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F. No. SO/TARC/Report/36/2014-15 Dated: 30/05/2014 To
Shri Arun Jaitley Sir, We submit herewith the First Report of the Tax Administration Reform Commission (TARC). Image 1
Preface Tax revenue yield is influenced by both tax policy and tax administration. While tax policy design ensures responsiveness of potential revenue to overall economic growth, tax base and tax rates, tax administration seeks to secure potential tax revenues effectively and efficiently. It is because the two are inextricably linked that reform in tax administration is as important as that in tax policy. In India, tax policy reforms have been accelerated since the economic liberalization unveiled in 1991. But no comprehensive reform in tax administration was undertaken in the same depth. Of course, changes in tax administration practices have occurred, albeit through a slow and incremental process reflecting the immediate requirements of the organization as opposed to much needed fundamental reform. The two administrative restructurings undertaken in 2001-02 and 2013-14, of the two Boards, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC), were also aimed at expanding the tax administrations primarily by increasing tax assessment units, thereby giving more promotional avenues to officers and staff. But neither of the two restructurings was aimed at reorganizing the operations or their structures so as to make them oriented towards the needs of taxpayers. Further, the restructurings have essentially stopped short of recognizing that direct and indirect tax services need to be delivered in a more synergistic manner so that there are gains for both taxpayers and the tax administration that should be buttressed by more rationalized enforcement activity, drawing upon information garnered from both direct and indirect taxes. Even within indirect taxes, service tax and excise duties are dealt with by separate commissionerates under the CBEC even though both are consumption taxes. The tax administration in the above regard did not, by and large, keep the prevalent global practices in view, i.e., it was not a benchmarked approach. Such a non-intersecting approach continues through the current restructuring process. The restructurings, therefore, have lacked a reform flavour. Since the focus is almost entirely on the extent of revenue collection irrespective of prevailing economic realities, any rise in collection could successfully mask the underlying need to fundamentally reform the tax administration. Indeed, the two tax administrations often attributed the gain in tax collection to the so-called restructuring. What has been overlooked is that the impact of tax administration on revenue collection as opposed to the revenue gain due to economic growth needs to be separately recognized. The year-to-year high nominal growth in tax collection over and above the inflation rate may have generated a sense of complacency regarding administrative performance. One deleterious outcome has been the inexorable rise in disputes, reflecting rising pecuniary and non- pecuniary costs of compliance to the taxpayer. The tax administrations witnessed large tax revenues becoming uncollectible due to disputes emanating from tax demands that were of a protective nature, i.e., issued just to insure the tax officials against future liability. Such disputes were commonly viewed to have had adverse ramifications for the investment climate as business decisions became increasingly difficult in an environment of growing tax uncertainty. The Commission (TARC), constituted to recommend reform exclusively in tax administration, was specifically mandated “to review the application of tax policies and tax laws in the context of global best practices and to recommend measures for reforms required in tax administration to enhance its effectiveness and efficiency.” The mandate reflected a deep concern of policymakers regarding the need for fundamental tax administration reform. Accordingly, the TARC tasked itself to address the thus-far missing elements of best practices in tax administration in a comprehensive manner. Such reform should aim at a vision that focuses on taxpayers and their relationship with the tax administration. This vision has to recognize the growing links between direct taxes and indirect taxes as occurring in most modernizing tax administrations in cross-country experience, and show the way to building an administrative structure that will bring accountability in the processes as well as greater outcome orientation. This would require the structure to be overhauled for purposive delivery and be so oriented that officers and staff are empowered while being given key performance indicators to reflect accountability and responsibility at both the individual and organizational levels. Only such a fundamental reform could ensure that the objective of bringing palpable benefits to taxpayers in terms of a transparent relationship and enhanced communication, ease of compliance, and quicker dispute resolution, is achieved. In order to comply with the above mandate, the TARC identified four terms of reference, based on their relative importance, for immediate attention in its first report out. The selected terms of reference are:
While covering these terms of reference, the TARC decided to address the other segments of the terms of reference in its subsequent reports. Issues such as impact assessment analysis, economic analytical models and strengthening database are examples of such aspects that are planned to be covered in future reports. To achieve the desired goal, the TARC sought the views of its stakeholders, including the two Boards and its field offices, and the taxpayers. The TARC held meetings with the two Boards separately and of the officers, staff and their respective associations at the five metros of Bengaluru, Chennai, Delhi, Kolkata and Mumbai. Views from the directorates of the two Boards were separately ascertained keeping in view the policy dimension of their work. The TARC also met newly recruited officers at the National Academy of Direct Taxes and the National Academy of Customs, Excise and Narcotics to assess whether the training - in content as well as regularity, either at the induction stage or later - was sufficient to frame a structure that would be able to deliver in the manner outlined above. It was also imperative for the TARC to meet industry and professional associations at all five metros to ascertain their experience with the tax administrations, their expectations and suggestions for reform. One of the most important aspects of tax administration is the dispute resolution mechanism, since an inadequate or tardily functioning one could impede tax collection and create a climate of distrust. In view of this, the TARC had meetings with the President of CESTAT and Members of ITAT. A list of such meetings is given at Annexure -I. The TARC is thankful to all the stakeholders for their suggestions and also for the free and frank discussions. These suggestions formed the basis of many of TARC’s recommendations. The TARC also acknowledges the co- operation and support of the CBDT and the CBEC in providing information and data that enabled TARC’s recommendations to be based on robust foundations. Looking at the task at hand, which required in-depth analysis of various aspects relating to the four terms of reference, the TARC constituted six focus groups, comprising officers of the two tax administrations – former as well as current – and professionals from the private sector. The topics to be addressed by each focus group were framed after detailed deliberation within the TARC. The focus groups themselves met several times and came up with innovative suggestions by providing a forum for open and frank discussions with TARC Members. In the final analysis, the role of the focus groups in deliberating on various issues in depth and bringing in knowledge of calibrating them with global best practices was crucial in forming the TARC’s views. This helped the TARC to successfully thrash out many a new idea and emerge with a critical mass of recommendations. A list of participants in the focus groups is at Annexure -II. The TARC’s recommendations were formulated at many meetings, formal and informal. A list of meetings in which TARC discussions were held is at Annexure – III. The TARC’s findings, conclusions and recommendations were unanimous, clearly pointing towards an overwhelming need for fundamental reform in tax administration that should successfully draw the attention of policymakers. Chapter I presents a comprehensive Executive Summary covering TARC’s coverage, main findings, conclusions and recommendations for the various aspects of the terms of reference covered in the report.The TARC believes this is the right moment in the light of a new reform environment that is expected to emerge precisely at this point of time. The TARC places on record its appreciation of the Department of Revenue for providing support. It also thanks the Chief Commissioners of Income Tax and Central Excise and Customs of Bengaluru, Chennai, Delhi, Kolkata and Mumbai for organizing meetings with officers and staff and for providing support in organizing meetings with stakeholders. The TARC also wishes to recognize the overarching support of the Secretary to the Commission in all aspects. The Director and Under Secretary as well as other support staff were also helpful. The work of three research consultants was important for the background studies that were carried out. The editor’s meticulous work at top speed was crucial. But for their intensive efforts, timely delivery of the report would not have been feasible.
New Delhi Tax Administration Reform Commission Chairman Dr. Parthasarathi Shome Level of Minister of State Members- full time Y. G. Parande Ex-Member, CBEC Sunita Kaila Ex-Member, CBDT Members- part time M.K. Zutshi Ex-Chairman, CBEC S.S.N. Moorthy Ex-Chairman, CBDT Secretariat Sanjay Kumar Secretary N.K. Jain Director Sukalyan Banerjee Under Secretary Administrative Support M.C. Batra Consultant (Administration) Research Consultants Vrinda Jaju Table of Contents
Preface Tax revenue yield is influenced by both tax policy and tax administration. While tax policy design ensures responsiveness of potential revenue to overall economic growth, tax base and tax rates, tax administration seeks to secure potential tax revenues effectively and efficiently. It is because the two are inextricably linked that reform in tax administration is as important as that in tax policy. In India, tax policy reforms have been accelerated since the economic liberalization unveiled in 1991. But no comprehensive reform in tax administration was undertaken in the same depth. Of course, changes in tax administration practices have occurred, albeit through a slow and incremental process reflecting the immediate requirements of the organization as opposed to much needed fundamental reform. The two administrative restructurings undertaken in 2001-02 and 2013-14, of the two Boards, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC), were also aimed at expanding the tax administrations primarily by increasing tax assessment units, thereby giving more promotional avenues to officers and staff. But neither of the two restructurings was aimed at reorganizing the operations or their structures so as to make them oriented towards the needs of taxpayers. Further, the restructurings have essentially stopped short of recognizing that direct and indirect tax services need to be delivered in a more synergistic manner so that there are gains for both taxpayers and the tax administration that should be buttressed by more rationalized enforcement activity, drawing upon information garnered from both direct and indirect taxes. Even within indirect taxes, service tax and excise duties are dealt with by separate commissionerates under the CBEC even though both are consumption taxes. The tax administration in the above regard did not, by and large, keep the prevalent global practices in view, i.e., it was not a benchmarked approach. Such a non-intersecting approach continues through the current restructuring process. The restructurings, therefore, have lacked a reform flavour. Since the focus is almost entirely on the extent of revenue collection irrespective of prevailing economic realities, any rise in collection could successfully mask the underlying need to fundamentally reform the tax administration. Indeed, the two tax administrations often attributed the gain in tax collection to the so-called restructuring. What has been overlooked is that the impact of tax administration on revenue collection as opposed to the revenue gain due to economic growth needs to be separately recognized. The year-to-year high nominal growth in tax collection over and above the inflation rate may have generated a sense of complacency regarding administrative performance. One deleterious outcome has been the inexorable rise in disputes, reflecting rising pecuniary and non- pecuniary costs of compliance to the taxpayer. The tax administrations witnessed large tax revenues becoming uncollectible due to disputes emanating from tax demands that were of a protective nature, i.e., issued just to insure the tax officials against future liability. Such disputes were commonly viewed to have had adverse ramifications for the investment climate as business decisions became increasingly difficult in an environment of growing tax uncertainty. The Commission (TARC), constituted to recommend reform exclusively in tax administration, was specifically mandated “to review the application of tax policies and tax laws in the context of global best practices and to recommend measures for reforms required in tax administration to enhance its effectiveness and efficiency.” The mandate reflected a deep concern of policymakers regarding the need for fundamental tax administration reform. Accordingly, the TARC tasked itself to address the thus-far missing elements of best practices in tax administration in a comprehensive manner. Such reform should aim at a vision that focuses on taxpayers and their relationship with the tax administration. This vision has to recognize the growing links between direct taxes and indirect taxes as occurring in most modernizing tax administrations in cross-country experience, and show the way to building an administrative structure that will bring accountability in the processes as well as greater outcome orientation. This would require the structure to be overhauled for purposive delivery and be so oriented that officers and staff are empowered while being given key performance indicators to reflect accountability and responsibility at both the individual and organizational levels. Only such a fundamental reform could ensure that the objective of bringing palpable benefits to taxpayers in terms of a transparent relationship and enhanced communication, ease of compliance, and quicker dispute resolution, is achieved. In order to comply with the above mandate, the TARC identified four terms of reference, based on their relative importance, for immediate attention in its first report out. The selected terms of reference are:
While covering these terms of reference, the TARC decided to address the other segments of the terms of reference in its subsequent reports. Issues such as impact assessment analysis, economic analytical models and strengthening database are examples of such aspects that are planned to be covered in future reports. To achieve the desired goal, the TARC sought the views of its stakeholders, including the two Boards and its field offices, and the taxpayers. The TARC held meetings with the two Boards separately and of the officers, staff and their respective associations at the five metros of Bengaluru, Chennai, Delhi, Kolkata and Mumbai. Views from the directorates of the two Boards were separately ascertained keeping in view the policy dimension of their work. The TARC also met newly recruited officers at the National Academy of Direct Taxes and the National Academy of Customs, Excise and Narcotics to assess whether the training - in content as well as regularity, either at the induction stage or later - was sufficient to frame a structure that would be able to deliver in the manner outlined above. It was also imperative for the TARC to meet industry and professional associations at all five metros to ascertain their experience with the tax administrations, their expectations and suggestions for reform. One of the most important aspects of tax administration is the dispute resolution mechanism, since an inadequate or tardily functioning one could impede tax collection and create a climate of distrust. In view of this, the TARC had meetings with the President of CESTAT and Members of ITAT. A list of such meetings is given at Annexure -I. The TARC is thankful to all the stakeholders for their suggestions and also for the free and frank discussions. These suggestions formed the basis of many of TARC’s recommendations. The TARC also acknowledges the co- operation and support of the CBDT and the CBEC in providing information and data that enabled TARC’s recommendations to be based on robust foundations. Looking at the task at hand, which required in-depth analysis of various aspects relating to the four terms of reference, the TARC constituted six focus groups, comprising officers of the two tax administrations – former as well as current – and professionals from the private sector. The topics to be addressed by each focus group were framed after detailed deliberation within the TARC. The focus groups themselves met several times and came up with innovative suggestions by providing a forum for open and frank discussions with TARC Members. In the final analysis, the role of the focus groups in deliberating on various issues in depth and bringing in knowledge of calibrating them with global best practices was crucial in forming the TARC’s views. This helped the TARC to successfully thrash out many a new idea and emerge with a critical mass of recommendations. A list of participants in the focus groups is at Annexure -II. The TARC’s recommendations were formulated at many meetings, formal and informal. A list of meetings in which TARC discussions were held is at Annexure – III. The TARC’s findings, conclusions and recommendations were unanimous, clearly pointing towards an overwhelming need for fundamental reform in tax administration that should successfully draw the attention of policymakers. Chapter I presents a comprehensive Executive Summary covering TARC’s coverage, main findings, conclusions and recommendations for the various aspects of the terms of reference covered in the report.The TARC believes this is the right moment in the light of a new reform environment that is expected to emerge precisely at this point of time. The TARC places on record its appreciation of the Department of Revenue for providing support. It also thanks the Chief Commissioners of Income Tax and Central Excise and Customs of Bengaluru, Chennai, Delhi, Kolkata and Mumbai for organizing meetings with officers and staff and for providing support in organizing meetings with stakeholders. The TARC also wishes to recognize the overarching support of the Secretary to the Commission in all aspects. The Director and Under Secretary as well as other support staff were also helpful. The work of three research consultants was important for the background studies that were carried out. The editor’s meticulous work at top speed was crucial. But for their intensive efforts, timely delivery of the report would not have been feasible.
New Delhi Tax Administration Reform Commission Chairman Dr. Parthasarathi Shome Level of Minister of State Members- full time Y. G. Parande Ex-Member, CBEC Sunita Kaila Ex-Member, CBDT
Members- part time M.K. Zutshi Ex-Chairman, CBEC S.S.N. Moorthy Ex-Chairman, CBDT Secretariat Sanjay Kumar Secretary N.K. JainDirector Sukalyan Banerjee Under Secretary Administrative Support M.C. Batra Consultant (Administration) Research Consultants Vrinda Jaju Tables Table 2.1: Categories of taxpayer services Table 2.2: Hierarchy of contact preference Table 2.3: Framework of e-services Table 2.4: Strengths and Weaknesses of Channel Options Table 2A.1: Benefits to AEO Entities Table 2A.2: Priority areas for e-services delivery Table 2A.3: Targets in different tax administrations for e-service delivery Table 2A.4: Sector-wise list of issues taken up during the Tax Forum meeings Table 3A.1: Region-wise Working Strength in the I-T Department (CBDT) Table 3A.2: Deployment of staff (working strength) in Central Excise and Customs Zones (incl. SEZs) Table 3A.3: Sample staff allocation in Central Excise, Service Tax, Custom (P) and Customs Commissionerates Table 3A.4: Differences between CBDT and CBEC Table 3A.5: Sanctioned posts in CBDT Table 3A.6: Sanctioned posts in CBEC Table 3A.7: Comparative statement of manpower resources in the two Boards after cadre restructuring, 2013 Table 3A.8: Delegated authority that can be exercised by the national revenue body Table 3A.9: Comparative Performance Indicators of some key Tax Administrations Table 3A.10: Estimated number of principal Chief Commissioners and Chief Commissioners in each Board for different functions Table 3A.11: Year of establishment of semi-autonomous tax/revenue authorities Table 4.1: Performance management in dispute resolution function Table 4A.1: Comparative working strength of trainers/ staff Table 4A.2: Fund allocation Table: 5.1: Threshold monetary limit for filing appeal in CBDT Table 5.2: Pendency of disputes at various appellate levels in CBDT Table 5.3: Age-wise pendency of cases for CBDT Table 5.4: Disposal of dispute cases for CBDT Table 5.5: Age-wise disposal of cases for CBDT Table 5.6: Adjudication limits in customs Table 5.7: Adjudication limits in central excise and service tax Table: 5.8: Threshold monetary limit for filing appeal in CBEC Table 5.9: Pendency of disputes at various appellate levels in CBEC Table 5.10: Age-wise pendency of disputes in CBEC Table 5.11: Disposal of dispute cases in CBEC Table 5.12: Reasons for Pending Call Book Cases in CBEC Table 5A.1: Disposal and age-wise pendency of adjudication of cases in Central Excise Table 5A.2: Disposal and age-wise pendency of adjudication of cases in Customs Table 5A.3: Disposal and age-wise pendency of adjudication of cases in Service Tax Table 5A.4: Number of court cases filed under different acts of indirect taxes up to December 2013 Table 5A.5: Number of court cases filed under different zones up to December 2013 Table 5A.6: Number of cases filed under various Sections & Rules of indirect taxes up to December 2013 Table 6A.1: US IRS FTC Codes Table 6A.2: Status of Prosecution cases Table 7.1: ICT maturity in tax administrations Table 7.2: Framework for analysis of ICT capabilities Table 7A.1: Total ICT expenditure as percentage of total revenue body expenditure – OECD Countries Table 7A.2: Total ICT expenditure Percentage of Total Revenue Body Expenditure – non-OECD countries Table 7A.3: Country-wise ICT Expenditure as percentage of total expenditure Table 7A.4: Service/efficiency/performance indicators Diagrams Diagram 1.1 Road-map for implementation of the TARC’s main recommendations Diagram 2.1: Proposed Organisational Structure for Customer Service Diagram 2.2: Regional Customer Relations Office Diagram 3.1: Large Business Service Diagram 3.2: Structure of the Independent Evaluation Office Diagram 3.3: Structure of TPA and Tax Council Diagram 3.4: Desired governance structure Diagram 3.5: Towards unified management structure in 5 years Diagram 3.6: Structure of CBDT Diagram 3.7: Structure of CBEC Diagram 3.8: Strategic Planning and Risk Management Directorate Diagram 3.9: Compliance Verification Directorate Diagram 3.10: Field structure for compliance verification Diagram 3.11: Dispute Management Directorate Diagram 3.12: Field structure of dispute management Diagram 3.13: Tax Recovery Directorate Diagram 3.14: Field Tax Recovery Unit Diagram 3.15: Structure of HR Directorate Diagram 3.16: Structure of F&A Directorate Diagram 3.17: Structure of Infrastructure and Logistics Directorate Diagram 3.18: Risk Management Framework in Customs Diagram 3A.1: CBDT Organizational Structure Diagram 3A.2: Structure of a Directorate in CBDT Diagram 3A.3: Organizational set-up of CCIT, DGIT office in CBDT Diagram 3A.4: Field level organisation structure in CBDT Diagram 3A.5: Structure of Corporate CIT Diagram 3A.6: Structure of CIT (Appeal) Diagram 3A.7: Structure of DGIT (international Taxation) Diagram 3A.8: Structure of Transfer Pricing Directorate Diagram 3A.9: Structure of DGIT (Inv.) Diagram 3A.10: Structure of CIT (Audit) Diagram 3A.11: Structure of CCIT (DR) Diagram 3A.12: Organizational set-up of CBEC Diagram 3A.13: Structure of a Directorate General in CBEC Diagram 3A.14: Organizational set-up of a Chief Commissioner of Customs zone Diagram 3A.15: Organizational structure of Central Excise Commissionerate Diagram 3A.16: Structure of Chief Commissioner of customs, Center Excise and Service Tax. Diagram 4.1: HR organizational structures of CBDT and CBEC Diagram 4.2: Organizational strategies Diagram 4.3: Result Orientation and Values Diagram 5.1: Appeal process in the I-T Act Diagram 5.2: Appeal process for indirect taxes Diagram 5.3: Average time taken to resolve dispute in indirect taxes Diagram 5.4: Proposed flow-chart for dispute management in CBDT Diagram 5.5: Proposed flow-chart for dispute management in CBEC Diagram 6.1: Structure for Commissioner (Prosecution) Diagram 6.2: DIT (Criminal Investigation) Diagram 6A.1: Tax payments and information flow Diagram 6A.2: OLTAS in direct taxes Diagram 6A.3: EASIEST in indirect taxes Diagram 6A.4: Launching of prosecution Diagram 7.1: ICT Governance Framework Diagram 7.2: Digital Capability Framework Diagram 7.3: e-government maturity model Diagram 7.4: Integrated ICT environment for SPV Diagram 7.5: High-level organisational structure for SPV Diagram 7.6 High-level organisational structure for DG (Systems) Graphs Graph 5A.1: Pendency of the cases before the High Court under the top 10 Sections of the I-T Act from June 2012 to September 2013 Graph 5A.2: High Court-wise pendency of the cases under the I-T Act from June 2012 to September 2013 List of Annexures Annexure - I TARC meetings with its stakeholders Annexure - II Composition of Focus groups Annexure - III TARC Meetings Annexure - IV Gazette Notification constituting TARC Glossary of Technical Terms AAR Authority for Advance Ruling ABN Australian Business Number AC Assistant Commissioner ACES Automation of Central Excise & Service Tax ACP Accredited Clients Programme AD Assistant Director ADC Additional Commissioner ADCIT Additional Commissioner of Income Tax ADG Additional Director General ADR Alternative Dispute Resolution AE Associate Enterprises AEO Authorised Economic Operators AISAssessee Information System AMC Annual Maintenance Contract ANAO Australia National Audit Office AO Accounts Officer AO Assessing Officer AOP Association of Persons APA Advance Pricing Agreement APAR Annual Performance Appraisal Report ARC Administrative Reforms Commission ARTS Automated Recording and Targeting System ASI Assistant Sub-Inspector ASKAayakar Seva Kendra ASTAssessment Information System ATM Automatic Teller Machine ATO Australian Taxation Office ATO IDs Australia Taxation Office Interpretative Decisions AU Assessment Unit AWDL Average Working Days Lost BIFR Board for Industrial & Financial Reconstruction BIN Business Identification Number BOA Board of Approval BPR Business Process Re-engineering BRC Bank Realisation Certificate C & CE Customs and Central Excise CAAP Computer Assisted Audit Program CAG/C&AG Comptroller & Auditor General CAO Chief Accounts Officer CASC Community Amateur Sports Club CASS Computer Aided Selection System CATCentral Administrative Tribunal CBDIT Central Board of Direct & Indirect Taxes CBDT Central Board of Direct Taxes CBEC Central Board of Excise and Customs CBI Central Bureau of Investigation CBIN Common Business Identification Number CBN Common Business Number CC(CSDF) Chief Commissioner (Customer Service Delivery Field) CC(CS-TE) Chief Commissioner (Customer Service - Technology Enabled) CC(DT) Chief Commissioner(Direct Tax) CC(EC) Chief Commissioner(Excise & Customs) CCA Cadre Controlling Authority CCITChief Commissioner of Income Tax CCR Confidential Character Role CDR Chief Departmental Representative CEI Central Excise Intelligence CEIBCentral Economic Intelligence Bureau CENVAT Central Value Added Tax CESTAT Customs, Excise and Service Tax Appellate Tribunal CFC Certified Facilitation Centre CFO Chief Financial Officer CGAController General of Accounts CHA Custom House Agent CHCO Chief Human Capital Officer CIN Challan Identification Number CIO Chief Information Officer CIP Criminal Investigations Program CIT Commissioner of Income Tax CIT Corporate Income Tax CIT(CO) Commissioner of Income Tax(Computer Operation) CIU Central Intelligence Unit CMR Cargo Management Reengineering CO Charged Officer CPC Central Processing Centre CPU Central Processing Unit CRA Canadian Revenue Authority CRCL Central Revenue Control Laboratory CRIS Centre for Railway Information Systems CRM Customer Relationship Management CRO Customer Relationship Office CSO Chief Security Officer CSS Central Secretariat Service CTO Chief Technology Officer CVC Central Vigilance Commission CVO Chief Vigilance Officer DA Disciplinary Authority DAVP Directorate of Advertising & Visual Publicity DC Deputy Commissioner DCITDeputy Commissioner of Income Tax DD Deputy Director DEMAT Dematerialised Account DG Director General DG (P,P&PE) Director General (Customer-Policy, Planning and Programme Evaluation) DG(F & A) Director General (Financial Control & Audit) DG(HRM) Director General (Human Resource Management) DGCEIDirectorate General of Central Excise Intelligence DGEP Directorate General of Export Promotion DGFT Directorate General of Foreign Trade DGHRD Directorate General of Human Resource Development DGIT Directorate General of Income Tax DIS Decision Impact Statements DIT Director of Income Tax DLA Directorate of Legal Affairs DoPT Department of Personnel & Training DoR Department of Revenue DoS Directorate of Systems DPPR Directorate of Publicity & Public Relations DR Departmental Representative DRAPE Directorate of Research, Analysis & Programme Evaluation DCRS Directorate of Customer Relations Support DRI Directorate of Revenue Intelligence DRP Dispute Resolution Panel DTAA Double Taxation Avoidance Agreement DTRTIDirect Tax Regional Training Institute DW & BI Data Warehousing & Business Intelligence EASIEST Electronic Accounting System in Excise and Service Tax ED Enforcement