audit tax returns as soon as possible after they are filed. While IRS audits have been very rare, the IRS can include returns filed within the last three years in an audit. Once a particular return is selected for audit, IRS sends an information document request along with specific questions about the return. This is similar to scrutiny assessments in India. While the IRS audit is the first-time assessment that happens in the US, there seems no concept of re-doing an already concluded assessment. This is similar to the practice adopted in many other countries as well. 

Also Read

4. Faceless regime and bureaucratic roadblocks:

The government has adopted the Faceless regime for both appeals and assessments in a bid to bring in transparency and remove bureaucratic roadblocks, although the implementation of the Faceless regime in its true spirit is a challenge. The existence of an electronic system does help the taxpayers in terms of reduction in compliance time. But often, taxpayers can experience issues with using electronic filing and payment systems, either due to glitches and errors in the system or a lack of taxpayer training and guidance. It is suggested that India puts in place a robust grievance redressal cell to tackle such issues. 

Tax policy and administration is one of the significant aspect to build confidence amongst the investor community and to improve the ease of doing business in India.  In a nutshell, the Government has been initiating significant reforms to improve the ratings and consistent progress on this count will expedite India’s ranking in the top 50 countries for ease of doing business in the years ahead. 

(Sandeep Bhalla, Partner, Dhruva Advisors. Views expressed are author’s own.)