Directorate EDD Extra Duty Deposit EDI Electronic Data Interchange EDP Electronic Data Processing EDR Early Dispute Resolution EDWEnterprise Date Warehouse EFPO Employees Provident Fund Organisation EFS Enforcement Information System EOU Export Oriented Unit EPCEngineering Procurement Construction ERI e-Return Intermediaries ERP Enterprise Resource Planning FAQ Frequently Asked Questions FDMCFinancial Data Management Centre FIEOFederation of Indian Export Organisation FIPBForeign Investment Promotion Board FIRCForeign Inward Remittance Certificate FIU Financial Intelligence Unit FMFinance Minister FRS Financial Resource System FSLRCFinancial Sector Legislative Reforms Commission FTC Foreign Tax Credit FTD Foreign Tax Division FTE Full Time Equivalent Employees FY Financial Year GAARGeneral Anti Avoidance Rules GDP Gross Domestic Product GST Goods and Services Tax GSTN Goods and Services Tax Network HC High Court HMRCHer Majesty’s Revenue and Customs of UK HR Human Resource HRDHuman Resource Development HRIS Human Resource Information System HRMSHuman Resource Management System HUF Hindu Undivided Family IAAS Indian Audit & Accounts Service ICD Inland Container Depot ICD International Customs Division ICEGATE Indian Customs and Excise Gateway ICESIndian Customs EDI System ICT Information and Communication Technology IEC Import Export Code IEO Independent Evaluation Office IFS Indian Foreign Service IFU Integrated Finance Unit IGM/EGM Import/Export General Manifest IMSC Inter-Ministerial Standing Committee IO Inquiry Officer IPR Intellectual Property Rights IRASInland Revenue Authority of Singapore IRC Internal Revenue Code IRCTS Indian Railway Catering and Tourism Corporation IRDA Insurance Regulatory Development Authority IRLAIndividual Running Ledger Account IRS Internal Revenue Service of USA IRS(C & CE) Indian Revenue Service (Customs & Central Excise) IRS(IT) Indian Revenue Service (Income Tax) IRS-CIInternal Revenue Service-Criminal Investigation ISD Input Service Distributor ITATIncome Tax Appellate Tribunal ITBAIncome Tax Business Application ITC Income Tax Code ITD Income Tax Department ITESInformation Technology Enabled Services ITO Income Tax Officer ITR Income Tax Return ITTNIncome Tax Technical News IVRSInteractive Voice Response System JC Joint Commissioner JCIT Joint Commissioner of Income Tax JRS Judicial Reference System JS Joint Secretary KACKnowledge and Analysis Centre KAIC Knowledge, Analysis & Intelligence Centre KPI Key Performance Indicators KYCKnow Your Customer LBS Large Business Service LBSNAA Lal Bahadur Shastri National Academy of Administration LDC Lower Division Clerk LEO Let Export Order LMS Learning Management System LTU Large Taxpayer Unit MAPMutual Agreement Procedure MAT Minimum Alternate Tax MCTP Mid-Career Training Program MD Managing Director MIS Management Information System MMS Manpower Management System MNEMulti National Enterprises MoF Ministry of Finance MOL&J Ministry of Law & Justice MOU Memorandum of Understanding MSP Managed Services Provider MSTU Ministerial Staff Training Units MTS Multi-Tasking Staff NACEN National Academy of Customs, Excise & Narcotics NADT National Academy of Direct Taxes NAIBD Need Analysis & International Benchmarking Division NALSAR National Academy of Legal Studies & Research NBFC Non-Banking Financing Company NCB Narcotics Control Bureau NCC National Computing Centre NGONon-Governmental Organisation NLP National Litigation Policy NMSNon-filers Monitoring System NSDL National Securities Depository Limited NTP National Training Policy OCSOrganisational Climate Survey ODI Officers of Doubtful Integrity OECD Organisation of Economic Cooperation and Development OL Official Language OLTAS On-Line Tax Accounting System OSCPA On Site Post Clearance Audit PS Personal Secretary P&V Personnel & Vigilance PAC Public Accounts Committee PAN Permanent Account Number PATA Pacific Association of Tax Administrators PAYE Pay As You Earn PC(CS-C) Principal Commissioner (Customer Service-Central) PC(CS-L) Principal Commissioner (Customer Service-Local) PCA Post Clearance Audit PCCV Post Clearance Compliance Verification PFA Pre-Filing Agreement PFRDA Pension Fund Regulatory and Development Authority PH Personal Hearing PIDPIR Public Interest Disclosure (Protection of Informers) Resolution PIT Personal Income Tax PMDPerformance Management Division PMES Performance Monitoring and Evaluation System PMS Performance Management System PO Presenting Officer PPP Public Private Partnership Pr. CC Principal Chief Commissioner Pr. CCIT Principal Chief Commissioner of Income Tax Pr. CIT Principal Commissioner of Income Tax Pr. DG Principal Director General Pr. DG(LBS) Principal Director General (Large Business Service) Pr. DG(P,P&PE) Principal Director General (Customer-Policy, Planning & Programme Evaluation) PRIS Performance Related Incentive Scheme PRS Physical Resource System QDP Qualified Depository Participant RA Revision Authority RBI Reserve Bank of India REAP Risk Evaluation Analysis and Profiling RFD Result Framework Document RM Relationship Manager RMDRisk Management Division RMSResource Management System RMSRisk Management System RTI Regional Training Institute RUDRelied Upon Documents RWA Residents Welfare Association SAD Special Additional Duty SARA Semi-Autonomous Revenue Authority SARS South African Revenue Service SC Supreme Court SCM Standard Cost Model SCN Show Cause Notice SEBI Securities & Exchange Board of India SEZ Special Economic Zone SFIO Serious Fraud Investigation Office SIIB Special Intelligence & Investigation Branch SLA Service Level Agreement SLP Special Leave Petition SMAC Social media, Mobiles, Applications & Cloud SMS Short Message Service SMT Social Media Technology SNC Serious Non-Compliance SO Section Officer SOFTEX Software Export SOP Standard Operating Procedure SPRM Strategic Planning & Risk Management SPV Special Purpose Vehicle SSC Staff Selection Commission STPI Software Technology Parks of India SVBSpecial Valuation Branch TAN TDS Account Number TAGUP Technology Advisory Group for Unique Projects TAP Tax Analysis & Policy TARC Tax Administration Reform Commission TAS Tax Accounting System TAS Tax Advocate Service of USA TC Tax Council TCS Tax Collected at Source TDRC Tax Dispute Resolution Centre TDS Tax Deduction at Source TIN Tax Information Network TP Transfer Pricing TPA Tax Policy & Analysis wing TPL Tax Policy and Legislation unit of CBDT TPO Transfer Pricing Office TRACES TDS Reconciliation, Accounting and Correction Enabling System TRO Tax Recovery Officer TRP Tax Return Preparer TRU Tax Research Unit of CBEC UJV Unincorporated Joint Venture UN United Nations UNDP United Nations Development Programme UPSC Union Public Service Commission UTI Unit Trust of India VAT Value Added Tax VCES Voluntary Compliance Encouragement Scheme for Service Tax VOIP Voice Over Internet Protocol WCO World Customs Organisation ZAO Zonal Accounts Office Chapter I Executive Summary
– Robin Sharma, in The Monk Who Sold His Ferrari Public institutions, including government departments across the globe, need fundamental reform at least every decade, if not more frequently. This reflects the likely, and widely experienced, slide in the improvements made in the structure and practice that usually accompany fundamental reform. Tax administration is one such institution. To counter the anticipated slide, some reforming tax administrations have installed departments of change whose exclusive responsibility is to track the slack and sharpen, on a continuing basis, their productivity, accountability, cost effectiveness and, increasingly in a modernizing context, their service delivery. Some countries have developed the practice of subjecting their tax administration structure to occasional external examination to facilitate and introduce corrective measures. India had not taken such measures in the past and the tax administration has experienced
modest improvement that do not necessarily reflect global movement. Several committees I.1 Coverage The TARC arrived at the view that taxpayer services must comprise the first focus of a tax administration and that it, therefore, must give prominence to “customer focus” in taxpayer services whose activities must be designed to improve the experience of taxpayers with the tax departments. The activities of the two departments - the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) - should be aimed at lowering the cost of compliance so that existing as well as potential taxpayers find it easier to follow the rules. To achieve this, a framework has to be designed that should aim to reduce uncertainty in tax
laws by providing clarity on tax obligations. Opening two-way communication channels No tax administration reform can be complete without looking deeply at the structure and
management of the tax administration. While recognising that there is no unique model of the
structure and management of a tax administration, there are some emerging cross-country
patterns. The clear movement is towards a common organisation for direct taxes and indirect
taxes. The TARC recognised that and decided to propose appropriate changes in the present
structure in a calibrated manner where, to begin with, selected functions may be delivered
through a common structure. One clear point to initiate this is the administration of large
taxpayer units (LTUs). This would accommodate the prevailing LTUs, whose offices –
currently in the five metros – perform both CBDT and CBEC functions, although in disjointed
silos. Thus, the LTU experiment of structuring operations around a taxpayer segment has till
now not gone far, the reasons being many. Another area of gaining such immediate synergy is
in making tax laws. A further area of the TARC’s consideration was the need to reorganise the
tax administration on a functional basis instead of its present organisation based primarily on
territorial jurisdictions. The TARC has taken an approach to reform in a step-wise manner over
time in recognition that the two tax administrations must be given time, albeit on a chalked out
roadmap, to move to a fully integrated tax administration. But prior to full integration, a unified
management structure through a common Board could be achieved in the next five years based
on groundwork to be completed on data integration, common delivery structure for the benefit
of taxpayers, and training of officers and staff based on comparable and benchmarked
parameters. Chapter III of the report deals with these aspects.
Tax administrations that do not allow specialisation among its officers and staff suffer in
interfacing with high quality tax intermediaries and taxpayers. They also find it difficult to
understand complex business transactions that require deep understanding and skill to decipher.
These skills do not come with only theoretical exposure but while working on the subject for a
minimum of 4-5 years, international experience revealing even periods as long as a decade
during which an officer is encouraged to specialize. It is thus imperative to allow tax officers
to develop specialisation in their work. Specialisation is not only required in audit functions,
as is commonly held, but also in dispute resolution, taxpayer services, and in other functions
of tax administrations such as HR, finance, tax analysis and ICT management. Chapter IV of
the report deals with the people function of the tax administrations, with training and
specialisation forming important components. It also focuses on the wider HR needs of staff
by identifying the need to introduce practices that have become common in modern tax
administrations including mentoring, effective performance evaluation methods, for example,
through assessment centres, and e-training. Chapter V deals with dispute resolution and management. The TARC found in its analysis
that the present dispute management structure should be converted into a separate vertical
function so that the tax collection functions do not influence the resolution of disputes, which
tends to occur at present. The current adversarial approach to disputes also needs to be
transformed into one that is more collaborative and solution-oriented. Besides, the dispute
structure needs to be modernised by bringing in alternative dispute resolution mechanisms
through arbitration and conciliation. This may require legislative change. The role of regular
interpretative statements has been emphasized to avoid disputes which otherwise arise due to
ambiguity and imprecision in laws, rules and regulations. Equally important is taking due care
for greater clarity at the law drafting stage itself. Both the CBDT and CBEC have been among the leading departments in the government in adopting ICT. Both have successfully implemented large projects that have made many processes convenient and transparent for the taxpayers and improved the efficiency of operations. However, there are still many gaps and a large room for improvement. Chapter VII is on the need for a deeper penetration of information and communication technology (ICT) in the two tax departments. ICT has to form the backbone of improved service delivery and that could be better achieved through a special purpose vehicle (SPV) as expounded in that chapter. I.2 Critical Findings At a macro level, the TARC found, first, that the Indian tax administration is in a vulnerable position due its static structure. For example, the recent “restructuring” of the two departments involved only an expansion in the number of posts without a corresponding reduction or reallocation of resources away from less productive areas that is a quintessential element of modern restructuring and change. Second, the TARC found that the tax administration remains essentially unable to address rapidly emerging challenges on the domestic or international fronts, reflected in recent decisions that are far removed from international practice. Third, the TARC found that it should make recommendations that may appear to be far reaching and path breaking but are very much desirable and doable in the Indian context since they are benchmarked with prevailing global best practices. Thus, it is fair to emphasize right at the beginning of this report that the TARC has not suggested any change that it believes cannot be carried out in the Indian context. Indeed, it is imperative that they be carried out given the prevailing tax administration characteristics in India. Some changes should be made with haste and others progressively so. The TARC has made specific suggestions of where the tax administration should make changes immediately, where it should position itself through continuing, self-generated reform in five years and, once appropriately empowered, where it should reach as a world class tax administration in ten years. In this perspective, a roadmap has been provided for complete and fundamental tax administration reform. Also, the recommendations made in different chapters of this report need to be viewed as a whole and not in isolated fragments, if the reform efforts are to bear the intended fruit. The TARC believes this is the right moment in the light of a new reform environment that is expected to emerge precisely at this point of time. The major fault lines in the tax administration are listed as follows. Position of Revenue Secretary and autonomy of the two Boards: The TARC found that these matters are closely related and comprise the crucial shortcoming at the apex level. It also found that earlier taxation committees had addressed the issue time and again – as will be described below – though government action has not followed. The TARC found that its view closely parallels those of the earlier committees, modified however to reflect international experience that has since emerged. There is a post of Revenue Secretary who occupies the apex position in the Revenue
Department and is selected from the Indian Administration Service (IAS). He is likely to
have little experience or background in tax administration at the national level and little
familiarity with tax, including international tax, issues that are increasingly taking centre
stage in emerging global challenges in taxation. Yet s/he is the final signatory on decisions
on tax policy and administration matters prior to their arrival for the Finance Minister’s
consideration. The TARC found that this has translated to the Indian tax administration’s
attention and concerns – in the form of the Revenue Secretary’s control over the CBDT and This is not the first time that a government committee has found that this admixture is anomalous, and that the post of Revenue Secretary is superfluous. It was considered by the Tax Reforms Committee, 1992, chaired by Prof. Raja J. Chelliah. The Committee’s views were as follows: “We recommend that (a) the two Boards should be given financial autonomy with separate financial advisers working under the supervision and control of the respective Chairman; (b) the Chairman of the two Boards should be given the status of Secretary to the government of India and the members of the rank of Special Secretary; and (c) the post of Revenue Secretary should be abolished.” (Para 9.27 of the Final Report Part – I) The TARC’s finding regarding the role of the Revenue Secretary is congruent. It is surprising that government has so far not visited this matter and, as will be developed in detail in this report, it is time to give renewed attention to it due to its adverse impact on the efficacy of the tax administration in India. Interestingly, the Chelliah Committee not only recommended abolishing the post of Revenue Secretary, but also emphasized financial autonomy for the two Boards. To quote,
Selected matters relating to the administration/financing structure had been examined in the case of the CBDT by the even earlier Wanchoo Committee, 1971. It recommended making the Board an autonomous body, independent of the Ministry of Finance, with the Chairman enjoying a status equivalent to that of a Secretary to the Government of India as in the case of the Post & Telegraph Board. The subsequent Choksi Committee, 1978, reiterated that,
The issue of the administrative set up of direct taxes was also examined later by the Estimates Committee of Parliament. In its 10th report (1991-92), the Committee made the following recommendation in Para 3.77 of their report:
With regard to the Committee’s observation that the two Boards are “fairly distinct from each other and do not require more coordination than that is necessary”, the TARC notes that since 1991-92 international experience has clearly moved counter to the Committee’s observations and as noted in Chapter III, the dominant global trend is in the direction of unification of direct and indirect tax administrations and treating corporate tax and VAT/GST together as business taxes. The TARC has worked along similar lines. First, it agrees that the post of Revenue Secretary does not merit presence in a modern tax administration. Instead, a Governing Council should be introduced with the chairs of the Boards alternating as its chairperson. In this manner, the TARC adds to the tenor of the Chelliah Committee in that India should benchmark itself with modernizing tax administrations by not only removing the position of Revenue Secretary but by replacing it with a Governing Council that should include members from the non-government sector as well. The Governing Council will oversee the functioning of the two Boards and approve broad strategies to be adopted by the tax administration to fulfil the objective of a more co-ordinated approach to the administration of the two taxes – direct and indirect – and create a structure which is independent. 24Such a co-ordinated approach also improves the focus of the tax administration towards its customers, or taxpayers. Second, synergy in tax policies and legislation between the two tax areas is to be achieved through a Tax Council, headed by the Chief Economic Adviser (CEA) at the Ministry of Finance. The Tax Council will bring the rigour of economic analysis and high precision in legislative drafting to tax laws so that tax laws are not only of assured quality, but are also coherent across tax types. The TARC found that the CEA is more equipped to deal with the links between tax and economic policies than the Finance Secretary (who was given a role by the Chelliah Committee). This new pattern reflects prevalent global practice in which tax and the economy are recognized to be intrinsically linked. That link needs to be established in India rather than linking it with external administrative control, apparently to accommodate an administration oriented service. The proposed structure would result in more autonomy in the functioning of the tax administration, which is unlikely to be achieved in the present structural framework as it fails to empower tax departments to carry out their assigned responsibilities efficiently. The Kelkar Committee, 2003 also recommended that both the CBDT and CBEC should be given requisite autonomy. 25The present functions of the DoR could easily be handled by the two Boards. The TARC could not identify the rationale for entrusting such functions to a separate body. Functions such as prevention and combating abuse of narcotic drugs and psychotropic substances and illicit traffic therein, Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, and the administration of central sales tax can be looked after by the CBEC while the enforcement of the Foreign Exchange Management Act, 1999, and Prevention of Money Laundering Act, 2002, can be looked after by the CBDT. The administrative functions relating to the Authority for Advance Ruling, Settlement Commission and Ombudsman can be delivered through the respective Boards. The Governing Council and Tax Council will operate as single entities over both Boards to achieve better tax governance. The Councils anticipate the eventual convergence of the two Boards. Over the next five years, the two tax departments would move to a unified management structure, i.e. a common Board and operate the services for both taxes, as shown in Diagram 3.5. This would pave the way over another five years to a fully integrated tax administration with corporate tax, excise duty and service tax, together comprising taxes on business. When major functions of the tax administration are organized along functional lines, and not on merely tax lines, it will enhance taxpayer as well as staff convenience. This reflects current global practice. This would, of course, not be at the cost of specialisation in different tax types. The description above is a snap-shot of the structure described in greater detail in Chapter III. Artificial separation of two tax Boards: The tax administration is divided into two Boards – CBEC and CBDT – whose Chairs and Members are selected from career tax officials, and who report to the Revenue Secretary. There are several crucial difficulties with the nature and practice of the two Boards. First, there is no rationale for a functional separation that fails to reflect the common global practice of the day. This is because many of the Members’ functions on the two sides repeat the same function that could be carried out ideally and optimally by the same official. This separation appears to accommodate the comfortable existence of Board Members rather than serve the interests of government in a sharp tax administration. Combining at least certain functions immediately would yield more Member positions in currently neglected areas. The Chelliah Committee had also recommended that the two Boards should operate in close co-ordination with each other. To quote: “With the abolition of the post of Revenue Secretary some arrangement would have to be made to ensure supervision and coordination of the activities of the two Boards. While alternative institutional arrangements could be considered, it is necessary to ensure that two basic conditions will be satisfied; the first is that the two Boards or the Tax Departments should not act independent of each other; as we have stressed earlier, it is extremely important that the tax system is structured and managed as a harmonious whole and that other inputs besides knowledge of tax administration are brought into the formulation of tax policy.” (Para 9.28 of the Final Report Part – I) Routine placement of officials in the two Boards (with little relation to length of tenure): Second, the selection of Chairs does not take into account the length of their remaining tenures prior to retirement. The selection is based almost entirely on seniority. As an indicator, in 2014 alone, there are likely to be four Chairs of CBDT and three Chairs of CBEC. For Members, there is a requirement of one year of residual service. Otherwise, the selection process is the same. With such rapid turnover and short tenures, there is little leadership in the Boards and, consequently, scant attention and time being devoted to directing national tax policies or providing administrative guidance – their quantity as well as quality have been reduced to random outcomes of ephemeral Chairs and Members. Board assignment has little relation to experience or link to specialized areas: Third, the assignment of functions among Members does not necessarily reflect their work experience. Additionally, some areas that comprise crucial matters in modernizing tax administrations are given inadequate attention – for example, information and communication technology (ICT). Indeed, in such a specialized area, it is possible that people elevated to the post of Member ICT may have spent hardly any time during their earlier career on this matter. It, therefore, is unlikely that such a Member will be able to manage the area or take dynamic essential steps to keep the tax administration abreast of the latest developments in ICT applications that would be beneficial to the system. Members making policy have little policy experience: Fourth, most Members emerge primarily or exclusively from field functions while, at the Boards, they are expected to design policy. Introduced policies, therefore, are often unrepresentative of the best available and experimented policy options from across tax administrations internationally. This happens even as top taxpayers express willingness to adhere to a rational tax administration framework while increasingly protesting against prevailing practices that do not compare with their experiences in dealing with tax administrations elsewhere. Members’ risk aversion leads to low productivity or low motivation to provide guidance or clarity: Fifth, positioned beneath a Revenue Secretary picked from another Service, the Boards have tended not to assume a leadership posture, their views and decisions increasingly revealing extreme risk aversion. The outcome is that the Boards’ decisions or pronouncements in the form of legislative changes, binding circulars, clarificatory guidance notes or press releases are few and far between, and that too under external force, in contrast with other tax administrations elsewhere. Risk aversion permeates down, and leads to, infructuous tax demands: The stance of inaction has permeated down to Chief Commissioners and even Commissioners who are averse to taking strong or even correct decisions that would counter infructuous demands made by lower level officers who have been given the role of a quasi-judicial authority. On the other hand, when an officer is convinced about a demand s/he has made but the Controller and Accountant General’s (CAG) auditor has disagreed with it, the Boards have issued standing instructions that a “protective demand” must be issued by the officer to the taxpayer. Thereafter, the departments persist in such futile litigation imposing completely avoidable costs on the taxpayer. The CAG has nowhere stated that such protective demands should be issued and it is entirely up to the Boards not to do so. Non-issuance could lead to their being called to explain by the Public Accounts Committee (PAC) of Parliament; this was not uncommon in earlier years. Where a considered view has been formed on CAG’s observations, the Boards ought to display the courage to defend their decisions before the PAC should such a need arise, instead of transferring the risk to the taxpayer. The Board’s standing instructions, therefore, reveals excessive risk aversion that could only have an adverse effect on the taxpayer who is left in a completely uncertain and trying position in terms of current cash flows and business decisions for the future. The deleterious ramifications for the economy can only be surmised but not exaggerated. Taxpayers express helplessness against rude or arbitrary behaviour of officers with little assigned accountability in practice: The continuing impact on the taxpayer who has been relegated to a position of helplessness is unprecedented internationally. The confusing, if not arrogant, environment that they have to face on a daily basis was reported by high finance officials of major Indian corporations who are some of the largest Indian taxpayers. This occurred during the TARC’s stakeholder consultations at five Indian metros– Bengaluru, Chennai, Delhi, Kolkata and Mumbai. They did not complain about the disagreements of the quantum decisions as much as about the rudeness in communication, non-maintenance of appointment time, passing on accountability to another location, and going so far in some instances as informing the taxpayer that a demand is being made to obviate “vigilance” – internal audit against the officer – and the taxpayer should take recourse to the appeals process available to him. This matter is detailed further as it has cropped up time and again during consultations with taxpayers in different contexts. Retrospective amendments clustered during 2009-12 may reflect this lackadaisical approach. In turn, this reflects complete lack of accountability at any level except on grounds of lagging behind in revenue collection. Lack of use of Information and Communication Technology (ICT) based data by the Tax Policy and Legislation (TPL) Unit and the Tax Research Unit (TRU): The two departments on both direct and indirect tax sides have made impressive advances in the installation of ICT and its use in the process function. What has not occurred is data mining. The masses of data generated, for example through the expansion of electronic filing, remain essentially unutilized. In modernizing tax administrations, modelling of taxpayer behaviour to obtain nuanced taxpayer behaviour patterns prior to the formulation of tax administration policy has become common practice. India has not yet begun even rudimentary attempts in this direction. Given its current size and officer backgrounds, in fact, no essential tax policy or tax administration policy analysis is carried out at either TPL or TRU. They function essentially to interpret and draft the law. There is no officer who is, or could be, entrusted to carry out ex ante or ex post policy analysis. This points to the urgent need to overhaul these units on the basis of a total reformulation in their objectives and scope. Adverse impact of revenue target on tax officer equilibrium: Revenue target is the sole criterion that is effectively used to assess performance. Targets are set in the Union Budget in a static context. No attempt has been made by the Boards to undertake any post mortem study that would analyse whether the projections were correct over a period of time when placed against the economic trajectory during the past year. Instead, the Boards pressure Chief Commissioners, who pressure Commissioners, who pressure lower level officers to meet fixed revenue targets, irrespective of the prevailing condition of the economy. Officers complained bitterly during the TARC’s consultations in the five metros about the anxiety that they go through on account of the revenue collection pressure and some even went to the extent of pointing to the need for mentoring, coaching and psychological support. Blind revenue target causes unjust pressure on good taxpayers: Modern tax administrations do not use a fixed or static revenue target. A revenue projection is made at the time of the budget reflecting the condition of the economy at that point. The projection is changed during the year reflecting the changing economic outlook. This is compared against what revenue is actually being collected. The difference is called the “tax gap”. This is continually minimized through better collection efforts by reducing or eliminating tax evasion rather than by putting pressure from the top on officers below who, in turn, pressure even good taxpayers to contribute more revenue or postpone making due refunds in particular during the last quarter of the financial year. Such policies would be illegal in other law abiding societies. Consequently, instead of formulating policies with respect to tax administration and tax policy, several Board Members take on the role of tax collector. The consequence, unsurprisingly, is twofold: first, a dearth of meaningful tax policy or tax administration policy and, second, an inequitable pressure on the good taxpayer. Indeed, the TARC observed, other than helplessness, deep and openly expressed anger amidst even top taxpayers in several metros. Wrong use of tax avoidance instruments for revenue generation: In the direct tax area, ordinarily, transfer pricing examination between associated enterprises should be used as a tool to minimize tax avoidance. In India, transfer pricing measures are used for revenue generation, which comprises a completely wrong approach. This is revealed through the allocation of revenue targets to transfer pricing officers (TPOs) from transfer pricing adjustments. This is unheard of internationally. Accordingly, India has clocked by far the highest number of transfer pricing adjustments, demanding adjustments even for very small amounts. There is also a high incidence of variation among TPOs in their adjustments for similar transactions or deemed transactions. Taxpayers reported that they often succumb to such adjustments simply to carry on with business activity for, otherwise, they would have to allot or divert huge and unavailable financial and staff resources to such activities. Several other avoidance measures are also interpreted by the administration to be used for revenue generation, which comprises wrong policy. Defective formulation and implementation of tax law and rules to generate revenue: On the indirect tax side, since the introduction of the “negative list” of services – only listed services are not taxed while all others are - has wreaked havoc among taxpayers due to poor management of change by the CBEC, reflecting lack of knowledge, preparedness or Board guidance to field officers leading to multiple interpretations combined with the usual lack of accountability for timeliness in clearing up confusion through circulars or guidance notes. The practice of delaying refunds by asking for irrelevant information reveals an undesirable and non-transparent practice to avoid refunding what is legitimately due to the taxpayer. Such artificial devices to garner revenue reflect an unethical approach to revenue collections. Lack of quality in fiscal deficit reduction: Revenue target policy is usually set to achieve a better fiscal target figure. The TARC observes that the revenue target policy has been erroneous inasmuch as it is not just the numerical figure of fiscal deficit that counts but its quality. If a fiscal deficit is reduced through coercive government action in an era of global information, international rating agencies are going to take note of the overall business environment. Merely reducing the quantified fiscal deficit is not sufficient since the focus turns also to the quality of deficit reduction. Herein lies the fallacy of pursuing a blind deficit reduction policy. It has to be matched, instead, with appropriate approaches towards revenue collection both from tax administrator and taxpayer point of view. Indeed, some countries today are so concerned about the impact of tax policy and tax administration on the taxpayer that they have virtually removed the word “taxpayer” from the lexicon, replacing it with “stakeholder” and “customer”, recognizing them as partners with the administration in generating revenue. India remains a long distance from such an approach. While revenue target is often achieved due to economic factors, identification of tax administration impact or tax-base impact is not separately attempted. Thus, the overall impact assessment is confined to a year, and no gainful change is made in the tax administration or conscious efforts made to widen the tax-base. Escalation of disputes and poor recovery from demands: Lack of accountability in raising tax demands without accompanying responsibility for recovery has led to an unprecedented situation in India, which is experiencing by far the highest number of disputes between the tax administration and taxpayers with the lowest proportion of recovery of tax while arrears in dispute resolution are pending for the longest time periods. Thus, dispute management comprising dispute prevention and dispute resolution is at a nadir. It has also become a profession in its own right in a backdrop where, in modern tax administrations, disputes are entered into only as a last resort. Virtual absence of customer focus: Much of the modernizing tax administrations across the world have changed their stance towards taxpayers in a visible change in the approach to dealing with them, which is to treat them as partners. Segmenting taxpayers according to their tax behaviour enables the tax administration to develop strategies appropriate for such behaviour and improve the collection mechanism. In India, no customer focus strategy has been developed based on segmentation analysis. Examples of customer focus are few and there is no training for it, reducing taxpayers to a subservient status: It is true that numerous Aayakar Seva Kendras (ASK) are being set up at locations all over India so that a taxpayer can register a question and follow how the matter is progressing through the system. However, selected visits indicated a wide variation in implementation. Second, through installed ICT software, a taxpayer can log in to see whether and how much his tax deduction at source (TDS) has been credited. However, many lacunae remain in terms of non-matching and the system has been slow in correcting anomalies. Third, other than TDS, there are significant cases of mismatch between the ICT-based Centralized Processing Centre (CPC) and the information percolating from there to a taxpayer’s Assessing Officer (AO). Although the taxpayer suffers as a result of the mismatch, the lack of responsibility or accountability, leave alone timeliness in resolution, between the ICT and the AO for redressal of the mismatch is striking, despite ardent pleas from affected taxpayers, the latter sometimes even being subjected to scrutiny. Fourth, a common complaint made during the TARC consultations by high and low taxpayers alike was that the Indian tax administration was virtually the opposite of what is understood globally as customer focus orientation in terms of congenial attitude and polite approach to the taxpayer, or in terms of timeliness in decision making. Instances of egregious tax officer behaviour: Taxpayers are subjected routinely to rude and arrogant behaviour, are made to wait hours – being called to appear in the morning though met many hours later, sometimes even in the afternoon – are asked to make photocopies of information already sent to the administration again during the visit without availability of copying machines, CEOs of companies being asked to appear when the CFO or an accounts official from the company would suffice. These characteristics signify practice that has descended to unprofessional levels, to put it mildly. There is no departmental training to behave differently; there are no guidelines or framework of rules for accountable behaviour. Yet the vision and mission statements of the departments pronounce their intention to care for the taxpayer by incorporating taxpayer perspectives to improve service delivery. The prevailing situation is so far from common global practice that, in the judgment of the TARC, there is likelihood of a tax revolt in the not so distant future unless emergency and compulsory training is conducted for officers, with strong cues from the leadership. Contextually, while Ethics, as a subject, forms a part of probationers’ training, Customer Focus is not addressed as a topic at any point in the officer’s career. This decidedly reveals how the tax administration has functioned, and continues to function, in isolation and in a feudal manner, protected by systemic job assurance and assessed highly as long as revenue targets are met. The distance of this framework and manner of functioning from authentic customer focus could not be greater. The need for remedy could not be more urgent. Large Taxpayer Units (LTUs): The concept of LTUs was introduced in 2006 following comparable practice in more than 50 countries. There should be a double dividend from the functioning of LTUs. On the one hand, large taxpayers defined according to their size of advance income tax or previous year’s excise tax or service tax payment, can pay all taxes Irrational approach to vigilance over officers: Perhaps the most fundamentally diagnostic finding of the TARC is the almost absurd approach, by global standards, to vigilance over tax officers and the continuance of the system without the slightest revealed interest to change it from within i.e. by the Boards. A primary responsibility of the Boards is the welfare of and justice to their officers. Yet these officers are subjected to anonymous charges against them that could be ruinous to their careers. Vigilance action against them emanating from such anonymous complaints can drag on for years or be kept in abeyance only to be revived for unrelated future adverse steps that may be taken against them if the system so desires. It is not surprising that correct, fearless decisions cannot be expected from officers in an environment of such uncertainty. Instead, the safe course of action is to relentlessly follow the “revenue protection” goal that is inculcated in them as the primary motto of operation. Fear of vigilance in management: The TARC found that a similar fear of vigilance lurks even in the higher echelons of management, rendering the administration devoid of bold or corrective action where needed or even where obvious. Unresponsive to taxpayers’ legitimate concerns, slow to undertake corrective action, on the contrary, instructing that protective demands be issued to taxpayers automatically on the basis of the CAG’s observations and ignoring its own officers’ assessment, the Boards – comprising top management of the tax departments – have succumbed to the fear of vigilance. The management is functioning to protect itself even while the taxpayer becomes its sacrificial lamb, revealing a lack of accountability towards the taxpayer. In this context, customer focus as enunciated in the vision and mission statements remains relegated to paper. Management becomes doubly irresponsible – towards both its officers as well as to taxpayers. Fear of vigilance as a consequence of external pressure and external head: Possibly the subservient status of the two Boards reporting to an officer from a different service and, more so, without essential background or knowledge of tax matters, is leading to the Boards shirking from taking bold steps or corrective action, or being unwilling to face the legislative or judicial branches as needed, or being unwilling to take initiatives in the building of infrastructure or, last but not least, failing to empower the institution and, instead, remaining inert towards its own officers and taxpayers. All of this characterizes the Indian tax administration of the day. It is clear that unless it is given its own autonomy, the Indian tax administration can never rise to its full potential. HRD – or People – function: First, while the need is to create a high-performing organisation, the HR policies of the two departments seem to work against the creation of a meritocracy. The promotion, transfer and placement policies do not adequately address the need for recognising merit, developing specialisation and creating a motivated and highly competent and professional work force, which is capable of effectively addressing the emerging challenges and also serving the taxpayers satisfactorily. Second, several officers mentioned that there is a culture of supervisors doubting and questioning correct decisions merely because they are perceived as customer-friendly. This demotivates even diligent and honest officers and induces them towards risk-averse decisions, thereby passing on an unfair burden on the taxpayer as that would be an easy way out from being subjected to further questioning by management. In short, the common management stance being one of distrust of the junior officer, rather than his empowerment, sows the seed of a chasm between an officer and the management. The former eventually succumbs to the laid out approach expected of him by the system. Third, the transfer policy of tax officers is routine if not archaic. The transfer policy needs to balance the needs of the organisation with the needs of an individual to maintain high morale. The argument that the Indian Revenue Service is an all-India service should not lead to the installation and functioning of a structure that ignores the need for specialisation. Transfers are given first priority over acquiring specialization in any subject that may be quintessential in carrying out acutely specialized tasks in a global context. An officer may be placed in TPL, TRU, systems, or international taxation, directly from the field without prior training merely to adhere to the transfer policy. Nevertheless, there are enough caveats in the policy to accommodate special ‘silver spoon’ cases. Indeed cases appeared to the TARC where circular transfer requests (pertaining to a group of officers) that are entirely ‘Pareto optimal’ – where there are gains without anyone being worse off – are ignored even where the transfer policy is apparently not compromised. Presumably this may reflect an underlying fear that such requests, if conceded to, may be repeated by others, not realizing that meeting such continuing requests would only enhance people welfare. The need for a transfer policy that is meaningful in its fairness and encouragement towards professional specialization cannot be over-emphasized. Fourth, another oft ignored aspect of the people function is the implementation of leave policy. This appears to be randomly applied at least in selected observed cases. The policy has broad scope for leave accumulation, but granting of leave appears inexplicable and unrelated to the accumulation of leave. Rather, it appears to be linked to the professional relationship between an officer and his superior. The right of the officer to take accumulated leave has sometimes been ignored, revealing a lack of information or of training of managers in modern management principles in which rights such as the days of acquired leave, or stipulated number of days of training, comprise the right of a worker and has nothing to do with a work relationship. There is no redressal for the worker in such circumstances. What is worse, there is no accountability assigned to the errant superior. The TARC gathered the impression that the management tends to wield a tough stick on an officer who s/he falls foul inter-personally of the system. Fifth, an issue that cannot be ignored and appears to work in the reverse direction is that of
moral hazard. Taxpayers openly complained during the TARC’s consultations about their Key internal processes: Glaring gaps prevail in internal processes. Some among those found by TARC are listed here: (1) a basic lack of harmony between direct and indirect tax departments; (2) relatedly, the issuance of PAN, its non-use thus far as a Common Business Identification Number (CBIN) and the lack of provision for de-registration, cancellation or surrender, and slowness in real time verification of PAN; (3) absence of possible consolidation of direct taxes on returns, for example, income tax and wealth tax; (4) continuation of jurisdiction specific returns for direct and indirect taxes; (5) lack of harmony even within indirect taxes, i.e., between customs, central excise and service tax, (for example, not combining audit of customs, excise and service tax paid by the same taxpayer, or not treating a business as a whole and instead treating it as individual audit units); (6) absence of e-invoicing and commensurate monitoring of CENVAT credit flow; (7) absence of audit protocols that separate different scrutiny procedures and protocols for different types of audits; and (8) the virtual absence of risk-based scrutiny selection for income tax despite the use of Computer Assisted Scrutiny Selection (CASS) due to lack of pre-selection data cleansing or systems-based checks and analysis. A particular gap remains in an interface function with the taxpayer; this is in processing and making refunds. (1) In the case of income tax, there is no time limit within which an AO needs to process the refund in case it could not be issued by the CPC. The insistence on manual filing of TDS certificates before the AO for verification of a refund claim stalls the process. (2) Where eligible refunds emanate from Commissioner (Appeals), Income Tax Appeals Tribunal, a high court or the Supreme Court, again, the AO faces no prescribed time limit for issuing the refund. (3) In the case of service tax, a consistent complaint was that of refusal to pay due interest to domestic suppliers and to service exporters under different pretexts – including repeated demands for additional documentation or the use of a provision entitled “unjust enrichment” – by the department. The latest available data reveal that, in 2010-11, interest on refunds was 0.01 per cent and 0.02 per cent of refunds for customs and excise respectively, which may serve as an indicator of the realism of the complaints. (4) It was reported by officers to the TARC that it was routine to receive instructions from above to slow down or stop making legitimate tax refunds in the last quarter of the financial year. Tax fraud, intelligence and criminal investigation comprise another deficient area. The TARC found that: (1) “Search and Seizure” and its legal backing need to be made clearer. Drafting of prosecutable issues and highlighting the offence and the evidence to be adduced either do not exist or are carried out not in a fully professional manner. A dedicated vertical assisted by lawyers is currently lacking and needs to be embedded in the administration. (2) The directorate in charge of investigation of criminal activity on the direct tax side is inadequately linked to other agencies and, remarkably, not even to the indirect tax side. This once again reveals the deep and inexplicable chasm that continues to exist between the two tax departments and is simply tolerated despite obvious synergies that would ensue if common functions were jointly performed. Role of ICT: ICT today is the most critical underpinning for tax administration reform. All modern tax administrations see it as a key component of their strategy to improve theefficiency and effectiveness of their operations, be it customer services, internal business processes or effective interventions in the area of audit and enforcement. They are also focusing on enhanced use of analytics to support their actions in diverse areas such policy making, customer segmentation and risk management. While the two Boards’ achievements are creditworthy, and provide a robust basis for future progress, in the TARC’s opinion, there is a long road ahead of both the Boards before they could be said to have achieved comparable global benchmarks, of a modern 21st century tax administration, for full and effective utilization of the potential that ICT offers. And in order to reach that destination, they will have to chart a new path as TARC has outlined in Chapter 7 of this report. ICT does not appear to be fully internalized in the thinking and working of the departments and there is not enough appreciation of its strategic importance as opposed to viewing it merely as a means of automation of transaction processing. The absence of integration of the ICT and business domains at the highest levels has led to sub-optimal realization of the benefits of ICT projects and systems. Greater attention is needed on the part of the senior leadership to the opportunities that ICT offers for re-engineering business processes to do things differently and more productively. Further, there is insufficient focus on the use of data analysis for developing policies and for making informed and evidence based decisions. It is true that the CBEC has already implemented, and CBDT is implementing, a data warehouse that will provide much better access to data as well as powerful analytical and reporting tools. However, in the absence of data sharing between the two Boards, the data warehouses will only provide data from their respective systems, and thus only a partial version of the truth, thereby limiting its utility. Further, merely providing technology is not sufficient. If the required human capacity to use the technology tools to perform advanced analyses is not developed, the potential of ICT will remain unrealized. There appear to be no efforts planned to create such capacity and develop an institutional framework for undertaking research and analysis in either of the Boards. The implementation so far has been in the project mode, meaning that individual projects were conceived, designed and implemented at different points of time for meeting different needs. There has been no clearly articulated ICT strategy, derived from an overall organizational strategy and vision, forming the basis of the project development. This weakness has been compounded by the absence of a robust ICT governance framework that would have encompassed sound programme and project management, closely linking business goals with ICT implementation. It has also led to heterogeneous approaches to ICT implementation, with systems being developed along different implementation models and not adequately catering to the need of interoperability. There are also gaps in the ICT implementation. These are either because some processes have not been covered in the scope of automation or because the sub-systems or modules that provide for digitization have are not been implemented. This is true of the core applications of both the direct and indirect tax administrations. The result is that data are incomplete and the Boards are still dependent on reports from the field, which, besides often being inconsistent and inaccurate, impacts on the efficiency of field operations. Missing pieces in digitization of operations also means that the Boards are unable to make meaningful performance measurements at the organizational as well as at team or individual officers’ levels. Consequently, they are unable to effectively manage performance at all levels. There also appears to be a communication gap between the DG (Systems) and the officers in the field, leading to difficulties in implementation as users do not seem to adequately perceive value in ICT implementation. Many administrations adopt suitable ICT maturity frameworks, to assess their progress in ICT implementation, as also the comprehensiveness, depth and effectiveness of such implementation. No such use of framework has been adopted by the two Boards. The most critical shortcoming of the current implementation arises from the two Boards operating in separate silos and a total absence of data sharing between the two. A big opportunity for radically improving both taxpayer services and enforcement actions is being missed on this account. An opportunity to reduce duplication of efforts and resources too is being missed. The TARC also finds that a key risk to the ICT implementation lies in the HR policies of the two departments, which are overly oriented towards a generalist approach. Effective ICT implementation requires specialized skills and capacities and all modern tax administrations recognize this. In India, on the other hand, the transfer policy results in situations in which crucial resources get moved out the ICT function, at critical points of time simply because of the prescribed tenures, and new (and often unprepared and unwilling) persons get inducted. Combined with the absence of a reliable process of knowledge transfer, this continues to pose a serious risk to ICT implementation. Compared to the size of the projects, the two DG (Systems) are also understaffed. Considering the complexity and scale of the tax administrations’ operations, and the challenges confronting them in a rapidly changing environment, the task of complete digitization of their operations is an onerous one. This, coupled with the need to take the implementation out of the silo-based approach that has constrained the realization of the full potential of ICT hitherto, would indicate that the DG (Systems) as they are currently configured and structured are ill-equipped to meet the future needs effectively. Only a purpose built organization that will take on the full responsibility for ICT implementation, with full operational freedom and flexibility to be run in an independent and professional manner, and yet be under the strategic control of and accountable to the two Boards, can successfully meet the challenge. I.3 Conclusions The critical findings delineated above, when combined, lead to the TARC’s overarching conclusion that, if an institution could have spirit, then the current Indian tax administration lacks that spirit. Functioning in a vacuum, it has lost its purpose as revealed in its behaviour, for its stated vision and mission are scarcely observed in its operational style. Its singular objective of protecting revenue without accountability for the quality of tax demands made is commonly believed to have severely affected the investment climate in India and in investment itself. This view reflects strongly the pleas, complaints and anger expressed by high and low taxpayers alike during the TARC’s stakeholder consultations. Thus, overall, the Indian tax administration is at its nadir. A fundamental and deep reform is urgently called for. There is no time to lose if investment is to be revived and its full potential reached, and an eventual tax revolt through capital flight or other direct protests is to be averted. Deconstructing, the conclusions may be summarized as follows: A crucial deficiency is a fundamental lack of customer focus in the Indian tax administration, which is in stark contrast to modernizing and reforming tax administrations. The randomness and uncertainty in tax demands, the rudeness and abrasiveness in tax officer behaviour towards taxpayers, totally obviating the latter’s stakeholder role, the inconsistency in demands made on similar tax matters without accountability, and the often poor quality of show cause notices have combined to project the tax administration in its poorest light in the eyes not only of the taxpayer but of society at large. Yet there is no place for customer focus thus far in the training syllabi of either branch of the tax administration. Indeed, recently, the phrase “tax terrorism” has appeared in the gathering commentary on the Indian tax administration. The present structure of the tax administration – (i) headed by a non-tax official imported from another public service stream that has no link to taxation, (ii) artificially separating the tax administration into direct and indirect taxes headed by two parallel Boards for common functions, ignoring, for instance, even the functional commonalities in LTUs that were established for the very purpose of reaping benefits from exchange of information between the two tax areas, (iii) living with a selection system into the Boards that has no or little link to the length of tenure, work experience, or specialization, and (iv) risk aversion arising from an externally imposed vigilance over the entire officer structure The risk averse behaviour of the tax administration has routinely led to infructuous tax demands on the taxpayer, often with the full knowledge that eventually such demands would not be able to withstand or pass the judicial process. In addition, a contrary view from the CAG on an AO’s assessment is directed by the Boards to be assimilated through a ‘protective demand’ on the taxpayer, despite knowing that it is likely to lead to a dispute. The resultant number of disputes and the time taken to resolve these have surpassed heights that are globally incomparable. The rules of appeal by the tax departments that elongate the process prior to final resolution and a high proportion of cases that end in eventual defeat have led to a miniscule proportion of recovery compared to demand. Yet there is no accountability regarding recovery for the concerned officer. While raising a demand is praised, there is no punishment for infructuous demands. The loser is the taxpayer in terms of time lost, advance payment required of the disputed amount resulting in deleterious effects on the cash flow of business, and the length of staff time and expenses associated with a long drawn-out dispute resolution process.
At the same time, accusations of moral hazard and demand for bribes cannot be ignored by the TARC. On the one hand, this could be partially explained through the administration operating as a subservient entity to another public service stream so that, despite an evidentiary slide in the morals of the institution, management does not feel directly responsible for it. On the other hand, given that the ultimate sufferer from corruption is the taxpayer – while recognizing that he has to necessarily be at least a passive participant – there is no gainsaying the fact that there is need for the tax administration’s management to take extraordinary steps to contain and obviate this institutional disease since it has a direct impact on society, its productivity and on the economy’s measured GDP. The TARC, therefore, concluded that the people function of the Indian tax administration is in a very undesirable state. Even as the staff continue to exhibit competence, if not brilliance, at an individual level, the system tends to defeat them from performing at their full potential. Certainly, it tests them on erroneous premises and subjects them to archaic management practices. This situation demands immediate correction through compulsory training in modern management practices at the Commissioner and higher levels of seniority, who currently are subjected to little or no requirement for continuing management education. It also demands people policies that are designed to recognize and reward high performance, ethical conduct and identify leaders early and groom them for leadership positions so that they can lead the organisation to high performance. The TARC is, therefore, making recommendations in relation to this function which have transformative potential and which are radically different from the current processes. The TARC recognizes that the question may be asked whether it is appropriate and feasible that a radically different HR dispensation should be operated in the tax administration de hors rest of the government. The TARC is making its recommendations after carefully deliberating over this question. The TARC believes that, with far-going reforms like the Direct Tax Code and the Goods and Services Tax on the anvil, the tax administrations are poised at an inflection point requiring strong leadership and bold action. The need for transforming the tax administrations is so stark that only radical measures can bring about the needed transformations. The measures that the TARC is recommending is based on the principles and practices which are already being operated in other tax administrations, both in developed and developing countries, for long. In India too, these practices exist, albeit, largely in the private sector high performing organisations. The TARC is recommending these measures for the two departments because that is what its remit is. However, the TARC fully believes that unless the HR policies in the government at large are also transformed along the lines of its recommendations, the administration in India will continue to remain a severe constraint against its growth and development. Somewhere a beginning must be made and it is the TARC’s conviction that the transformed IRS can become a beacon for rest of the civil services. The TARC concluded that rapid rationalization of key internal processes is called for whether they be in the case of PAN – its generation and termination, or its wider rationalized use for more taxes – consolidated filing of returns for different taxes, harmonization of computerized processing at the CPC with that of the AO, making refunds of direct tax and indirect tax credit, risk-based selection scrutiny using ICT, or consistency checks across direct and indirect taxes in the case of search and seizure, and intelligence and criminal investigation. In the case of ICT, the TARC concluded that the Boards must commit themselves to full digitization and work towards building comprehensive systems, covering all key processes, in which everyone, from the top leaders to the frontline employees, works in a digital environment. In other words, ICT must get embedded in the DNA of the organization. There is a clear need to articulate an ICT vision and strategy, derived from business strategy that reflects the departments’ vision and mission, which will provide an overarching setting for the design of the ICT architecture. This will provide consistency and coherence across different ICT projects, systems and sub-systems and bring about much greater interoperability, ensuring better customer satisfaction. There is an equally urgent need to embrace a sound ICT governance framework, along with rigorous adoption of programme and project management methodologies, so that there is deeper business-ICT implementation and effective ICT risk management. HR policies need to be aligned with ICT requirements. This means they must promote specialization, allow the necessary length of tenures to allow development of the required skills and their application in the relevant areas, and allow personal growth for qualified officers according to their suitability and inclination and organizational needs. HR policies need to cater to the lateral entry of specialists where such skills are not available internally. Further, the policies need to specifically take into account the stages of the project lifecycle while considering transfers of staff who may be engaged with those projects. In order to enhance business-ICT interaction, the Boards need to adopt structures and process to establish a working relationship between business owners and DG (Systems) officers that will align ICT implementation with business needs and priorities. To promote better analytical support for policy development as well as operations, a specialist organization, the Knowledge Analysis and Intelligence Centre, needs to be set up for which the ICT function will provide the necessary platform and tools. KAIC will be the repository of highly specialized analytical and other related skills. Its remit will be to address highly complex problems with strategic implications. Good analysis will have to continue to happen within each functional vertical, which the ICT function needs to support through appropriate technological tools. In short, to be able to shape themselves into a modern 21st century tax administration, the two Boards need to adopt the agenda of a complete digital transformation. The TARC believes that for fulfilling such an ambitious agenda successfully and sustainably, it is essential that a single SPV with operational freedom and flexibility to take quick decisions should be established for servicing the ICT needs of the two Boards. It should be set up as a company with professional management and a sound business model that would make it financially self-reliant. The SPV can also be tasked to set up the ICT platform for the KAIC and also support it through ICT specialists, who can be seconded from the SPV to the KAIC. Accordingly, the TARC’s main report is organized sequentially, comprising Customer Focus, Organizational Structure, Dispute Resolution, People Function, Other Internal Processes, and Information and Communication Technology (ICT). The recommendations that follow in the next section are also similarly ordered. Recommendations In what follows, the TARC lists its main recommendations in the full belief that they can be instituted if the willpower exists at the top policy level. Such changes have occurred in other countries including the one that bequeathed India her prevailing bureaucratic structure that has seen its best days and has outlived itself. It is now time to confront what is bad and change it for the better to reflect the expectations of India’s new and future generations that have the desire to work and be productive rather than facing and combating high costs of compliance. Only recommendations that are desirable and doable along these lines are listed below. Also, the recommendations should be considered as a package and not on a pick-and-choose mode. That would not work; it would be better to set aside the recommendations in toto and reconsider them at a future date when India may be ultimately ready to make serious changes that are needed but is not up to facing them as of now. Diagram I.1 gives road-map for implementation of the TARC’s main recommendations. I.4.a Customer focus A taxpayer is the entity that approaches the tax administration and thus comprises the latter’s customer. Yet the prevailing treatment of the taxpayer by the tax administration requires much to be improved in reflection of global practice. Customer Focus reform therefore is the first need. It comprises Chapter II and the first set of recommendations The TARC recommends that:
I.4.b Structure and Governance As the customer faces and enters the tax administration, how well s/he is treated and how smoothly his job is accomplished is dependent on the structure and governance of the tax administration. This therefore comprises the second area of reform. For example, TARC found the lack of synergy between the two tax departments even for LTUs despite their establishment in 2006 to be a telling reflection of the administration’s lackadaisical approach to installed policy. Structural reform is therefore recommended using LTUs as the anchor for which common functions need to be immediately consolidated for the two tax departments. Many other structure and governance from deep within are also needed if operations are to be rationalized. Structure and Governance comprises Chapter III and the next set of recommendations. The TARC recommends that:
The TARC recommends that:
I.4.e Key Internal Processes There are several internal processes in the tax administration with respect to management of PAN, consolidated filing of returns of different taxes, assessment, timely refunds, risk-based scrutiny and others that cannot be ignored. Such Key Internal Processes comprise Chapter VI and associated recommendations are made. The TARC recommends that:
Information and Communication Technology ICT constitutes the backbone of a modern tax administration. India has made progress in this area. Nevertheless there are caveats that have to be recognized and corrected so that the system could meaningfully move forward to enable quicker processes, automatic correction of errors and inconsistencies, upgrading of software and hardware, convergence of ICT functions of the two tax departments. Information and Communication Technology and recommendations thereof comprise Chapter VII. The TARC recommends that:
Chapter II Customer Focus
II.1. Rationale for customer focus II.2. Current status (a) Approach (b) Structures II.4. Global best practices Table of Contents (a) Taxpayer services: customer focus i. Dedicated organization for delivery ii. Dedicated personnel for taxpayer services iii. Whole-of-government approach iv. ICT for effective taxpayer service delivery v. E-service delivery vi. Maturity model vii. Priority areas in e-service delivery viii. Evaluation of success of e-services ix. Ascertaining customer service needs x. Quality of taxpayer services xi. Pre-filled tax returns (b) Taxpayer rights and complaints (c) Taxpayer advocate service II.5. Gap
II.6. Way forward (a) Desired organization structure and governance (b) Taxpayer service delivery (c) Proposed structure II.7. Recommendations Appendix II.1 Present taxpayer services by CBDT and CBEC Appendix II.2 ICT delivery mechanisms in other tax administrations Appendix II.3 International practices of taxpayer rights and obligations Appendix II.4 Tax issues taken up by the Tax Forum Chapter II Customer Focus II.1 Rationale for Customer Focus Tax administrations have traditionally been both the regulator and enforcer of tax laws with limited attention to taxpayer service. However, this is rapidly changing worldwide with an increased demand for better services by taxpayers. This has made tax administrations recognize their obligation to offer quality services to taxpayers, who are increasingly perceived as their customers. In an attempt to achieve this, interaction between the taxpayer and tax administration is being made taxpayer-focused, easy, convenient and friendly. Improving the way in which tax administrations work with taxpayers not only results in better customer service but also has the potential to increase tax revenue. Taxpayers are more likely to comply voluntarily when tax administrations adopt a service-oriented approach towards them. Educating and assisting taxpayers help them meet their obligations comfortably. Taxpayer services, therefore, need to be takenas an integral part of the functions of a responsible and responsive tax administration, and these should, therefore, be institutionalized as an ongoing and continuous process rather than a sporadic one. It is one of the core or basic functions of any tax administration to not only help taxpayers comply with their obligations but also be sufficiently demonstrative to make them feel like “valued customers”. Tax administrations tend to make a distinction between enforcement tasks and service delivery. However, there is a growing realisation that they are intrinsically linked. The complexity of tax laws often determines the framework of relationship that exists between the tax administration and taxpayer. Although this framework is often based on voluntary compliance, the complexities of tax laws skew it. This gives rise to disputes between the taxpayer and tax administration. It is, therefore, crucial to consider the taxpayer as a client and to follow the logic of providing services to the client. For that, a targeted professional organization, with specialized staff having the right professional skills and attitudes, with a service orientation, is required. II.2 Current status II.2.a Approach At present, there is no dedicated focus on taxpayer service in the Indian tax administration – CBDT or CBEC. It is not considered an identified function. There is no generally accepted definition of “taxpayer service”. Therefore, it has different connotations for different organizations. Many of the taxpayer services are delivered through different wings of the same organization, and while they are bound to be ‘individual-driven’, they fade out with time or staff change. For example, directorates have been established to deal with computerisation. These initiatives have made tax return processing more efficient, which has led to a considerable increase in compliance, with improved taxpayer satisfaction. But the present stage of computerisation is mostly in silos and business processes are not fully re-engineered to effectively utilize information and communication technology (ICT) to bring about the needed taxpayer focus in service delivery. Similarly, publicity campaigns and advertisements are major means of communication. They are intended to generate awareness about tax laws and compliance procedures. These awareness campaigns largely inform taxpayers about the due dates for filing, tax payment, etc. But there is no structured communication strategy. The I-T Department’s Vision 2020 spells out the vision, mission and values of the department as well as the strategic plan for 2011-15. Among other missions, it strives to make compliance easy, enforce tax laws with fairness and deliver quality services. It notes that promoting voluntary compliance is one of the prime concerns of the department and that when taxpayers find it easy to comply with tax laws, voluntary compliance is automatically enhanced. There is a citizen’s charter along with Vision 2020, which communicates service standards for all taxpayers. The citizen’s charter of the CBEC attempts to create a climate for voluntary compliance. It emphasizes dissemination of quality information to trade and taxpayers by establishing guidance units in its offices. These units are supposed to furnish information to trade on issues of specific interest, provide general information about laws and procedures and the admissibility of benefits under various exemption schemes. Seminars, open houses, websites publicity material, audio-visual media, etc., are other means of dissemination of information. The citizen’s charter recognizes websites are a faster means of communication. Interactive telephone help-lines and grievance redressal machinery – independent Ombudsman at each customs station and central excise commissionerates – have been identified as other means of taxpayer service delivery. The different means and modes of communication adopted by the two Boards are given in Appendix II.1. Even though there appears to be multiple channels of communication with taxpayers, in practice there is a communication gap between the taxpayer and tax administration. II.2.b Structure There is no identified structure in either Board to provide taxpayer services in a comprehensive manner. Field officers are entrusted with the function of providing various services to taxpayers along with their regular functions as assessment officers (AOs). AOs and superior officers sometimes conduct or participate in seminars organized by taxpayer associations, but this is not in every place, nor is it a common practice. On the direct taxes side, Aayakar Seva Kendras (ASK) have been opened in many offices. This acts as a single point of contact for the taxpayers where their requests, including grievances, are registered and acknowledged. A unique identifier tracks their request and the resolution process. The Directorates of Public Relations and Publicity in the two Boards are responsible for communicating with taxpayers and carrying out advertisement and publicity campaigns for the tax departments. This directorate is also responsible for taxpayer awareness and taxpayer education, while the Directorate of Systems is mainly responsible for electronic delivery of taxpayer services. II.3 Weaknesses Customer focus is simply not regarded as a core function of the tax administration. It does not feature as a crucial component or essential practice. As a result, taxpayer services are diffused in their delivery – spread over many locations within the organization and field offices. Officers provide various taxpayer services in addition to their normal duties. They are normally not able to, or perhaps even expected to, devote sufficient time or adequate importance to taxpayer services. Other tax administration work like tax collection, verification, judicial and audit functions are considered to be their main duty. No proactive clarifications, either on interpretation of law or procedure, are ever given by the officers. Indeed, this is not expected in the absence of specific guidance from the top, which is surprising given that Sevottam is the motto of the tax administration. This is in sharp contrast to global practices today. To bring this deep deficiency to focus right at the very beginning, this issue comprises the first chapter of this report. The citizen’s charters of the two Boards lay down service standards and timelines for the delivery of the services mentioned therein. But there is no mention of adherence to these timelines when addressing queries from taxpayers. Besides, there is neither a review mechanism for delivery, nor any impact assessment or metrics to measure the outcomes achieved. Apart from this, there is no clear-cut, structured approach for different segments of taxpayers. There is an urgent need to revisit the present citizen’s charter to make it more meaningful and customer focused. There is no dedicated setup to ascertain the needs of a taxpayer on a continuous basis. There is also no institutional mechanism for receiving feedback with respect to the services provided. While the tax departments often roll out a number of services, most of these are on an ad-hoc basis and are not backed by any taxpayer feedback or needs survey. Further, there is a disconnect between different wings within the same department. This sometimes results in different messages reaching taxpayers, leading to confusion. For example, while the publicity wing of the I-T department may simply convey to taxpayers that e-filing leads to quicker refunds, the central processing centre (CPC) may actually issue demand notices instead of the refunds due because there was a TDS (tax deducted at source) mismatch,. There is also virtually no media policy. While the CBDT recently tried to frame a media policy, it has been based on officers interacting with the media rather than on communication through multiple channels. The policy appears to be too centralised. In the absence of a coherent framework for taxpayer service delivery, there is a need to design and deliver client-focused taxpayer service programmes through the installation of customer feedback mechanisms, change the attitude of tax officers and build an enhanced relationship between taxpayers and the tax administration in a mutually beneficial manner with international best practices as the benchmark. II.4 Global Best Practices II.4.a Taxpayer services: Customer focus “Taxpayer services” in different tax administrations refer to the manner in which taxpayers are treated, i.e., professionally, with respect and fairness. Taxpayer services are a set of strategic initiatives undertaken by the tax administration to assist taxpayers in complying with tax laws. At a broader level, many tax administrations set up effective taxpayer service programmes, which would include fundamental services like simplification of procedures to facilitate voluntary compliance, providing taxpayers with information to prepare tax returns, or to resolve issues of filing as well as answer questions that may arise before filing tax returns, at the time of filing tax returns and after tax returns have been submitted to the tax administration. Facilitation of tax payment is another limb of taxpayer services. Table 2.1 categorizes various taxpayer services. Table 2.1: Categories of taxpayer services
Source: OECD, May 2007 II.4.a.i Dedicated organization for delivery Generally, tax administrations carry out reforms to introduce taxpayer services in conjunction with institutional simplification to enable taxpayers to fulfil their responsibilities. Without tax administration reforms, many tax administrations feel that even the most comprehensive services offered to taxpayers would not be effective. As part of the reform process, tax administrations are setting up a separate taxpayer service vertical. Some tax administrations have a “customer segmentation” approach to planning and delivery of taxpayer services. These approaches, however, vary in terms of their scope and intensity. Tax administrations sometimes have dedicated inquiry services for large taxpayers by industry groupings. These act as the first point of inquiry for designated large taxpayers. For new businesses, another separate inquiry service is often set up for specific service/education programmes to ensure that they handle their tax matters correctly from their first dealing itself. II.4.a.ii Dedicated personnel for taxpayer services Many countries have dedicated personnel in their tax administrations for taxpayer services. For this, they identify training needs, develop training plans and undertake efforts to train some of their staff for taxpayer services. They also evaluate those trained to find out whether the training has helped bring about the needed customer focus. The Chilean IRS follows this strategy. For placement of trained staff for taxpayer services, the National Tax Agency of Japan often considers the suitability of staff, based on their ability, aptitude, past performance and personal circumstances, to increase overall efficiency in delivering taxpayer services. II.4.a.iii Whole-of-government approach An OECD report that compares tax administrations in different countries emphasises the Several countries have adopted a single unified approach to registration of businesses. The delivery of some government services on a “whole-of-government” basis has seen the emergence of government shop-fronts delivering tax-related services that were previously delivered through local offices.1The bottom-line is to make it easier for a taxpayer to comply. II.4.a.iv ICT for effective taxpayer service delivery Tax administrations have embarked upon making interaction with the taxpayers easy while eliminating direct contact to the extent possible. This has been built on improved public confidence in the tax system. The UK’s HMRC has a strategy to not simply move the volume of contact to self-service, but to manage contact through the most efficient channel that meets both the taxpayer’s needs and those of the tax administration. This is carried out on the basis of actual analysis – using a statistical technique called Probit – to search for, and find, how customer queries are clustered, and to allocate staff resources accordingly. Service is provided through multiple channels including call centres, websites, e-mails and through the offices of the tax administration. A hierarchy of contact preferences is shown in Table 2.2 below. Table 2.2: Hierarchy of contact preference
Source: OECD, 2007, a case of ATO II.4.a.v E-service delivery Many tax administrations have taken steps to exploit the use of modern ICT to transform their operations, in particular for tax collection, assessment processes and to provide basic services to the taxpayers. These technologies, if applied effectively, reduce administrative costs for the tax administration as well as for taxpayers. They also deliver faster and more accessible services to taxpayers. Electronic services offered by most tax administrations include providing information about forms, making electronic filing of tax returns possible and providing tax calculations. The provision of e-return filing is almost universal, and a number of countries have made substantial progress in increasing their e-filing usages. This increase has been achieved in a number of countries because e-filing has been made mandatory. Between the tax types, mandatory e-return filing in different countries is more common for corporate income tax (CIT) as compared to personal income tax (PIT).2, 3 Most VAT returns are also being e-filed– in the fiscal year 2009, about 50 per cent of the countries such as Belgium, Finland, Japan, Korea and Mexico had an e-filing facility; this increased to almost 75 per cent by 2011. Brazil has 98 per cent of its taxpayers filing electronically. India is attempting to rapidly increase the ratio of electronic filers in the overall taxpayer net by intensifying its ICT orientation in the processing of tax returns. Tax payments are the raison d’être for tax administration, and constitute one of the important interactions between taxpayers and tax administrations. Many tax administrations are increasingly providing electronic payment facilities for all types of tax payments for both individuals and businesses so as to make the payment experience easier and less costly. It is stated that costs involved in providing tax payment facilities reduce significantly when these are made fully electronic. The methods used are often internet banking and direct debit from banks. ICT has made sharing and collaboration on a real-time basis possible, leading to both efficiency and cost effectiveness. In fact, the OECD report on tax administration also recommends the use of ‘social media’ to reach out to taxpayers. Further, the report also emphasises SMAC (social, mobile, applications and cloud) to provide stratified personal contact and new forms of communication and interaction with a potentially large and growing numbers of taxpayers. The framework of e-services for taxpayers is summarised in Table 2.3 below. Table 2.3: Framework of e-services
Source: OECD, 2010 II.4.a.vi Maturity Model Many tax administrations base their taxpayer service delivery on the maturity model. 4 The maturity model represents the four stages in e-service delivery with more value to users and represents increasing maturity in a number of dimensions such as from static content to dynamic content, publishing to interaction, generic dialogue to individualised dialogue, simple transactions to complex transactions, inclusion of authenticated transactions, partly-automated processes to fully-automated online processes, agency-aligned delivery to citizen-centric delivery and agency-aligned services to cross-agency services. Stage one is normally the presence of a website that publishes available information about services. Stage two allows users to browse, explore and interact with that data. Thus, the key difference between the two stages is that while in stage one there is static data access, stage two allows interaction with the data/information. Stage three of the maturity model allows taxpayers to transact on the tax administration’s website. This facilitates real-time responses to the service demands of taxpayers. Stage four goes a step further in the transaction process by allowing data-sharing. This level of online transaction normally requires prior user approval/consent and/or a legal framework. Many tax administrations, at present, operate at stage three of the maturity model, but there is wide variation in services and strategies adopted by them for moving from stage three to stage four. II.4.a.vii Priority areas in e-service delivery Many tax administrations also consult taxpayers while formulating plans. They make their plans publicly available and inform taxpayers of the progress achieved by them vis-à-vis targets specified or the delivery of e-taxpayer services. Many tax administrations also have a longer perspective plan identifying priority areas for the next three years or so. These priority areas are wide-ranging in scope. A common element in all the priority areas of tax administrations is increasing the range and quality of online services to taxpayers, enabling them to self-manage their tax affairs, adoption of whole-of-government approach and increasing usage of e-filing and pre-filling of tax returns. Appendix II.2 gives priority areas of e-service delivery and the targets for e-service delivery in various tax administrations. II.4.a.viii Evaluation of success of e-services A wide range of metrics is used by tax administrations to evaluate the success of their e-services strategy. The most commonly used metrics are timeliness of specific services provided to taxpayers, quality of services delivered as established via survey responses, taxpayer satisfaction established through a survey, trend in the adoption rate of specific services, tax administration cost reduction, etc. The Canadian CRA used timeliness for specific services, service quality, client satisfaction and availability of e-filing as its metrics to evaluate service delivery. The UK’s HMRC uses a standard cost model (SCM) to estimate cost savings from specific initiatives. The Australian ATO uses service standards and benchmarks for reporting performance outcomes of services delivered. New Zealand uses customer satisfaction survey results. The Singapore IRAS has a taxpayer feedback panel, which serves as a structured and regular communication channel for taxpayers’ feedback on tax policies, processes, service and initiatives. The taxpayer feedback channel such as the biennial taxpayer survey reaches out to various segments of taxpayers to understand and meet taxpayers’ needs and expectations in an ever changing economic and business environment. The US IRS periodically conducts surveys to measure the pre-filling and filing burden of individual taxpayers. The sample design for the survey typically balances three objectives. The first is to ensure a sufficient number of respondents within and across strata to meet the needs of the model of compliance burden. The second is that it should be efficient so that the estimates are reliable, and the third is to facilitate comparisons between the current year study and that of the previous year. II.4.a.ix Ascertaining customer service needs Most tax administrations have been placing increased focus on knowing the needs of taxpayers; to do so, they also put in place customer relationship managers (CRMs) for the taxpayers.5 Through such an arrangement, they cater to each taxpayer’s need individually. Some tax administrations also form consultative forums to ascertain taxpayer motivations.6 The data so collected from surveys and points of contact are often analysed by advanced tax administrations with the help of data mining techniques to understand the major area of queries. major tool in these new initiatives is a simulation centre — an in-house usability lab that allows the agency to understand the root causes of service demands. It is imperative that similar simulation centres be designed in India, forming perhaps the most crucial aspect of the immediate change needed in re-structuring India’s tax administration. II.4.a.x Quality of taxpayer services Linked to the rights and obligations of taxpayers is the quality of taxpayer services. The basic aim of the quality of service is to raise tax awareness and enhance the level of voluntary compliance. This is done by providing taxpayers and tax intermediaries clear, precise and timely information, simplifying tax forms and tax laws, translating the laws into locally understood dialects, ensuring courtesy and considerate treatment, responding expeditiously to every taxpayer’s enquiry, complaint or request, and educating taxpayers about their tax obligations and rights. Over the past few years, tax administrations have taken steps to increase transparency and accessibility in this area. Modern tax administrations need to be committed to transparency, making their performance and activities transparent through the publication of annual reports and official statistics. They should continue to gather evidence from users of their data and other members of the public to assess whether they have met their pledge to deliver effective customer service. They see open data information as a fundamental tool to deliver public services. Most tax administrations are aware of their access to confidential and personal information and of the need to protect the confidentiality of such information. They also ensure that data that could harm their operational capabilities are not placed in the public domain. Care is also exercised to ensure that sensitive information is not made available to those seeking to pervert the tax system so that the administration’s ability to hold them to account and maintain fairness is not compromised. Taxpayer service performance measures generally centre on the level of services provided in terms of timeliness. As the taxpayer service programme progresses through the maturity model, the time expended reduces accordingly. Most of the tax administrations have fixed timelines for delivery of taxpayer services. Once a tax administration has established its timelines, it communicates them to all its stakeholders and puts in place suitable mechanisms to deliver services in a fixed time period. II.4.a.xi Pre-filled tax returns Pre-filled tax returns for personal income tax have been a significant development over the last few years. Technology has aided this process. The OECD survey suggests that many tax administrations have come to realize the significant benefits that can be realized from the use of pre-filling of tax returns.7 Systems of pre-filled returns are the product of a simple idea with II.4.b Taxpayer rights and complaints The recognition of the ‘rights’ of the taxpayer is an emerging trend. In a number of countries, such as the Netherlands and Russia, these rights have been codified in tax laws, while in others, for example, in Australia, Ireland, New Zealand, Singapore, and South Africa, they have been elaborated upon in tax administration documents, sometimes referred to as ‘taxpayer’s charter’ or ‘service charter’. Appendix II.3 gives international practices of taxpayer rights. India does not specify what the taxpayer can do if not satisfied, nor is there any indicator of accountability on the part of the tax officer or time limits for responses to categories of taxpayer queries. The tone is set, instead, with respect to the tax officer’s voluntary service orientation. Many tax administrations have special institutional arrangements to deal with taxpayers’ complaints. Dedicated bodies like the Ombudsman in Australia, Canada, UK, Brazil, South Africa and tax mediators in Belgium and France look into tax related complaints. These bodies are independent of the tax administration. In many countries, they have been set up under a specific law. The primary purpose of this arrangement is to ensure that taxpayers have an opportunity to raise matters when they feel they have been treated in an unfair manner. India too has set up the office of the Ombudsman at different places. However, by and large, taxpayers appear to be afraid to file formal complaints for fear of retaliation, whether unfounded or not, from the tax administration. II.4.c Taxpayer Advocate Service (TAS) The US IRS has set up the tax advocate service (TAS), which is an independent organization within the US IRS. It helps the taxpayer in resolving problems that he might have with the IRS and recommends changes that can help prevent such problems in the future. The TAS helps taxpayers by ensuring that they are made fully aware of their rights and that they understand them, thereby ensuring fair and just treatment. A taxpayer can approach the TAS at any stage when he is unable to resolve a problem that causes financial difficulties on his own, or he faces an imminent threat of adverse action or has attempted to contact the IRS repeatedly with no response. The TAS helps taxpayers resolve issues with the IRS through its various services and programmes like case advocacy, in which the taxpayer is assigned an advocate to assist him. Basically, TAS offers free services to taxpayers by guiding them through all the complex processes involved in resolving tax problems. A mechanism of this type that guides a taxpayer, step by step, with the support of an advocate is absolutely essential in India. II.5 Gap II.5.a Lack of focus on taxpayer service From the survey of global practices, it can be seen that most tax administrations have defined strategies to deliver taxpayer services effectively and that systems are in place to ensure direct facilitation for taxpayer compliance. Improving the delivery of taxpayer services in this manner is the key element in defining the performance standards of any tax administration. A review of taxpayer services in various tax administrations indicates that demand management, taxpayer education, taxpayer assistance, effective issue resolution and a focus on costs and service should form the key performance indicators in taxpayer service. As part of their strategy to deliver effective taxpayer services, tax administrations often have a dedicated taxpayer service unit as has been already described. The unit acts as an interface between the tax administration and the taxpayers so as to minimize the taxpayers’ complaints and, in the process, improves voluntary compliance by taxpayers. For this purpose, the unit carries out tasks to provide workable solutions, replies to taxpayer’s letters of a general nature, organizes taxpayer sensitisation seminars and workshops for target groups, assists in simplifying tax returns, holds consultations and advisory meetings with professional taxpayers and ensures availability of tax literature/bulletins explaining the functions of the tax department. All of this is lacking in India. In fact, there is no dedicated taxpayer service structure. Taxpayer services are delivered in a diffused manner. With the increasing usage of ICT, most tax administrations now use online taxpayer surveys. Even social media is being used for such surveys. Most of these surveys are often paired with behavioural analysis for a proper understanding of the behaviour of the taxpayer to gain useful insights on taxpayers’ interests with an economic cost-benefit analysis. Such behavioural analyses are of relevance to the tax administrations for various functions. No such taxpayer survey has been conducted in India either by the CBDT or the CBEC. The CBDT, however, has recently instituted a study on the compliance cost to taxpayers through a research organization. The results are awaited. II.5.b No dedicated personnel for taxpayer services In the absence of dedicated personnel for taxpayer services at present, the function has devolved on the Commissioners, who find it difficult to focus on taxpayer services because it is one among several functions that they are responsible for. Some odd initiatives taken by them do not really fulfil the objective of taxpayer services. Recently, the CBDT initiated the ASK programme, which aims to set up an ASK at each of its buildings.8 But there is no trained staff for the kendras, and personnel are posted in a routine manner. Such personnel are often uninterested in and do not have the aptitude or training for providing taxpayer service. The basic recognition that taxpayer services personnel are the public face of the tax administration is not understood. The staff assigned to the ASKs or even for other taxpayer services lack service orientation, good inter-personal and communication skills, and the desire to assist taxpayers. II.5.c No taxpayer segmentation The organizational structure of different tax administrations has evolved considerably over time. From organizational structures based on tax type, there has been a move to base the functions of the organization on the type of the taxpayer, i.e., small, medium or large. Based on such segmentation, tax administrations have developed customized approaches to meet the needs of each group. But such taxpayer segmentation has not yet been done in the CBDT or the CBEC. One such move towards taxpayer segmentation started in 2006 and four large taxpayer units (LTUs) were set up by the government as self-contained units to administer both direct as well as indirect taxes. This is in line with the best international practice of organizing tax administration operations around a segment of taxpayers based on their size and risk assessment. But so far, the progress on that has not been very satisfactory. Not many large taxpayers have joined these LTUs. To ensure they do so, the government may have to think in terms of changing the present guidelines to make it mandatory for large taxpayers to join LTUs. At present, it is left to the large taxpayer to decide whether they wish to join an LTU or not. However, the change to making it mandatory for large taxpayers to join LTUs will need to be accompanied by the provision of customized taxpayer services. Increased use of ICT can help provide customization and personalization of services for the taxpayers. Such use of ICT in segmentation has so far not been attempted. II.5.d Multiple agencies for registration In India today, a taxpayer has to approach a number of departments for registration for different activities or functions, and he gets a number of identification numbers. But there is need to have a common registration based on PAN. PAN was earlier adopted as a common business identification number (CBIN) and has been used as a basis for identification numbers by customs, central excise and service tax authorities, and other organizations like the Director General of Foreign Trade and Employees’ Provident Fund Organization. It would, thus, be appropriate to think, define and engineer business processes to create a single-window delivery system for registration. II.5.e Absence of taxpayer surveys Tax administrations should determine what type of service taxpayers want by simply asking them via interviews, surveys, focus group discussions, etc. Taxpayer services can also be improved by conducting periodic surveys to monitor taxpayer perceptions about taxpayer service and other compliance issues. The tax administration should also use focus groups, surveys and other feedback methods before implementing new services and procedures. Using information received, strategies could be developed for more cost effective and efficient service delivery channels. In order to minimize the burden on taxpayers, these should be co-ordinated with other planned activities. Trends from data collected in-house reflecting type of service demand, volume, etc., should be evaluated to enhance service delivery. Agreed upon feedback should be incorporated into business process improvement initiatives and the tax administrations should determine, in order of priority, which inputs taxpayers provide would most impact revenue, cost, trust or compliance, if performance delivery were to be improved. II.5.f Inadequate fund allocation If we look at the present allocation to the publicity directorates in the two Boards, it can be stated that fund allocation is inadequate. Such low fund allocation for taxpayer services often results in increased cost of compliance. It may be understood that the compliance cost and administrative cost (inclusive of taxpayer service delivery cost) have an inverse relationship, i.e., as administrative resources assigned for taxpayer services increase, compliance cost should go down; a low administrative cost tends to increase the cost of compliance, as also the social cost. Hence, there is an urgent need to make adequate allocation of funds to deliver taxpayer services so that the compliance cost goes down. II.6 Way forward II.6.a Desired organization structure and governance Dedicated organization To bridge the gap between the present structure of taxpayer service delivery in the two Boards The organization should be responsible for designing customer services as well as delivering them at the field level. It should, thus, not be central in its dispensation but would also need to have regional or field offices with clearly defined responsibilities at each level. Customer feedback should form the basis for evaluating its performance and it should be held accountable for any negative feedback from its customers. The organization should be structured on a clear understanding of the requirements of different taxpayer segments as the need for services and information differ substantially between segments. Taxpayers need to be segmented based on the common elements in their behaviour. Such segmentation would include segregating the taxpayer population into smaller groups of customers with similar characteristics to develop and deliver “tailor-made” specific approaches and products for each segment. For delivery of services, it would be necessary to understand and develop a dedicated organization along with compliance strategies that address taxpayers’ characteristics. A central element of this organization should be a mechanism to ensure that tax officials are accountable to the government as well as to the taxpayers. There should be policies to encourage accountability, consistency and transparency for better and consistent delivery of services to taxpayers. A taxpayer service strategy should set out the tax administration’s vision, guiding principles, and high-level objectives for taxpayer service and describe its operational delivery plans. It should also explain how the tax administration would measure performance and judge success. Close collaboration between internal stakeholders as well as engagement with external stakeholders in its preparation is necessary. To accomplish this, there is need to have a vertical dedicated to customer services. This will provide a focused approach to achieving the objectives. The vertical would require to be anchored by a strong headquarters that sets out policy and programme direction, and provides guidance.9 The main responsibilities of the headquarters should include preparing an annual national work plan specifying expected work volumes, service and enforcement initiatives, staffing levels and expenditure budget requirements. The national plan should also contain parameters for quantity, quality and timeliness of performance. The headquarters would also be responsible for regular monitoring and reporting on performance against the national work plan, explaining variances and recommending corrective action. The field organization should focus primarily on operations and programme delivery. The nature and size of the field organization can be based on a number of factors, including territorial jurisdiction and the type of taxpayers in that jurisdiction. Efforts should be made to ensure physical presence in almost all offices across the country. It is important to recognize the needs and compliance challenges faced by different segments of taxpayers; the field structure should accordingly be segmented into large, medium or small taxpayers. There can be situations when some functions are required to be shared across taxpayer segments for economies of scale, for example, for receiving returns, processing payments, etc. The core responsibilities of the field organization would revolve around three basic approaches: (a) Walk-in – Taxpayers sometimes feel that their problems are best resolved face-to-face; physical presence helps in providing a medium to meet this through walk-ins. Taxpayers could be assisted with tax forms, requirements in preparation of tax returns, or any other such function. For example, personnel in field formations could assist in replying to queries and dispute resolution. (b) Taxpayer education/outreach The delivery of educational and other outreach programmes/products to taxpayers, tax department employees and tax intermediaries such as tax practitioners and industry groups could be done through field offices. The scope of this activity would be to periodically update them on changes in law, policies, and procedures. The delivery could be through face-to-face interaction, online services, telephone, written communication, advertisements and publicity campaigns. (c) Media co-ordination –The front office should focus on creating a positive perception of the tax department in the minds of the general public by highlighting significant achievements of the tax administration in the area of customer service and clarifying the position of the tax department in respect of any news incorrectly reported. Accessibility of taxpayer services Taxpayer service is also a matter of accessibility. The service should not just exist, but should be easily accessible from a taxpayer’s point of view. Taxpayer service could be accessed through in-person interaction or through a telephonic information service or through pamphlets, folders, forms, internet service, advertisements in papers and commercials on radio and television. The second equally important aspect is prompt processing of taxpayer applications or complaints. Taxpayer service is also a matter of attitude towards taxpayers. Effective taxpayer service requires clear commitment on the part of the tax administration to assist the taxpayer, to treat him fairly and have the capacity to understand his concerns and questions and to have the foresight to anticipate his needs. This attitude must permeate all contacts with the taxpayer. Further, since technology is changing the possibility of accessibility, expectations of taxpayers are also changing. Taxpayers now expect to receive services from the tax administration in a manner similar to that they receive from other service organizations like banks or mobile phone providers. The development of taxpayer services, with robust internal processes for managing them, therefore, is critical. The international trend is for tax authorities to administer the tax regime in a way that encourages and expects taxpayers to self-assess their tax liability and then remit the relevant amount of tax to the government. Conceptually, this is a sound approach as the taxpayer generally has better information on his sources of income and expenses and it is relatively expensive for the government to assess every taxpayer’s return. Through the self-assessment process, tax administrations rely on a system of voluntary compliance, where taxpayers pay what is due, when it is due, and without coercion. However, self-assessment can only work if a majority of taxpayers know their obligations and are able to comply with them. The overall level of compliance also improves if the cost borne by taxpayers in carrying out self-assessment is low. Therefore, an essential element of tax compliance is helping taxpayers understand their tax obligations and promoting voluntary, timely, accurate and inexpensive reporting of tax liabilities. Personnel for taxpayer services The CBDT and CBEC should emulate the initiatives taken by other tax administrations, which have recognised taxpayer service as an important and integral part of its functions and creating a dedicated workforce for its delivery. The staff would require proper training and orientation to deliver taxpayer services. The attitude of tax officials providing quality taxpayer services is very critical. There can be no place for arrogance, rudeness, impatience, lack of receptivity or boredom. At the same time, they need to be empowered to take initiatives to satisfy the taxpayer. Such empowerment should be clearly defined at each level and appropriate flexibility should be infused to encourage creativity. It is important that back-office personnel communicate with frontline employees so that they have adequate information and support. This support should not only be in terms of technology, information and internal resources to meet the needs of the taxpayer, but also in terms of training. It should not be assumed that tax personnel know how to treat taxpayers in a friendly, helpful and professional manner. These skills need to be taught to them to ensure that everyone in the organization is on the same page in terms of taxpayer service. Orientation programmes for tax personnel should train them to view taxpayers as customers and as most important to the tax organization. The training should help improve the listening skills of staff, develop the ability to stay calm when faced with adversity, enable them to evaluate situations and make quick decisions, and develop the ability to organize and handle information/data in a systematic and logical manner, and to work independently in a team environment. Since the function of rendering taxpayer services is the initial point of contact with taxpayers, the staff should also have a good working knowledge of tax laws, office procedures and tax obligations for different tax types. Tax personnel would often be required to provide information to the taxpayer about his tax liability or other details. The staff needs to be competent to handle such questions accurately, correctly and consistently. Any new tax officer joining the taxpayer service vertical would have to undergo the necessary orientation and motivation training. Initial training (at the point of entry into the service) with respect to taxpayer rights should be reinforced later through periodic training. Without continuous education on taxpayer rights throughout the career of tax personnel, it would be difficult for them to absorb the change in culture and incorporate a working knowledge of taxpayer rights in their daily activities and interactions with taxpayers. The training courses should also refocus on customer relationship and effective communication, with special emphasis on the segmentation of taxpayers to be dealt with. Repetitive reminders are usually needed to bring this forgotten or overlooked objective back to primary focus. Customer relationship management Customer relationship management (CRM) is a well-known concept today in the private sector. There is increasing realization in different agencies to adopt the concept to achieve higher efficiency and improved taxpayer satisfaction. The tax administration also needs to make CRM an integral part of its policies and processes. Strategies for CRM would include developing core services around which customer relationships could be built, customizing the relationship to the individual customer, augmenting the core service with extra benefits and developing strategies to retain them.10 Accountability A proper accountability structure would be required to be put in place so that responses to taxpayers are delivered accurately, consistently, promptly and properly at all times. Tax employees would have to deliver within this accountability framework so that the standards and quality of service delivery are not compromised at any time. The focus of delivery should not be on outputs but on providing accurate, consistent and prompt responses. Difficulty may be experienced in measuring the performance of such outputs as the taxpayer, even with accurate, consistent and prompt responses, may not be satisfied and would rate the performance poor. In such circumstances, iterative improvements would have to be worked out for better performance and creating better accountability to the basic objective of achieving a high degree of taxpayer’s satisfaction. The performance and activities can be put in the public domain through the publication of performance outcomes regarding service delivery, customer satisfaction, etc. In this respect, carrying out well-designed and structured taxpayer surveys and gathering data thereon on a regular basis would be an important tool. Such surveys could either be physical or online. Transparency Transparency is one of the essential requirements for proper delivery of taxpayer service. This would work best if taxpayers are kept informed of the organization’s activities and achievements vis-à-vis the service standards laid down. The taxpayer charter should clearly and in simple language lay down what rights the taxpayers have. This would increase awareness among the taxpayers. Funding of taxpayer services Taxpayer services and delivery thereon would get impaired if it is not adequately funded. To ensure that activities such as taxpayer education/outreach programmes, publicity, etc are properly carried out on a regular basis, budgetary provisions are required to be pegged as a fraction of the tax collections or total expenditure of the tax administration so that there is an appropriate in-built escalation clause and adequate funds are available. Advanced tax administrations often have 10-15 per cent of total expenditure allocated to taxpayer services. The taxpayer services vertical, on the same lines, should also have 15 to 20 per cent of the total expenditure or 0.10 to 0.15 per cent of average revenue collection of the previous three financial years for taxpayer services. The rationale is that the source of revenue collection is the taxpayer; hence, there are reasonable grounds to expend on them with the objective of garnering revenue from them in a friendly and pro-active manner. At present, the expenditure is only on publicity, and that is about 5 per cent of the total expenditure. To begin with, at least Most tax administrations deliver taxpayer services through ICT, and fund allocations to ICT are often merged with the fund allocations to taxpayer services. In any case, a large part of the ICT budget is allocated to delivery of taxpayer service through electronic channels. In many tax administrations, ICT-related costs alone range between 10 and 15 per cent of the total expenditure. A comparison with other tax administrations in this respect might not be appropriate due to a variety of factors, in particular because in India there has so far been little attention to ICT-based taxpayer services. It is, thus, important to recognise that fund allocation for e-delivery of taxpayer services should not be merged with the fund requirement for taxpayer services and at least 10 per cent of the total expenditure should be allocated for delivering taxpayer services through ICT channels. Quality management Tax organizations have been orienting themselves as service providers with an obligation to provide quality services to their customers. Quality taxpayer services aim at ensuring that every taxpayer pays the fair and right amount of tax under law and at the right time, with a view to facilitating widening of the tax-base, attaining high revenue collection efficiency and effectiveness, and creating an overall taxpayer friendly environment in tax administration. Quality would include timeliness, accuracy of advice, ease of access to information, clarity, promptness, urgency, precision, and adept tax knowledge. These service qualities along with a friendly approach can go a long way in improving quality. Quality addresses the expressed needs of the taxpayer; but it should also include assistance in areas in which the taxpayer might have not realized that compliance could be facilitated through taxpayer service and information. Quality issues need to be explained to tax personnel and understood by them so as to improve the quality of service delivery. There would be a need to develop statistical profiles of the categories of inquiry and requests for assistance that are made most frequently. A data mining tool would be required to develop a screening and referral system, and to train tax personnel on how to review taxpayer inquiries and to ensure prompt and effective responses. Services should be monitored, evaluated and reviewed from time to time to assess their effectiveness and efficiency. This could be done through surveys, customer feed-back, impact analysis and use of performance indicators/benchmarks. A wide range of metrics has been used by different tax administrations to evaluate the success of the taxpayer services. These can provide guidance to the CBDT and the CBEC. The most commonly used metrics are quality of service delivered, timeliness of service delivery, and overall customer satisfaction. II.6.b Taxpayer service delivery Taxpayer surveys Taxpayer surveys are required as a precursor to the design of any taxpayer service, as a tool to assess the generation of awareness and as a feedback mechanism for the service/initiative itself. They ascertain the needs and requirements of taxpayers as well as their overall satisfaction level. Surveys should be a regular activity for the tax administration. Feedbacks help in fine- tuning taxpayer service and in improving overall customer satisfaction. Surveys and related feedbacks also provide guidance for new services and improvement in structure for good delivery. Findings from customer surveys can also be used to update and reframe Frequently Asked Questions (FAQs). FAQs are an instrument for customer services, which have to be a regular part of the customer services to be put up on the website of the tax administration. Surveys can be random or have a structure, based on sample designing with ex-ante objectives. Surveys can either be in-house or conducted by external agencies. But it is imperative that the findings are independent and professional and the results are respected so that an accountability structure for providing better services could be framed. In fact, there is strong merit in setting up a process of anonymous taxpayer service experience and evaluation, more along the lines of “mystery shopping” that is done very often in the private sector so as to ensure alertness, awareness, courtesy, responsibility and accountability through every layer of the taxpayer service delivery chain. Customer satisfaction looks at the overall satisfaction as perceived by the customer/taxpayer. One way of incorporating taxpayer rights into this measure is through customer satisfaction survey questionnaires. These could be used to determine whether the Customer Service Directorate is responsive to taxpayer needs, whether they have been heard and treated fairly, whether taxpayers are kept informed and whether officials are effective in communicating the rights of a taxpayer to him. Timeliness, accuracy, fairness and resolution of a problem should also comprise an intrinsic component of the surveys. It should be remembered that taxpayer surveys are also helpful to gauge the revenue potential from sectors that are likely to reveal their attitude towards tax payments. Taxpayer surveys should comprise three types – first, a small quarterly survey of, say, 1,000 taxpayers to track changing attitudes to tax payments; the second, an annual survey to cover a wider change in the taxpayer’s attitude and tax administration’s objective to assess the success rate of selected key performance indicators (KPIs) of the tax administration; and the third, a longer-term, three-yearly survey of at least 5,000 taxpayers in a stratified sample to assess structural movements in the maturity of the taxpayer’s behaviour and enablement of taxpayer segmentation. Apart from these surveys, the opportunity to gather information on customer satisfaction when he interfaces with the administration, for example, through suggestion boxes or digitally, should not be lost. Time-bound delivery of service There should be a time-frame for delivering every type of service like registration, refund, or rebate. Tax personnel must ensure that every service is delivered to the taxpayer within a fixed time-frame. If there is a delay in delivery of services, there should be an automatic compensation or delay cost, which should be paid to the taxpayer. At the same time, if benefits are given in a timely fashion, then tax personnel should be appreciated and their performance should be appraised accordingly. ICT for effective taxpayer service delivery Tax administrations have employed various channels for taxpayer service delivery. Table 2.1 categorizes these taxpayer services under the broad heads of information, interaction and transaction. E-services based on ICT improve service delivery and also provide a means to integrate or transform services as shown in Table 2.2. In many rapidly developing tax administrations, mobile and internet penetration is often comparatively high and this enables them to exploit this infrastructure by introducing ICT-based channels such as internet portals, mobile payment options and ATMs, which serve as powerful levers to improve taxpayer service levels. ICT allows for sharing and collaboration, which leads to efficiency and cost- effectiveness. It offers scope for customization and personalisation because of which target delivery is made possible and remote access allows users to access services 24*7 from anywhere in the world. Keeping in mind the steps taken by some tax administrations to in put in place a seamless ‘one- stop-shop’ of digital services, both the CBDT and the CBEC should deploy a similar ICT-based approach in alignment with the whole-of-government approach to allow taxpayers to access taxpayer services. ICT-based taxpayer service channels could include websites, e-mails, call centres, SMT such as Twitter, Facebook, YouTube and SMT-based SMAC. There can be a hierarchy of contact preferences, as adopted by ATO. Online access tax information and delivery of services can also be provided through interactive kiosks in banks and post-offices. Use of social media technologies (SMTs) SMTs are the new and personalized face of connectivity. SMT uses channels such as Twitter, Facebook, YouTube, etc. This allows stratified personal contact and new forms of communication and interaction with taxpayers. The CBDT and CBEC need to explore and use these technologies in a variety of ways. SMT deployment would enable tax administrations to communicate tax news, taxpayer information and various timelines for tax compliance as well as to conduct dialogues on proposals requiring large public consultations. Thus, SMTs can help in building a compliance programme with far reaching and widespread participation. ‘Tax apps’ can also be developed in sync with the latest technology trend in SMAC (social media, mobiles, applications and cloud). Since delivery of SMTs might require a detailed and fast-changing technological base, it is felt that a special purpose vehicle (SPV) or a public-private association could help in its delivery in a more effective and efficient manner. Even private sector firms using SMTs have often employed an SPV model for effective delivery through SMTs. A similar model could be employed to set up a single-window, multi-channel delivery system for taxpayer services in both the CBDT and CBEC. However, all these might require a strong ownership framework and management participation by CBDT and CBEC officials in the SPV or public-private association so that delivery is focused and in tune with the use of SMTs for taxpayer service delivery. Call centres India has a high penetration of telephony.11 New dimensions of the ongoing digital revolution are evolving continuously, enabling an abundance of information to move faster, cheaper, in more directions and in more intelligible forms. Broadband is going to play a more critical role in making the country a networked and a connected economy. It is thus appropriate for the CBDT and CBEC to consider increasing taxpayer services delivery through different modes of ICT such as websites and automated phone services. Another important channel for service delivery could be through a national toll-free number for call centres. These call centres could provide information in the local language for the benefit of taxpayers, increasing their accessibility. To reduce demand and taxpayer waiting time, an appointment only model that requires taxpayers to call and schedule an appointment before visiting an in-person tax administration service centre could be considered. This would give the call centre agents or the person in the offices a chance to resolve taxpayer issues before scheduling in-person appointments. Such a facility could provide hands-on guidance and training to taxpayers on different facilities to enable them to access these on their own. Seamless interface and single window delivery Each of the above services can be delivered individually and from separate platforms. But there is a strong case for a seamless interface with integrated service delivery. It is imperative that instead of using multiple channels, an integrated, customer-driven process should be developed. This would reduce duplication of effort and would enable delivery to be made through a common platform. While e-delivery can be the norm, the traditional channels of service delivery through the brick and mortar mode cannot be given up at this juncture. In-person assistance would always be required for certain taxpayers such as low-income ones, rural and semi-urban taxpayers, elderly citizens, etc. Often, the in-person service through brick and mortar offices may be expensive; nonetheless, it is an important means of service delivery. It would be important to concentrate most of the service activities in a few central hubs, may be at the level of the Commissioner’s office, and providing limited services in smaller, remote offices. The strengths and weaknesses of the various channel options are summarized in Table 2.4 below. Table 2.4: Strengths and Weaknesses of Channel Options
Source: Based on USAID Aug 2013 Taxpayer education and assistance programmes Educating taxpayers is an important component of taxpayer services, raising awareness about rights and obligations, reducing ambiguity and creating trust between the tax administration and its customers. Well-defined and well-executed education and awareness campaigns help ensure that taxpayers understand compliance requirements. Both the CBDT and CBEC would need to enhance their present delivery of taxpayer education. The delivery of programmes can also be done through public-private partnerships (PPP). This can be done by organising education programmes under the guidance of departmental officers. Faculty can include eminent persons or retired persons from the CBDT and CBEC with the requisite skills needed to deliver such programmes. The website often is an important medium for delivery of education and awareness programmes. Changes in tax laws, notifications and circulars could be put on the website in simple, easily understood language. Explanatory notes giving the reasons for or objectives of changes in laws and procedures proposed in the budget should also be placed on the website. They should invariably be published in local languages for the ease of the taxpayers. Tax administration should increasingly conduct post-budget presentations and workshops, highlighting the various changes in laws and procedures for all categories of taxpayers, including small taxpayers and pensioners across regions. Communication A primary objective of taxpayer services is to inform the taxpayer of their duties and responsibilities under tax laws. Publicity campaigns through radio, newspapers and television informing taxpayers regularly of the results of the tax administration’s efforts (for example, increase in the number of registered taxpayers, increase in the tax revenues, and results of scrutiny/audits for improving voluntary compliance) is another dimension of communication. The segmentation of taxpayers and the messages that need to be communicated to them would comprise an important component of the communication strategy. Understanding the segment that a taxpayer belong to influences communication. The communication plan, therefore, should address three areas – first, convince taxpayers of the benefits of paying taxes; second, educating taxpayers on how to comply; and last, increasing the perception of risk of non- compliance by publicizing improvements in scrutiny/auditing, collection and other controls. Communication needs to be done at various levels. Therefore, clear lines of responsibility should be established between the central and regional offices, and the responsibilities of officers for communication at each level should be clearly defined. The communication strategy must be considered as part of the design and implementation of the service and not as a follow-up activity. A series of short videos on specific taxpayer rights could be developed and posted on the websites. The CBEC has done this on the registration procedure. Posting information on the website in simple language would be a key element of communication. The website could have a tab titled “know your rights as a taxpayer” on the homepage itself. Taxpayer grievance redressal Procedures could be established to enable a taxpayer to obtain a prompt and impartial response to any legitimate complaint about the conduct of an individual employee. These complaint response procedures could be organized and operated so as to provide for receipt and processing of such complaints by departmental personnel who have thorough familiarity with the authority, organization, and administrative and operating procedures of the department. This procedure should also be well publicized and made easily accessible to taxpayers. The procedure should be so structured that the causes of all legitimate complaints about the conduct of individual employees can be easily identified and it can be determined what changes may be necessary in the training, supervision or assignment of service personnel to eliminate causes of legitimate complaints. Ombudsman The institution of Ombudsman has been set up to redress the grievances of taxpayers. The decisions of the Ombudsman should be binding on tax officers. There is no rationale why an independent professional having knowledge of the field/area cannot be appointed Ombudsman. Hence, the Commission is of the view that the office of Ombudsman should be thrown open to both government and non-government professionals. The office of the Ombudsman should be formed with adequate staff and infrastructure. Specialized taxpayer services a) Pre-filled tax returns to taxpayers CRM could go a long way if the CBDT can introduce pre-filled tax returns for taxpayers. This service-driven activity would create a positive environment of taxpayer services. Further, it is also an effective tool to increase voluntary compliance by making it easier for taxpayers to comply. Normally, this would only be possible for personal income tax. To start with, this facility should be provided to salaried and interest earning taxpayers. The taxpayer will have the option to accept the tax return as it is or modify it. In either event, the filing process would be completed with the submission of the tax return electronically. b) Effective issue resolution Many tax administrations often resolve close to 90 per cent of the issues at the first point of contact on a phone service channel or within one visit through in-person service channel. This high rate of first-contact resolution reduces the overall demand for issue resolution, since failure to resolve issues typically leads to additional inquiries. The key strategy to achieve a high percentage of early resolution of issues would be effectively identifying issues, making sure they are transferred to the right person for effective resolution and for more complex issues, elevated to more specialized tiers. Clear service timelines could be established. This could even be for complex issues. Both the CBDT and the CBEC should develop a mechanism for such early issue resolution. There should be a dedicated organization with trained personnel to handle this. c) Access to rulings At present, there is no mechanism to provide either product ruling or public ruling on any tax issue. Some initiatives, however, have been taken by the CBDT to provide a departmental view on various issues. But so far, there have been very few departmental views. Many tax administrations provide rulings on important aspects of tax laws, which are made public. The CBDT and CBEC could consider setting up a forum where taxpayers can make requests for interpretative statements, industry-wise interpretations or clarifications of various provisions of tax laws, etc. The issues raised by taxpayers from time-to-time could form a bank of issues on which the respective Boards can issue departmental views. Stakeholder engagement There is a strong need to consult stakeholders of tax departments. It not only provides crucial inputs for formulation of policy and processes but is also a source of valuable feedback on the implementation of existing policies and procedures. Consulting stakeholders, which primarily comprise taxpayers, is a practice very commonly followed in most modern tax administrations. In India, we do not have a comprehensive and regular process for stakeholder consultations. Although a glimpse of such an engagement is seen at the time of the annual budgetary exercise, the consultation process vanishes as soon as the budget is presented to Parliament, to resurface only at the time of the following year’s budget discussions. Stakeholder consultation on both direct and indirect taxes is through two channels – separate central tax advisory committees and the regional tax advisory committees at the level of regional chief commissioners. The central committees were formed for tax policy inputs, but the committees largely focus on administrative issues, and meet occasionally. Regional committees at many places are found to be either not constituted or not functional. Tax Forum Recently, another forum for stakeholder engagement, called the Tax Forum under the advisor to the finance minister, was constituted to look into tax-related issues/disputes. This forum provided a platform to hear the views of industry groups and associations. It was also used by the government to clarify its stand on tax related matters. Several long standing issues faced by taxpayers, both in direct and indirect taxes, were taken up and resolved through the meetings of the forum. The outcome of these meetings led to the issue of many clarificatory circulars and notifications. The forum, during its tenure, met representatives from industry groups and associations and covered matters relating to the information technology, manufacturing, infrastructure, services (including financial services), insurance (including reinsurance) and the export sectors, and international taxation. Disputes faced by the taxpayers, both in direct and indirect taxes, were taken up and resolved through these meetings. The process was open. Proposed safe harbour rules were shared with the stakeholders. A final notification was subsequently issued after receiving comments/suggestions. A list of issues taken up in the tax forum is given in Appendix II.4. Taking note of the strong need for regular stakeholder engagements, the Commission recommends a permanent body for stakeholder engagement on tax related issues/disputes. This has been elaborated upon in Chapter III of this report. II.6.c Proposed Structure As stated earlier, a taxpayer should be viewed as a customer. It would be the endeavour of the tax administration to not only “serve” the taxpayer but build a “relationship” of mutual trust and confidence with its customers and provide quality services. The present structure does not address the above objective. To bridge the gap, there is need for a new setup/structure to build a strong relationship with its customers. The effort should be to integrate taxpayer services, taxpayer communication and education, taxpayer feedback and grievance redressal under one umbrella. Taxpayers should be segmented into large business services (LBS), medium and small taxpayers. All taxpayer services for both direct and indirect taxes will be within the LBS structure under one delivery mechanism (i.e. the same CRM). In this sense, taxpayer service delivery will be located under one umbrella for large taxpayers i.e., the CBDT and CBEC will jointly function for large taxpayers through the Principal DG (LBS). 12 However, for other taxpayers, i.e. medium and small, the operations of the CBDT and CBEC would have to continue in separate chains. A road-map has been provided regarding joint delivery of services for these taxpayers. Taxpayer services The customer relations setup should be responsible for building strong relations based on mutual trust and confidence not only with the existing but also with potential future customers. It should be responsible for communication, education, customer service, grievance redressal and customer feedback and analysis in a comprehensive manner. The setup should not only be responsible for designing services (other than those handled in compliance verification and dispute management) but also delivering them at the field level. Customer feedback should form the basis for evaluating its performance and it should be held accountable for any negative feedback. The new setup should also be the nodal point in discharging the responsibilities envisaged in the proposed citizen’s charter law.13 Briefly put, the main functions of the directorate should be:
The structure of the proposed organization is given in Diagram 2.1 and that of a typical regional customer relations office in Diagram 2.2. Proposed Structure The new Directorate of taxpayer services would be headed by an officer of the rank of Principal Chief Commissioner. It would primarily comprise two parts:
Customer-Policy, Planning & Programme Evaluation The Directorate General would comprise the Directorate of Communication, Directorate of Technology Enablement, Directorate of Research, Analysis and Programme Evaluation and Directorate of Customer Relations Support. DG (Policy, Planning and Programme Evaluation) would be supported by an Additional Director (Administration), who would be responsible for day-to-day administration of the DG office. The Directorates The directorates under the Directorate General would be headed by a Principal Director/Director. Each directorate would have various divisions headed by an Additional/Joint Director. The divisions would comprise various units headed by a Deputy/Assistant Director. The Deputy/Assistant Director would be assisted in his functions by ministerial staff. i. Directorate of Communication The directorate of communications would be primarily responsible for all policy and planning matters related to external as well as internal communication. (a) Communication Strategy Division This division would be responsible for developing the communication strategy for the external customers of the department. The broad policy guidelines developed by this division would be followed by field formations. The development of communication strategy would involve developing responses to questions such as what to communicate, whom to communicate with, how to communicate and when to communicate. The division would be responsible for identifying the objective of communication, that is, what outcome is expected from the communications (for example, the general or overall objective of the communication strategy could be: To build the image of the tax department as an efficient, professional, responsive and innovative organization), categorization of customers, who are primarily taxpayers; and strategy focussed on effective dissemination of information. The identification of customers and the messages that need to be communicated to them should be an important component of the communication strategy. Understanding the customers is important as they may be of different ‘types’, each with their own likes, needs and abilities. The better the tax departments know their customers, the better the chances of being able to influence them would be. Intellectual (e.g., understanding of an issue), cultural (e.g., considering an image as taboo) or access-related (e.g., owning a TV, radio, having internet, telephone etc.) differences would lead to differing customer needs; the greater the understanding of the departments of issues like these, the likelier they are to achieve the desired impact. The bottom line is that if the tax administrations do not see the customers, appreciate them and listen to them, they will never reach them. For a suitable communication strategy, therefore, segmentation of customers may be important. They can be categorised as existing, potential and future taxpayers and further classified as individual or corporate taxpayers. Further categories could be male/female, senior citizens/young executives, tech savvy or non-tech savvy etc. Each segment of taxpayers would have different needs and all communication will need to be tailored to the differing needs of different categories of taxpayers. Existing and potential taxpayers can also be classified on the basis of their behavioural features; hence, communication with potential taxpayers could be as follows:
The messages to be communicated to external customers may be categorized as:
The channels of communication appropriate for different kinds of tax services are briefly described below.
The type of communication used with a customer would depend upon the message as well as the category of customer involved. For example, educating a future taxpayer on the need to pay taxes would normally fall in the category ‘information’, which is one-way communication with the customers. Similarly, an existing tech savvy customer, could be informed, could interact and transact through the departmental website. Mobile Apps could also be developed for such customers for all three kinds of communication. The choice of communication channel would depend mainly on the type and content of message or service to be delivered, available resources, and also – most crucially – on how the target group likes to receive the message. Some channels of communication may be more advantageous in terms of its reach to the target group. It may not be prudent to use all the channels for all kinds of messages and services to different categories of customers. Therefore, a channel strategy specifying the preferred channels for communication for different target groups should form an essential part of the overall communication strategy. Such a channel strategy would not only optimize the efforts of the tax department in reaching out to taxpayers but also make the communication more cost-effective. (b) Media – Policy and Response Division The division would be responsible for developing the media policy for the department as well as providing the policy response to issues raised in the media. The main components of the media policy should be to lay out clear objectives for interaction with the media and create responsibility centres for media co-ordination at the central and local level. At present, the tax department’s interaction with the media is centralized at the Board level. This results in very limited information being released through the print and electronic media. Moreover, issues of local importance do not find adequate coverage in local media at field stations. The departments need to use this medium of communication more effectively, particularly since it has a vast reach. Perception management is an aspect that has been not been given adequate importance by the tax administration in India. Even though the tax departments have, over the last few years, taken several initiatives using technology to make compliance easy for taxpayers, there is still a negative perception about the tax departments, (for instance, the perception that tax officials are unfriendly and rude; it is very time consuming to interact with the tax departments; no sense of enforcement etc.) in the minds of many taxpayers. This needs to change, and the media could play an important role in this. The main aim of the media policy should be to create a positive perception of the tax department in the minds of the general public by highlighting significant achievements of the tax administrations, particularly in the area of customer service and by clarifying the position of departments in respect of any news that is incorrect. Besides, taxpayer education as well as wider dissemination of information about taxpayer service initiatives for promoting voluntary compliance could also be the objectives of the media policy. The media policy should maintain a careful balance between different kinds of messages to achieve the overall objective of building the image of the tax departments as an efficient, professional, responsive and innovative organization. Major changes in laws and procedures, including issuance of circulars and notifications of public importance, should necessarily be disseminated to the public through the print and electronic media. Media monitoring should be one of the primary functions of this division. Media coverage should be categorized topic-wise and analysed to identify areas of achievement as well as deficiencies. When there is adverse publicity regarding deficiencies in the functioning of the tax department, the division should be in a position to issue suitable policy responses that could also serve to correct a negative image. The results of analyses carried out in this division would be shared with the research, analysis programme evaluation directorate, which would then use this result to improve customer services. The policy guidelines developed by this division for interacting with the media should be followed by the field formations. (c) Customer Relations (Education and Outreach) Division This division would primarily be responsible for developing strategies for customer education and outreach programmes, particularly contact-based initiatives carried out by the department. In the beginning of every year, the division should come up with an annual action plan for customer outreach and education, identifying customer segments for targeted education and outreach. The division should also design specific programmes for customer education that field formations should implement during the year. Setting up tax kiosks at various locations could be one such programme; temporary kiosks could be set up for a day or two in residential areas such as apartment blocks in association with RWAs, large offices and other central locations in cities. These tax kiosks may be manned by departmental staff/tax return preparers (TRPs), who could, apart from helping taxpayers prepare their tax returns, also handle queries from taxpayers relating to return filing, PAN applications and refund status. Another initiative could be single-window mobile vans to take customer services to the door-step of customers and reduce compliance costs. These mobile vans could be a single-window to clarify all queries by small taxpayers. Home visits by trained TRPs for assistance in preparation and filing of tax returns could also be an outreach programme to help taxpayers and reduce their cost of compliance. Seminars and workshops for educating/interacting with customers, post-budget discussions/seminars for clarification of doubts, participation in trade fairs and other such events, visits to schools, offices and public establishments, etc. could be other customer education and outreach programmes designed by this division for educating existing and potential customers. Communicating with school children to convey the importance of tax payment in nation building could be an important policy initiative. Road-shows and street-plays for conveying specific messages may be another. The programmes could be designed at the central level to maintain uniformity. These programmes could then be carried out at various locations in local languages through the respective customer relationship offices (CROs). (d) Internal Communication, Brand Building and Standardization Division The Internal communication division would be responsible for coming up with an internal communication policy that would ensure promptness, certainty and uniformity in the response of the tax officials to the needs of taxpayers. Communication with internal customers is as important as that with external customers. For tax departments, internal customers are primarily the employees of the department. Other internal customers could possibly be partner organizations such as NSDL, UTI, Infosys, etc. The internal customers form the link between taxpayers and the tax administration. Therefore, effective communication with internal customers is essential for the vision and mission of tax departments to be conveyed effectively to external customers as well as implemented successfully by the tax departments. Internal communication is also crucial to equip and enable the staff and other partner organizations to meet the expectations of taxpayers and discharge their duties effectively, promptly and honestly. The channels for internal communication would depend upon the recipient of the communication and the message to be communicated. Some of the channels for internal communication could be dissemination of information through a website including the latest amendments, circulars, notifications etc; a knowledge management portal for making available assessment orders, judicial decisions, best practices and online discussion on these; a learning management system (LMS) having topic-wise training modules and tests for enhancing competence in a desired area; and a forum for online discussions and exchange of ideas on the above. The delivery of messages to thetarget audience in the most efficient and cost-effective manner should be an important component of the communication strategy. Brand building and standardization should also be the responsibility of this division. This would include designing the official logo and coming out with a policy for standardization. The division should also be responsible for standardization of offices and other physical infrastructure so as to maintain a uniform customer experience throughout the country. It should also design a mascot which is in sync with the vision of the tax department. This could be displayed prominently in all tax offices. ii. Directorate of Technology Enablement Tax administrations the world over are striving to deliver more and more services to customers electronically. The Indian tax administration has also in the recent past introduced several measures for delivery of taxpayer services through the electronic mode such as electronic filing of tax returns and payment of taxes, processing of income tax and indirect taxes returns at the centralized processing centre (CPC). However, in view of the recent developments in information and communication technologies (ICT), there is still a lot of scope for improving existing e- services and introducing new technology-based taxpayer services. Thus, there is a need to have a separate Directorate of Technology Enablement that would primarily be responsible for all policy and planning matters related to technology-based customer services such as call centres, website, social media, e-filing, e-payment, etc. Technology has also brought forth channels of instant communication such as social media and mobile phones. Tax departments should keep pace with technology and be prepared to take into its fold many more young customers. At present, the departments neither have any presence on social media nor do they use mobile applications to reach out to taxpayers or provide services to them. Therefore, separate divisions should handle mobile technology and social media and continuously undertake efforts to develop ways and means to use these technologies for improved customer service. The mobile technology division would be responsible for designing mobile apps that could be used by customers to communicate with the departments, particularly for transaction- based communication. For example, on the direct tax side, such apps could be used to view the tax credit statement (26AS), instant payment of tax and, perhaps, preparation and filing of tax returns. The social media division should frame a policy for presence on social media, which should include the requirement to set up a response team that provides quick policy response to issues raised on social media platforms. In case of further expansion of technology-enabled services, separate divisions may be created for handling matters related to that class of services. Each division would frame policies related to the service falling within its purview. iii. Directorate of Research, Analysis and Programme Evaluation (DRAPE) DRAPE will be responsible for all research related to customer service, analysis of feedback and evaluation of various customer service programmes run by the department. The directorate will be responsible for ascertaining the needs of customers and designing services to fulfil those needs and enhance customer satisfaction to reduce compliance barriers and costs. It will take care of needs analysis, international benchmarking, feedback analysis, programme evaluation, the citizen’s charter and development of schemes and programmes for customer services, including modification of existing ones. (a) Needs Analysis and International Benchmarking Division (NAIBD) The Needs Analysis and International Benchmarking Division would be responsible for ascertaining customer needs (information, interaction as well as transaction), based on inputs from other wings including call centres, websites, grievance redressal, etc. as also the study of internal processes and cross-country best practices. Within this division, a customer feedback and survey office will receive inputs from the results of customer surveys carried out by the CRO. This division would also receive inputs from the Service Delivery and Grievance Redressal (Co- ordination) office. (b) Feedback Analysis, Programme Evaluation and Taxpayer’s Charter Division The Feedback Analysis, Programme Evaluation and Taxpayer’s Charter Division would be responsible for analysing feedback received from various sources, including call centres, websites, social media, CROs, etc. on a continuous basis. Based upon the feedback, the division will evaluate the performance of various customer service schemes and programmes and make recommendations therein for improved customer experience. The primary objective of the analysis carried out by this division would be the evaluation of customer service schemes and programmes and making recommendations for improvements therein, recommending changes in the procedures and internal processes for improved customer experience, identifying barriers to compliance and measuring cost of compliance on a continuous basis, making recommendations to remove the barriers and reduce the cost of compliance, carrying out impact analysis of policy decisions on customer compliance cost and making suitable recommendations for changes, if any, in policy decisions to ensure better compliance. This division would also be responsible for designing the taxpayer’s charter and evaluating the performance of the department vis-à-vis the timelines committed in the charter. Based upon analysis and feedback, timelines provided for existing services could be amended and more services could be included in the charter. The taxpayer’s charter designed here would be implemented by the service delivery and grievance redressal setup in the field formation. (c) Innovation Division The Innovation Division should be responsible for the development of schemes and programmes for customer services and for modifying existing ones based on inputs from the Needs Analysis and the Feedback Analysis divisions. It would also be responsible for running new schemes at the pilot stage. Once the scheme stabilizes, it will be taken over by the field setup. Some of the new customer service initiatives/schemes (these are only illustrative) could be:
iv. Directorate of Customer Relations Support The Directorate of Customer Relations Support (DCRS) will be responsible for policy and planning in respect of support required by the customer services setup at the headquarter as well as at the field levels. The directorate would comprise the following divisions:
Chief Commissioner (Customer Service – Technology Enabled) (CC (CS-TE)) CC (CS-TE) will be responsible for supervising the delivery of all technology enabled services. There will be separate offices for handling each service. All these services will be run at the national level with regional offices, if needed. These offices will support the customer relations offices located in the field that are expected to interact face-to-face with customers. The Chief Commissionerate will run the following services:
Customer services in large business services We have recommended in Chapter III of this report that large business service (LBS), to be operated jointly by both the Boards. Customer services for large taxpayers covered by LBS would be delivered within the LBS through the customer relationship managers of the LBS. Customer relationship managers will maintain a close liaison with this vertical. The field structure being elaborated below is in respect on non-LBS segments. Chief Commissioner (Customer Service Delivery - Field) (CC (CSDF)) The Chief Commissioner (Customer Service Delivery Field) will be responsible for implementation of customer relations schemes and programmes, including delivery of customer services and grievance redressal, at the central level as well as the local level. This setup would have two verticals – one for delivery of services at the central level and the other for service delivery at the local level through the regional customer relations offices. Each vertical would be headed by a principal commissioner. The Principal Commissioner (Customer Service-Central) {PC(CS-C)} will would be responsible for running various customer service programmes at the central level like the tax return preparer scheme, communication with a particular customer segment like children and central government agencies, knowledge sharing initiatives that form part of internal communication (Let Us Share), etc. The Commissionerate may have the following units:
At present, the departments face problems in releasing advertisements in the print and electronic media through the DAVP as the release orders by DAVP adhere to their internal media policy and do not fully take into consideration the requirements of the department. Thus, advertisements are often released in small newspapers having low circulation that are not read by the department’s target audience. The process of release through DAVP does not give effective control to the departments in terms of the releases and instances occur when the release is not carried by a newspaper despite a release order by the DAVP to the concerned newspaper. Although the department does not make payment in such cases, an opportunity to reach out to stakeholders is lost, more so when an advertisement is intended to publicize a statutory due date. The Advertisement and Publicity unit, therefore, should be responsible for releasing advertisements to the media, for which it should be adequately staffed. The unit should also act as a link between the customer communication centre in the regional CROs and the Communications Directorate at the central level. The advertising content prepared at the central level should be made available to regional centres to be publicized through various channels at the local level. It may also seek inputs from local offices about the coverage of centrally released advertisement campaigns at the local level. The central unit should also receive inputs and suggestions from the customer communication centre of regional CROs, and consolidate and provide these to the Communications Directorate for policy formulation.
The unit should be responsible for releasing media briefs on routine matters in accordance with the media policy. It should also be responsible for organizing media interaction with the Chairmen or Board Members of the two boards and other senior officers of the department at the central level on specific issues of importance. At the local level, media briefings on routine matters may be done by the media unit in the regional CRO. Information in respect of all media reports at the local level should be sent by the CRO to the central media co-ordination unit, which will be a repository of media reports at the local level. This may be used by the media division of the Communications Directorate for policy interventions and response.
A separate printing and publication cell may be made in-charge of designing and printing of pamphlets, taxpayer information booklets, books etc. and disseminating these to field offices. The taxpayer education material as well as departmental publications should be designed at the central level to maintain uniformity. The unit will distribute the material to local CROs, which would then be responsible for translation of the same material in local languages. The taxpayer education materials should be readily available in sufficient numbers in all tax offices as well as in major public places such as airports, railway stations, etc.
Principal Commissioner (Customer Service – Local) The local field setup for customer relations would be headed by Principal Commissioner (Customer Service – Local) {PC(CS-L)}. The PC (CS-L) shall, through the customer relations office support and evaluation units, supervise the functioning of customer relations offices (CROs) throughout the country. The CRO would be the primary unit of interface with customers for delivery of services and redressal of grievances. Two separate units, Service Delivery and Grievance Redressal (Co-ordination), and Customer Survey and Feedback, will also function under the PC (CS-L) and will carry out headquarter functions of this setup.
This unit will shall also be responsible for creating a system for time bound delivery of services to customers through software for managing and monitoring customer requests/applications (similar to the Sevottam software of the income tax department). It will provide support to customer contact centres of regional CROs, which should have a node for registering customer requests. MIS for disposal of customer applications and redressal of grievances will be generated by this unit at the central level. It will also be responsible for running a system for online tracking of requests/grievances by the customers.
The survey unit will be responsible for designing and conducting periodic surveys to measure customer satisfaction in various areas such as customer enrolment, tax payment including TDS, return filing, audit (indirect tax)/survey/search, assessment/adjudication, dispute management/resolution, taxpayer education and grievance redressal. The surveys can be carried out centrally or through the regional customer relations offices. The feedback unit will be responsible for ascertaining customer feedback from various sources. This may include design mechanisms to obtain feedback from customers following any interaction such as a visit to a tax office. It may also develop and monitor a PAN-based/online feedback mechanism just after availing of a service or visiting a tax office through automated touch screen kiosks placed at every customer relations office.
Each unit will be responsible for providing support to the CRO within its zone as well as evaluating its performances for service delivery and redressal of grievances within the timelines provided in the citizen’s charter. The requirement of CROs for support in terms of budget, infrastructure or manpower would be consolidated by the respective zonal units and forwarded to the Customer Relations Support Directorate. The customer relation functions in the field formation are proposed to be discharged through a separate setup called the CRO. The CROs will be the points of contact of the tax administration with their customers and will be spread throughout the country. A typical CRO at the regional level will comprise customer contact, customer service and customer communication. Customer contact centres will carry out the front office functions in the CRO. This will be the single point of contact between the tax administration and its customers. This centre will handle all customers and have the following sections:
The customer service centre will be the main service providing section on the CRO and be responsible for the actual delivery of customer services or redressal of their grievances in a time bound manner. All service requests received from customers by the front office will be forwarded to the concerned units in this centre, which would have specific units for various services. The performance of the CRO would largely depend upon the efficient functioning of this section. Segmentation of customers into large, medium and small taxpayers may be done to provide focused services to customers. All aspects of tax administration in which an ordinary customer needs service such as registration, tax payment including TDS, return preparation and filing, return processing and refund payment, rectification and other miscellaneous services, must be dealt with by this section. This section should also be seamlessly connected to various customer service schemes run at the central level such as the e-filing portal, CPC etc. so that grievances related to those could also be handled by the agents at the customer service centre. It would be responsible for co-ordinating with the centralized customer service schemes for resolving grievances. Therefore, the customer should be able to receive all the services and redress all related grievances at this single point of contact with the tax administration. The customer assistance section of the front office may escalate a matter to the concerned section in the customer service centre if the matter could not be resolved at their level. The customer communication centre will carry out the headquarter functions related to customer communication in the CRO. The centre will be the extended arm of the Directorate of Communication of the central office and the schemes and programmes of the directorate will be carried out in the field through this office. This centre would carry out the following functions at the local level through separate section:
Structure of CROs below the regional level The regional CRO would comprise all the three centres. However, at smaller stations, the CRO would comprise only the customer contact and the customer service centres. At very small stations, the CRO would only have the customer contact centre and all customer service functions would be carried out at the Charge CRO under which the Range CRO functions. In the field, efforts should be made to set-up common front offices for both direct and indirect taxes so that taxpayer convenience is maximised. II.7 Ingraining customer focus in the organisation The recommendations made above for a separate functional vertical for taxpayer services is mainly to ensure a structured approach and focus in delivery to the taxpayers with clear accountability. The creation of this vertical should not lead to the impression that it is the responsibility of this vertical alone to maintain customer focus. What needs to be emphasized is that the customer orientation must pervade the entire organisation and all actions, whether in policy or in operations, of the tax administration must reflect that. This is an important cultural attribute that the organisation leadership and people function, as discussed in Chapter IV of this report, must continuously reinforce. II.8 Recommendations The Commission recommends that:
Chapter III Structure and Governance Table of Contents III.1 Existing organizational structure III.2 Global best practices III.3 Gap III.4 Desired Governance Structure
III.5 Board structure and Field functions
III.6. Role of knowledge, analysis and intelligence and its integration for operational effectiveness III.7. Autonomy and independence coupled with responsibility and accountability – relationship with Ministry of Finance III.8. Recommendations Appendix III.1: Present structure of CBDT and CBEC Appendix III.2: Comparison between CBDT and CBEC Appendix III.3: Post-cadre restructuring scenario Appendix III.4: Delegated authority that can be exercised by the national revenue body Appendix III.5: Comparative performance indicators of some key tax administrations Appendix III.6: Role of chief economists in the tax departments Appendix III.7: Enterprise risk management Appendix III.8: Role of Chief Financial Officer Appendix III.9: Estimated number of Principal Chief Commissioners and Chief Commissioners in each Board for different functions Appendix III.10 Global practices on autonomy for tax administrations Chapter III Structure and Governance III.1 Existing organizational structure The Union List and the Concurrent List of the Seventh Schedule of the Constitution of India allow the central government to levy, collect and administer direct and indirect taxes. At present, direct taxes constitute roughly 54.4 per cent and indirect taxes constitute 44.8 per cent of the gross tax revenues of the central government. 14 The Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) have been set up as apex bodies to administer the levy and collection of taxes under the respective statutes. Each of the two is headed by a Chairperson with six members. The two Boards report to the finance minister through the revenue secretary. The powers and functions of the Boards emanate from the Central Board of Revenue Act, 1963, as well as from the Government of India (Allocation of Business) Rules, 1961. The administrative set up of the two Boards has been the subject matter of wide comments/critique by various committees from time to time (see below). Unlike other statutory boards like the Postal Board and Railway Board, the CBDT or CBEC has not been declared a separate department. Under the present arrangement, the CBDT and CBEC are part of the Department of Revenue (DoR), even though it is neither its department nor its attached or subordinate office, nor an autonomous organization or a public sector undertaking. According to the Government of India (Allocation of Business) Rules, the role of the DoR is restricted only to dealing with matters concerning the CBDT or CBEC. However, it has no powers to exercise any supervision or control over CBDT or CBEC or any of its attached offices. Similarly, the DoR has no power to administer direct or indirect tax and its functions in respect of these acts are restricted to replying to questions thereof to the Parliament. The DoR has also no role in the administration of the Indian Revenue Service, income tax (I-T) or customs and central excise (C&CE). The power to issue instructions to the I- T authorities rests statutorily with the CBDT, and, in the case of indirect taxes, with the CBEC. The I-T department, and the C&CE and service tax departments are the field functionaries below the CBDT and CBEC, respectively. The field functions are headed by Chief Commissioners. The core function in the field set-ups is assessment and recovery of taxes. Appeal is another area of importance. In direct taxes, the field functions are primarily territorial but there is tax type segmentation also, particularly in big cities, the typical segmentation being between corporate and other taxpayers. Salary cases are also dealt with separately in many places. In indirect taxes, the three taxes – customs, central excise and service tax – are administered separately. The two Boards are separately supported by various directorates in their policy work. These directorates work as attached offices of the Boards, and carry out operational functions, support functions and monitoring functions. There are also some variations in the work assigned to these attached directorates between the two Boards. The detailed structure of the field functions, as well as of the directorates of the two Boards, is given in Appendix III.1. Although the two Boards and the respective departments under them have developed different structures and procedures, a commonality of approach is seen in functions, such as external publicity, computerization or systems, human resource management, logistics, etc. These functions are delivered through attached directorates in both Boards. A comparison between the CBDT and the CBEC is given in Appendix III.2. Recently, both Boards carried out cadre restructuring. These restructuring exercises were in terms of creating some more posts and levels, partly in view of the enhanced work load and partly to increase the effectiveness of the tax administration. CBDT created 20,751 additional posts; assessment units (AUs) were increased from 3,420 to 4,500, increasing the assessment commissionerates from 228 to 250. Through the restructuring, it was also decided to strengthen the international tax, investigation, and TDS functions and create a separate Directorate for Risk Management. CBEC also created 18,067 additional posts, to create 45 exclusive audit commissionerates and increase service tax commissionerates from 7 to 22. Central excise commissionerates were also increased from 93 to 119 and customs/customs (P) commissionerates from 35 to 60. Appendix III.3 gives the sanctioned strength at various levels, before and after the cadre-restructuring, in the I-T department as well as in CBEC field functions. While the two Boards and respective departments under them have broadly similar structures and processes for their governance, they work independently of each other. There is almost no synergy between them either in data sharing or carrying out key functions where such synergy would result in value to the departments as well as taxpayers. A common approach and joint working in many areas, such as ICT, infrastructure, analysis, and large taxpayer units could eliminate duplication and result in better value for the investments put in. Co-ordinated efforts in enforcement and audit would certainly result in a much better detection rate and suppression of non-compliance. A similar approach in the domain of taxpayer services would also result in greater customer focus, convenience to the taxpayer, and lower compliance cost. One such step to enhance sharing of data and building a common framework for delivery to taxpayers was taken by setting up Large Taxpayer Units (LTUs). But that has so far not been able to bring any synergy between the two departments even at the level of LTUs. The direct tax and indirect tax departments in the same physical infrastructure of LTUs continue to work in separate channels. There is no data sharing or joint scrutiny. Thus, the basic objective of setting up LTUs has been defeated and the desired change has not been achieved. The primary focus of reform in the administrative structure recommended by TARC begins with the LTUs. III.2 Global best practices There has been a wide movement over the past two decades across the world for reform of tax administrations, motivated by the desire to enhance their efficiencies and effectiveness. This has been part of a wider sweep of administrative reforms undertaken by governments in response to demands from their constituencies, which now have access to extensive and deeper information not only from their own governments but also from governments elsewhere. Therefore, taxpayers demand better and more economical and effective tax services. With increased emphasis on self- assessment as the preferred mode of tax governance, there has been renewed focus on the modernization of tax administrations, in particular, on greater customer orientation and the use of ICT to carry out functions and processes. Historically, most tax administrations, including India’s, have worked as traditional government departments. But increasingly, the trend is towards higher autonomy as it is now widely admitted that tax administrations require specialized skills to implement tax laws, and to design and implement operational policy to deliver taxpayer services more effectively and at a lower cost. Traditional structures and procedures have come to be viewed as too rigid to respond to the rapidly changing needs of taxpayers and the challenges faced by tax administrations in a modern environment. There is growing recognition that, given the range and nature of tax laws to be administered and the large numbers of taxpayers to be serviced, tax administrations require adequate powers and autonomy to perform in an efficient and effective manner. At the same time, since tax collection is a sovereign function, it is also recognized that tax administrations need to operate in a fair and impartial manner, and be subject to a range of checks and balances of parliamentary or legislative control to ensure transparency in their operations and proper accountability for the overall management of the tax system. These characteristics transform the manner of functioning from a typical government department to that of a semi-autonomous or fully autonomous agency, i.e., having a certain degree of freedom to work within an overall framework that defines clear obligations to achieve the stated vision, mission and objectives under a stable legal framework provided by the legislature. This trend has been observed globally in several countries. The tax administration would then have its own structure and powers for effective and efficient operations, adequate resources to carry out tasks within an accountability framework for its operations; the framework, nevertheless, is subject to its control and self-assessment in the form of key performance indicators. While the above framework runs across the various forms of tax administrations from government department to semi-autonomous agency to a fully autonomous agency, the difference is largely in the degree of control in terms of finance, recruitment and the accountability structure. Increased autonomy could diminish administrative and corporate governance problems, including organizational inefficiencies, and deliver fairer and more effective services to the public. Increased autonomy is often a response to inadequate central government systems for human resources, expenditure management, and general administration, which could result in poor revenue performance, low rates of compliance, ineffective staff, and corruption. It has been argued that an autonomous tax administration can lead to improvements, including better accountability for results, synergies in administration, and management based on professional skills and isolated from external constraints. The OECD reports a fairly divergent set of institutional arrangements in terms of autonomy for tax administrations.15 Increased autonomy is often to ensure better accountability to the government and the citizens they serve. The divergence in arrangements is largely due to underlying differences in the political structures and systems of public sector administration as well as long-standing historical practice. The report states that overall flexibility or autonomy has been fully achieved in 16 out of 52 advanced and emerging economies surveyed. Although these tax administrations have designed their own internal organizational structure, staff remuneration was found to be tied to wider public sector pay scales. Appendix III.4 provides an insight into the range and nature of powers that have been delegated to revenue bodies. The OECD report also states that 31 out of the 52 surveyed countries have unified their tax administrations into revenue bodies that manage both direct and indirect taxes – separating, in some cases, customs administration from the tax bodies. The motivation has largely been to improve efficiencies by reducing costs and to attain greater synergies, considering that taxpayers for income tax, excise and VAT/GST are often the same. In 11 countries, a formal management/advisory board comprising external representatives has been established as part of the overall governance framework. Broadly reforms have moved along two main axes – (a) revamping institutional mechanisms for governance and (b) reorganizing the machinery for tax administration. On the first aspect, as noted above, there have been initiatives in many tax administrations to create institutional mechanisms for governance to provide greater autonomy coupled with a sharper focus on outcomes, accountability, transparency and a greater voice for stakeholders. This has led to the creation of autonomous/semi-autonomous agencies to manage the business of tax administration. In many cases, a high level institution such as a board or council with representation of key stakeholders is interposed between the tax administration and the finance ministry. Such councils have advisory and oversight responsibilities over the administration. They vet or approve the broad strategic plans of the administration, the setting of priorities and broad organizational performance targets. They also monitor and evaluate the outcomes of the administration’s activities and operations. Such governance structures and practices have the advantage of providing operational freedom while being accountable for the delivery of agreed outcomes. They are characterized by a high degree of separation of policy from administration. The tax administration also gains by obtaining overall guidance from the council and a degree of insulation from political pressures. The other axis of reform addresses the organizational structures and processes for tax governance focused on outcomes, with a strong emphasis on improvements in the efficiency and effectiveness of operations. They have moved from tax-type organizational structures to staff being organized along functional groupings. This approach permits better management of and better outcomes from core functions and greater consistency and coherence in the administration’s interface with taxpayers. It has permitted better standardization and greater operational efficiency leading to improved organizational performance and productivity. A key driver of such structural reform is the rapid growth of ICT, which is being extensively deployed, enabling radically different ways of doing business and liberating users from the constraints of time and geography. Alongside functional restructuring, the approach also segments taxpayers in order to better target administration policies, services and compliance management activities in reflection of taxpayer needs and behaviours. The OECD survey indicates that 49 out of the 52 surveyed countries had “function” as a key element in their organizational structure. III.3 Gap In 2014, India has been ranked 152 out of 185 countries on ease of “paying taxes” in the World Bank’s “Doing Business” indicators. This is a stark indication of the gap between where we are and where we ought to be. The big question is how the tax administration can be transformed to radically improve the ranking if India is to emerge even among the top 50, with a view to improving its ranking steadily thereafter. To answer this question, we need to assess ourselves against global best practices. A tax administration should define its own objectives and performance horizon within an agreed framework. It should also carry the full responsibility of formulating its own strategies and operational plans so that it can respond rapidly to the changing circumstances resulting from increasing globalization represented by emerging business arrangements and the corresponding needs of the tax administration. Some of the traditional views or structures need reorientation and change. The preoccupation of “how” to administer has to yield to “why” and “for what”. It is for these reasons that modernizing a tax administration changes the existing organizational structure to fit the needs of the time, reorganizing its activities in an effective and efficient way. This could include decisions on the number, size and geographical location of tax offices. Functional autonomy also includes autonomy to design policy on human and material resources, personnel recruitment, their training/development programmes, remuneration of staff (including an incentives policy) and, last but not least, evaluating staff performance. In literature, the practice of establishing a tax administration removed from the formal internal structure of the ministry of finance and with a broad range of autonomous powers, mirrors a broader development in public sector administration that is described as the “executive agency” model and, in the context of tax administration, it is generally referred to as the “revenue authority model”. To repeat, the rationale for this model relates primarily to the effectiveness and efficiency that an autonomous organization can bring to managing its affairs in a business-like manner, free of political interference and freed from the constraints of the prevailing civil service system. Unlike the main trend in OECD surveyed countries, the Indian tax administration continues to function in a traditional framework. The two Boards, though statutory, are a part of the DoR in the Ministry of Finance, as mentioned above. The organization of the Boards is largely by the tax- type. In their working, they are subject to the usual governmental procedures of administration, finance and personnel management, including governmental processes in terms of recruitment and financial management. Neither of the tax administrations, the CBDT or the CBEC, has any autonomy, either functional or financial. In fact, they have no financial powers, and are often subject to the general scrutiny and economy instructions applicable to other parts of government. This has impeded the work of the Boards in the context of laying down a structure for customer services and in bringing information technology as a base for tax administration with speed. There have been instances where the tax administration has been subjected to economy instructions, which imposed a ban or near ban on recruitment even when the economy, and trade and investment, were expanding. This created a shortage of manpower and a resource constraint. The overall mind-set of the staff is administrative – with an emphasis on risk adverse adherence to procedures and rules of business with little attention to outcomes. A large amount of energy and time tends to get consumed in obtaining necessary approvals and sanctions for changing/restructuring of the Board’s functioning as well as that of the field formations, training and implementation of ICT projects etc. This inhibits the ability to respond quickly to emerging needs and challenges. Lack of specific accountability in the operational business model appears to be the main cause of lack of visible positive outcomes. Other main shortcomings in the Indian tax administration are:
Several tax administrations are undergoing major organizational reform to achieve improved outcomes, in particular in areas such as increasing application of customer segmentation approaches (including large taxpayer units), bringing separate verticals for more focused delivery and on expanding the ICT base. It is time the direct and indirect tax administrations in India follow international best practices and the two Boards in India are given more autonomy so that they become at least semi-autonomous. III.4 Desired Governance Structure Globally, tax governance is now based on the principle of self-assessment, and promotion of voluntary compliance is the keystone of tax administrations’ strategy. It is so in India as well. Both the CBEC and CBDT have adopted self-assessment and promotion of voluntary compliance as a key element in their strategies. Self-assessment implies a fundamental shift in the relationship between the state and the taxpayer. It implies a tacit compact based on trust in each other and shared responsibility for ensuring compliance with the country’s tax laws. In very broad terms, the responsibility of the taxpayer is to exercise diligence in the payment of taxes correctly and that of the tax administration is to create conditions in which the taxpayer is enabled to do so, build the confidence that his rights are protected and apply sanctions effectively where the trust is broken by the taxpayer by violating the law. The shared responsibility is an inevitable consequence of the complexity and scale of challenges faced by the tax administration, which cannot be met by a purely sanctions based regime. There is also a moral dimension to this. Taxation is an important element in the relationship between citizens and the state and a relationship based on a common set of values certainly serves a larger social purpose. Many tax administrations are building trust- based systems as part of their strategic policy framework in the belief that the most productive way to achieve genuine acceptance of, and adherence to, regulations is not by exclusive reliance upon sanctions and legal coercion but through strategies that appeal to a citizen’s law abiding self. III.4.a Enhanced customer experience The primary goal of a tax administration ought not to be to meet merely revenue targets but to maximize compliance and reduce/minimize the tax gap. All good tax administrations build their compliance strategies on the foundation of sound risk management and around the promotion of voluntary compliance. At a high level, this means that the object of the strategy is to move the environment towards the compliant end of the compliance spectrum. This is achieved through a mix of appropriate strategies and tactics aimed at different segments of taxpayers in order to induce compliance. For taxpayers inclined towards compliance, the effective tools will lie in the domain of taxpayer services and taxpayer assistance. For taxpayers disinclined towards compliance, such as those who make evasion a part of their business strategy, the response will have to be effective enforcement and deterrence. Underpinning all this is effective communication that makes compliance easy and user friendly and manages to create a credible perception that it pays to comply and does not pay to evade. Success in dealing with such challenges requires the creation and sustenance of specialized technological and human capacities and suitable structures and processes to deploy them effectively. Simply put, at the root of reform of the tax administration lies the transformation of the taxpayer experience. For self-assessment and voluntary compliance to give the desired outcomes, the structures and processes of governance have to be founded on some key principles and values. These can be summed up as follows:
Further, in terms of processes, the following broad principles can be regarded as best practices in good governance:
Traditional tax administrations are driven primarily by the revenue maximization motive. However, if the tax administration is to be customer focused and based on self-assessment and voluntary compliance, it must adopt other goals and performance measures that promote the achievement of multiple goals. Revenue, it must be realized, is an outcome of correct actions and cannot be the goal itself. The focus of attention, therefore, must shift to strategies and actions that promote sustained growth of revenue. Such objectives can be measures to reduce the tax gap, increase customer satisfaction (which in turn enhances voluntary compliance), minimize disputes and provide faster resolution of disputes, reduce transaction costs as well as administrative costs, etc. To attain these objectives, the administration has to focus on achieving greater integration of people, process and technology and its internal and external environment. It must strive, by effective use of technology and human skills, to get smarter in serving its customers as well as in enforcing compliance. Performance management and accountability frameworks must be built around such indices for effective and efficient revenue administration. For the tax administration to be able to do so, it needs the requisite degree of autonomy, which is not usually available in traditional government structures. Naturally, as a concomitant to such autonomy, it must bind itself to accountability in terms of outcomes that the government and other stakeholders expect from the tax administration. It necessitates that a more broad-based governance with the interests of external stakeholders also adequately represented. Another dimension is people. Currently, all tasks in the administration are carried out by career IRS officers. This is fully consistent with the general administrative structure of the government in which the management of the various departments is entrusted to career civil servants and the higher layers of the civil services comprise either the All-India Services or the Group ‘A’ Central Civil Services like the IRS. Although the latter are constituted for specialist functions, their career paths, culture and attitudes, and HR policies are largely governed by considerations that are valid for a generalist administrative service. In many ways, a modern tax administration demands a unique set of skills, which normally do not reside in the civil service structure. These have to be nurtured and on occasion acquired from outside. Hence, the organization needs greater freedom to develop and operate HR policies congruent with its requirements. It also needs to reorient its policies to promote the growth of specialization and professionalism. Chapter IV of the report discusses HR issues in detail. III.4.b Synergy between direct taxes and indirect taxes An important consideration in the governance of tax administrations in India is the achievement of a much higher level of synergy between direct and indirect taxes. This is driven by two important considerations. A common database between them will lead to great gains both in terms of enforcement and taxpayer services. It is often the same taxpayer who has to deal with direct taxes and indirect taxes separately. Despite large commonalities in key structures and functions between the two Boards, there are a number of differences that seem to exist largely because they operate separately and in silos. There is an almost complete absence of synergy between them whether in the matter of sharing data or resources or in the matter of doing things jointly to achieve greater efficiencies. Due to their silo functioning, each Board gets a fragmented view of the taxpayer. From the compliant taxpayer’s perspective, therefore, enhanced integration between the CBEC and CBDT would result in a more harmonious and convenient taxpayer experience. At the same time, greater sharing of information between them would reduce opportunities for fraud. An important element of reform in many countries has been the unification of tax administration to provide integrated management for both direct and indirect taxes. Although that may not be achievable in India immediately considering the sheer size and complexity of the two organizations, it is desirable that in key dimensions of governance, policy making and operations, a much higher degree of integration is achieved between the CBDT and CBEC at the earliest and a roadmap is laid down for achieving complete integration. One effort that was made to achieve a greater degree of integration was to set up LTUs to promote sharing of data and to build a common framework for delivery of services to taxpayers. However, that experience has been far from satisfactory. The two departments continue to operate in silos and there is little sharing of data. The taxpayer experience has also not been uniformly satisfactory as evidenced by the unwillingness of a large number of eligible taxpayers to opt in and the desire of some of the LTU clients to move out. Overall, there is little evidence to suggest that there has been realization of the potential benefits of the LTUs either for the tax administrations or for the taxpayers. Apart from some convenient facilities on the indirect tax side, little has been achieved beyond co-location of the two departments under the same roof. The current model of LTUs, therefore, has failed to deliver the intended results. This is a pity, for LTUs have the potential to incubate the eventual integration of the tax administrations that is so clearly desirable. TARC believes that with proper design, this potential can still be realized. There are two main factors that affect their working currently. The first is the continued operation of the two administrations in silos even inside LTUs, and the second is the fact that the regime is optional for taxpayers. The former prevents a “whole of taxpayer focus” while the latter prevents a level playing field among similarly placed taxpayers. Internationally, separate handling of large taxpayers is primarily a matter of taxpayer segmentation and is driven by the uniqueness and dimensions of their compliance risks and the complexity of their operations. It is not a matter of choice for the taxpayer whether he wishes to be covered by the large taxpayer operation. If these two factors are addressed and suitable structures and processes put in place to ensure a “whole taxpayer view” across direct and indirect taxes, TARC is of the view that the first major step would be taken in the direction of integration, which will pave the way for much greater synergy. To promote joint working between the two Boards in the large taxpayer operations, we believe that the current regime of LTUs needs to be transformed into a large business service as given in Diagram 3.1 below. To bring synergy between direct and indirect taxes, services and operations need to be handled by joint teams of officers from the two administrations so that the clients are handled on the basis of an account management concept. Each client would have a relationship manager (RM) with adequate support from direct and indirect tax specialists. He would be the single point of contact and would interface with internal divisions of the LBS for attend to customer needs. The RM will also supervise compliance and service teams; the audit teams could be separate, although their interface with the taxpayer would be through the RM. The choice of RM should be made carefully, having regard to subject matter expertise, broad cross tax knowledge and inter-personal skills. All core functions of LBS, namely, taxpayer services, compliance verification, dispute management, recovery and tax debt collection should be managed within this service. Audits should also be jointly conducted by multidisciplinary audit teams. Segmentation can be made only for different businesses, such as financial sector, resource industries, media and telecom, manufacturing, ITeS, etc. and not on the basis of taxes. Such synergy would usher in better tax governance. The reasons why we began the discussion on synergy in functions with LBS was that this was an area that had been initiated as a pilot case for co-operation between the two departments. Our conclusion is this area remains the critical area in which not only co-operation, but actual functioning, have to be integrated by the two departments.
The structure of LBS referred to in Diagram 3.1 is discussed later in this chapter. What we are recommending goes far beyond that. We are proposing convergence of the management of the two tax administrations while keeping the two revenue services on parallel tracks for some time to come. How the management is to be converged is described next. III.4.c High Level Governance As noted earlier, as tax administrations move to acquire greater autonomy and independence from governmental structures, often as a concomitant to delegation, a high level body in the form of a board or council is interposed between the administration and the ministry of finance. Such bodies commonly have the mandate for oversight of the administration, providing it guidance and advice and approving its strategic priorities and plans. Key stakeholder interests, such as the government, industry, and taxpayers are represented in the composition of these bodies. Such boards/councils, however, do not deal with the day-to-day operational aspects of the administration so that it is not accountable for such matters to the ministry of finance. We have given the reasons why India needs to close the gap with international practices and provide greater autonomy to the two Boards. Concomitantly, there is a need to provide a proper accountability and governance framework. This should be in the form of a Governing Council above the Boards and an independent evaluation office reporting directly to the council. These are discussed below. Governing Council A Governing Council should be set up at the apex level to oversee the functioning of the two
The composition of the council shall be as follows:
The council should have the power to invite specialists as it may consider appropriate for its deliberations. It can be assisted by executive committees comprising representatives of the two Boards and invited experts in specific areas such as ICT, infrastructure, HR, finance, or others. The council should meet as often as necessary but should meet at least six times a year. The terms of the external members of the council could be similar to those of independent directors on company boards. The council should be serviced by an independent evaluation office which will provide it secretariat support. The recommendations of the council, where government’s approval is necessary, can be submitted by the Chairperson of the concerned Board to the Finance Minister. Where matters need the approval of the cabinet, the required processes shall be handled by the concerned Board. The council can also be an effective forum for obtaining the views of trade and industry. Currently, consultation with industry is through mechanisms such as trade facilitation committees, central and regional tax advisory committees, etc. The issues they deal with largely concern the day-to- day working of the tax administration. The government had also set up Tax Forum for resolution of issues on which there were disputes. The Tax Forum provided an opportunity to industry associations and chambers to explain their stand on tax matters. The exercise was found to be mutually beneficial, and a number of instructions and circulars were the outcome of that exercise. Chapter II of this report elaborates on that. Keeping in view the usefulness of these committees and the Tax Forum for stakeholder’s engagement, it would be appropriate that the Central Tax Advisory Committees as well as the regional committees continue to meet, though more often. The Tax Forum, so far working under the Advisor to the Finance Minister, can meet under the chairman of the Governing Council and the chairman of the other Board, along with the officers of the two Boards who are connected with the issues being taken up in the Tax Forum meetings. The Tax Forum can meet at least twice a month. Independent Evaluation Office The present framework of accountability in the government is based on ministerial accountability to Parliament and the scrutiny of departments by the Comptroller and Auditor General of India (CAG), who reports to the Public Accounts Committee (PAC) of Parliament. While this is a crucial pillar of democratic governance to ensure correct administrative and interpretative actions on law and revenue, another mechanism for evaluating the performance of the tax administration against its stated goals and objective is needed. Such a mechanism is needed to monitor the performance of the tax administration, promote accountability and evaluate the impact of policy. For those purposes, an independent evaluation office (IEO) should be instituted. The IEO will report to the Governing Council and through it, to the Finance Minister and to people at large. Evaluation provides a basis for accountability by assessing the factors that affect the tax administration’s ability to reduce the tax gap and improve voluntary compliance or to achieve the objectives of Vision 2020 of the CBDT and the Vision and Mission of the CBEC. It is expected to bring out the truth about successes and shortcomings, i.e., “to tell it the way it is”. This feedback can help the tax administration to improve its performance, and bring accountability. If followed through, this can also deepen the tax administration’s engagement with its stakeholders. The tax administration can then assess its policies and programmes to develop better instruments and policies to achieve its objectives. Thus, in a nutshell, the role of the IEO is to be the evaluator and conscience keeper of the tax administration for its various responsibilities and duties in matters of both tax administration and tax policy. Many tax administrations have similar IEOs. The US IRS has an IRS Oversight Board, created as part of the IRS reforms in 1998. It was designed to allow the IRS to better serve the public and meet the needs of taxpayers. The IRS Oversight Board is a nine-member independent body, charged to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of internal revenue laws and to provide experience, independence, and stability to the IRS so that it may move forward in a cogent, focused direction. A similar body was created in 2003 in the Australian Tax office, the Office of the Inspector General of Taxation. It was established as an independent statutory office to review systematic tax administration issues and to report to the government, in the interests of taxpayers, on recommendations that would improve the fairness, efficiency and integrity of the tax system. The office identifies topics of taxpayer concerns, and presents its critical review with a focus on improving its working on a continuous and regular basis. The Inspector-General’s reports to government are required to be made public. The role of the Inspector General is not to review the tax policy, and is only on matters of tax administration. What we are recommending, however, is to include the review of tax policy impact as one of the responsibilities of the IEO. The Table in Appendix III.5 lists a selection of performance indicators employed by representative tax administrations. The key performance indicators compared here are: registration and filing, taxpayer services and education, returns processing and payments, arrears collection, audit and investigations, appeals, organizational goals, and personnel goals. As may be seen from the Table, different tax administrations employ different measurement indicators for common performance indicators, and understandably so. The basic objective criteria remain the same though there is some difference in detail. The Prime Minister approved the outline of a “Performance Monitoring and Evaluation System (PMES) for Government Departments”.16Under PMES, each department is required to prepare a results-framework document (RFD). An RFD provides a summary of the most important results that a department/ministry expects to achieve during the financial year. This document has two main purposes: (a) move the focus of the department from process-orientation to result-orientation, and (b) provide an objective and fair basis to evaluate a department’s overall performance at the end of the year. The RFD seeks to address three basic questions:
In short, what are the relevant success indicators and their targets, which can be monitored? Both Boards have been following this process. However, owing to two principal factors, there are severe limitations to the effectiveness of monitoring through this process. First, the focus is largely internal and the areas chosen, such as tax collection, compliance and enforcement, human resource and capacity building, are not those which are important from the taxpayers’ point of view; as such they do not reflect outcomes that are relevant for taxpayers. Secondly, the scope has not been fully extended to field formations where the bulk of the interface exists. Nevertheless, it does furnish a framework that could be adopted and upgraded by the IEO. Setting up an IEO has to be beyond the concept of goal setting and monitoring achievement towards those goals. In the tax administration, it may not be sufficient to say that a number of audits were completed in time, which in any case is done due to statutory time limitations. But what is required is to see how well these functions were performed, what the quality was of that delivery; also what the response of the taxpayer to the delivery of services was, and whether the activity eventually led to the fulfilment or to moving closer to the vision statement of the tax administration. It is for such reasons of close monitoring and reviewing tax administration issues and to guard the interests of taxpayers in a systematic manner that some advanced tax administrations have set up oversight boards so that there is continuous improvement in the fairness, efficiency and integrity of the tax system. Since matters of taxation are important for the development of the economy with a large impact on trade and investment, it is all the more important to set up an IEO in the tax administration. The IEO is to be a single entity and would report directly to the Governing Council, of which it would be the secretariat. Its reports will be independent, covering a wider aspect of tax administration, which until now has received insufficient attention. It will look at the functions of the two Boards and their eventual impact on the stakeholders in an independent and comprehensive manner. Among other things, the IEO will be required to publish its evaluation reports so that the public at large are aware of the performance of the tax administration in key areas. The difference between the oversight entities in the US IRS and ATO and the proposed IEO is that, in a way, the proposed IEO is embedded in the larger tax administration structure. Yet, at the same time, it does not report to the two Boards and has an independent structure with a large role to itself. The structure of the Independent Evaluation Office is given in Diagram 3.2 below.
III.4.d Common Tax Policy, Analysis and Legislation Unit Another dimension that needs to be addressed at the structural level is about the handling of tax policy and related legislation. Currently, this is handled in the two Boards, independently in the Tax Research Unit (TRU) and Tax Policy and Legislation (TPL) wings. These work in silos. The proposals of the Boards reach the finance minister in separate channels. This cannot be considered to be a consistent and coherent approach to issues of tax policy. Very often, they are also short on adequate research, analysis of data and multidisciplinary inputs. Currently, TPL and TRU have become virtual legal repositories devoid of careful analysis, market surveys or use of macro-fiscal models. The task of twenty or so staff of TPL or TRU is performed in UK HMRC by the head of department of Knowledge, Analysis and Intelligence (KAI), which has approximately 400 staff members, thus allowing a wide array of essential analysis, completely ignored in the Indian tax administration. In India, these aspects of analysis are urgently needed. The drafting of tax laws, acts, rules and regulations needs to be approached in an interdisciplinary manner. A variety of areas of knowledge needs to be brought to bear on the drafting; economists to analyse the economic effects of different policy initiatives and alternatives, as well as their revenue effect; tax law experts to develop detailed designs of the proposed rules and regulations, with reference to global practices, and tax lawyers with drafting experience to work on the actual legislative language. 17 If the proposed tax laws impact accounting rules and practices, accounting institutes (the Institute of Chartered Accountants of India and the Institute of Cost and Works Accountants of India) are also required to be consulted. The role of tax administrators is largely restricted to policy development, evaluating economic alternatives with revenue effects, and to provide guidance on possible administrative problems that may arise from proposed rules and regulations and suggest alternatives based on relevant experience (again, with comparative knowledge of practice of different countries wherever relevant). Keeping in view the above, a Tax Council supported by a common tax policy, analysis and legislation unit should be established to cater to the needs of both direct and indirect taxes. The unit would be responsible for all three major components of tax policy formulation – policy development, technical analysis, and statutory drafting. 18 Tax Council The remit of the Tax Council would primarily be in the area of handling of tax policy and related legislation. The council will have the following composition:
It is important that the Tax Council is headed by a person having an understanding of public finance. Only such a person would be able to understand the cross-sectional implications of proposed tax laws on industry, trade and investments and thus, be able to bring out more sharply the objective of the tax laws without hurting the other sectors of the economy. It is unlikely that generalists, even if they have worked in a particular post and gained considerable experience, would have the required understanding. It is for these reasons that we recommend that the Tax Council be headed by the Chief Economic Adviser of the Ministry of Finance. The other members of this Tax Council would be the chairmen/chairpersons of the two Boards, members of the two Boards responsible for tax policy and legislation, and also the two economists associated with the two Boards. The Additional Secretary (Budget), Ministry of Finance, should also be a member of this council, and his role in the Tax Council would be to make sure all the deadlines of budget making are adhered to while formulating tax laws. This role is also due to the fact that the Additional Secretary (Budget) is responsible for implementing and monitoring the targets set in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The Tax Council would be supported by the chief economists of the Tax Policy and Analysis wing in each Board. Each of these economists should be in the rank of Principal Chief Commissioner. The chief economists in the two Boards can be appointed from either the government system or outside on contract basis as is done regularly in the Ministry of Finance. Appendix III.6 elucidates the role of chief economist in the tax department. The objective is quality assurance of the administration’s analytical output. The reason it should be headed by an economist rather than any other profession is the centrality of economics in tax analysis and tax policy. Other professions would provide background support in carrying out surveys and statistical and systems modelling. The TPA for its analytical work must carry out statistical modelling such as GDP-based forecasting, long-term as well as short-term, micro-simulations along with discretionary change models so that decisions are based on sound analyses, and are data and evidence driven. The Commission will expand on this aspect later when it submits its recommendations on another segment of its terms of reference, namely, “to review the existing mechanism and recommend appropriate means including staff resources for forecasting, analysis and monitoring revenue targets”.19 Such a significant expansion and deepening of analysis improve the processes of policy development. The development of policy options should be accompanied by detailed impact assessments, ex ante as well as ex post. The revenue projections of any new policy option would be based on careful data analysis and revisited periodically in the context of changes in economic trends. The terms of reference also requires the Commission to “recommend capacity building measures for preparing impact assessment statements.” This will be taken up by the Commission in a subsequent report. The Tax Council will deliberate on the proposals put forth by the joint Tax Policy and Analysis (TPA) wing of the two Boards and firm up its recommendations for the consideration of the Finance Minister. Recommendations on tax matters will be submitted on file to the FM by the Chairman of the Tax Council. The structure of the Tax Council as well as of the TPA with chief economist is given in Diagram 3.3.
The existing TPL and TRU wings of the CBEC and CBDT can be subsumed in the TPA, which can be expanded to include specialists such as economists, tax law experts, statisticians, operations researchers and social researchers so as to form a multidisciplinary team. These specialists should be supported by a large complement of analysts, with adequate skills to undertake advanced data analytics. It could begin with 200 staff members (Diagram 3.3), increasing to 400 over 5 years as management of the two Boards converges (explained in Section III.4.e), reflecting the functional areas that it covers. For example, tax law experts and drafters should possess specialized knowledge and have drafting experience if they work on actual legislative language. These lawyers and tax law experts could be hired either from outside or from the existing cadre of government lawyers. Similarly, social researchers, such as behavioural scientists, will help in assessing behavioural impact of different policies options and help choose options that will maximize complaint behaviours among taxpayers. Care has to be taken that only those adept and having specialized knowledge are selected for these jobs on a fixed-term assignment, which can be extended if their performance is satisfactory. Other specialists should have similar specialized knowledge. While drafting legislation, it is vital that a high degree of precision is achieved in translating legislative intent into law so that ambiguity and consequent confusion are avoided and the potential for disputes minimized.20 The current practice of initial drafting being done by IRS officers posted in TPL/TRU and then the draft being vetted by the legislative branch of the Ministry of Law and Justice (MoL&J), almost towards the end of the process, is certainly not an ideal practice. While the responsibility for final vetting of legislation or subordinate legislation would rest with the MoL&J, that Ministry cannot be expected to be completely familiar with nuances of complex tax legislation. Legal drafting is a specialized skill requiring a deep knowledge and understanding of law, rules of judicial interpretation, precedents in the given area and sharp linguistic skills, and these attributes may not be with the tax officer or an economist. Taxation law is a highly specialized and dynamic field with ever increasing complexity because of the growing complexity of business, and officers in the MoL&J may have up to date knowledge of development. There is thus a gap. This adversely affects the design of legislation. As earlier noted, drafting of tax laws, rules and regulations, therefore, needs to be approached in an interdisciplinary manner. It is recommended that the TPA staff working on legal drafting would need to have a legal background with appropriate training in legal drafting. Some would come from within government Keeping in view the above, it is also recommended that the following practices/guidelines should
Another key reform would be to make the legislation ICT-compatible to the extent possible. This means that business rules required to meet compliance requirements should, as far as possible, be capable of being translated into an algorithm. This would ensure embedding compliance to the law in the relevant ICT system itself. This would also imply that relevant ICT experts are brought into the loop from the early stages of decision making itself. An equally important aspect of tax governance is to ensure that laws, rules, regulations and other tax policy measures such as exemptions are reviewed periodically to see whether they retain their relevance to contemporary socio-economic conditions and meet changing requirements well. For this, a robust process needs to be institutionalised. As a starting point, a thorough review of existing rules, regulations and notifications should be undertaken. Going forward, it should be standard practice to insert a sunset clause in each rule, regulation and notification. This will ensure regular review to keep governance updated and contemporaneous. These reviews must necessarily involve wide public consultations. Diagram 3.4 below shows the overall structure that would bring the desired governance structure, comprising the Governing Council, Tax Council, LBS, IEO, and other field functions for compliance verification. But as we will see, as part of the desired governance structures, other important functions, such as dispute management, taxpayer services, quality assurance, etc would also be required to converge across the two Boards. III.4.e Towards a modern and fully integrated tax administration We have so far discussed convergence in governance, vision, mission and the strategy of the two Boards (through a Governing Council), synergistic approach to tax policy formulation and drafting of tax laws, and convergence in operations for large businesses through LBS. But this is not, by any reckoning, enough. Such selective convergence, instead of amalgamation, remedies only to an extent the present static, established culture and departmental interests. This in no way is moving towards a fully integrated tax administration. Many modern tax administrations have over the last few years moved towards that. In a fully integrated tax administration, corporate tax, excise and service tax are clubbed together as business taxes to provide better taxpayer convenience to businesses. Staff and officers are organized principally by functional groupings such as registration, information processing, audit, collection, appeals, etc and generally work across taxes. This approach to organizing tax work allows more standardization for work processes across taxes, thereby simplifying computerization and arrangements for taxpayers and contributes to improving operational efficiency. But such a unified and fully integrated structure may require some more time as it would need more open dialogue between the two Boards to arrive at a common ground to initiate the process. Such higher and purposeful movement can be achieved by the two Boards through cross-functional committees at various levels.
Given the present level of preparedness of the two Boards, TARC has recommended, as described above, selective convergences to achieve better tax governance, unified ICT-based delivery (Chapter VII), and a single customer relations officer (Chapter II), but that is a movement only towards an integrated management structure and not an integrated tax administration. It, therefore, is fitting that a timeline be drawn to achieve the eventual goal of a totally unified management structure with not only a common tax council but also a common Board for both direct and indirect taxes that can be called the Central Board of Direct and Indirect Taxes. TARC recommends that this should be achieved in the next five years. This transition is schematically depicted in Diagram For a unified management structure, apart from the common Board, the functions which can easily support the framework would be in the areas of human resource management and vigilance, finance, infrastructure and logistics, and compliance verification. If these were to be operated as common services, meaning that only one directorate comprising direct and indirect taxes would service the Boards, it would result in greater synergies than is possible under the present scheme where common functions are carried out separately under each Board. The prevailing arrangement only implies accommodation of fractured interests. Special fields such as international taxation, MAPs, APAs, transfer pricing etc. on the direct tax side and international co-operation, valuation in related party transactions, customs border control functions etc on the indirect tax side could, however, continue as separate functions. The question one may ask is whether there are other options. One option would be to identify more commonalities and fuse these functions, currently being performed separately by the two Boards, and let the two Boards function independently in areas that are unique in their respective functions. The Railway Board could be a model that could be considered for adoption. In the railways, there are multiple services that merge into one Board. Based on that model, the approach could be along the following lines:
(c) For selection of competent officers, identification must happen early enough. This has been discussed in Chapter IV of this report. A large number of other steps will be needed to achieve an eventual integration of the two departments, where, not just the management, but even the staff would be amalgamated. For example, during the first five-year preparation period, dynamism in the CBDT and CBEC would be needed to ensure full preparedness using ICT, deepening of training and continuous rationalization of posts to respond to changing needs. The next five years would be to integrate the services as a common service to taxpayers with no distinction whether they are approaching the tax department for direct tax or indirect tax. The administration would thus be common; delivery to the taxpayer would also be common. It may be kept sight of that the railways have a long history of managing multiple services converging into the Board and their experience has been garnered through challenges and continuance of some inter-service tensions. The same may have to be encountered in the two tax departments. The success of the effort depends on how dynamically they can think and act towards a sea-change in their mode of conducting business. It is up to them to take on the challenge and steer the change through strong leadership. Preoccupation about which service should occupy which posts could be obviated if the senior leadership focuses on the highest efficiency and productivity of both. Trust and fairness would be the fulcrum on which the initial transition to a unified management structure in five years would move ahead. III.5 Board structure and field functions In the foregoing paragraph, we have recommended that the two Boards should move towards a more synergistic relationship through a governing council and a common tax council for the present. But as stated, this is only the first step and is only in view of the present structure of the two Boards, with a requirement to align it with the needs in the current context and with a view to respond to emerging and future challenges to satisfy its stakeholders. The two Boards can then converge in the next five years to a more unified management structure, and in the following five years, to a fully integrated tax administration as many modern tax administrations are. One of the main reasons for this desired movement is India’s deepening integration with the global economy, increasing global competition, a rapidly changing taxation landscape driven by new and emerging economic paradigms such as the digital economy, e-commerce, and the need to deal with such issues. Tax-base erosion because of the development of highly complex structures for transactions by multinationals, aimed at minimizing their tax burden, is another reason. In addition, businesses are increasingly adopting seamless methods, helped by technological advancements, for online and cross-border transactions. The current structures and processes, we feel, are not sufficient and the thinking processes have also not been a step ahead. The integration of the two Boards has been recommended also in the context of the unprecedented potential and power that ICT provides for radically enhancing the efficiency and effectiveness dimension of an organization by sharing of information and knowledge, providing opportunities for greater creativity and innovation resulting in newer ways of doing work that are far more productive and rich. The power of data analytics is another tool that can significantly enhance the quality of policy and programme design as well as effectiveness of implementation. It is in the above context that we look at the organizational structure of the two Boards for the present. As noted earlier, international best practices have distinctly moved towards the adoption of a “function” based structure for effective management of tax administration. It is noteworthy that out of 52 tax administrations surveyed by the OECD, covering both OECD and non-OECD countries all, barring 5, have, to varying degrees, adopted a functional structure. Such a function- based organization is usually anchored by a strong headquarters organization that sets policy and programme direction and guidance. The main responsibilities of the headquarters can be:
Under the overall direction and guidance of the headquarters, field organization deliver on the programmes, being directly responsible for it. Field functions are also aligned to core tax administration processes such as taxpayer services, audit, dispute resolution, enforcement etc. Although these field functions often mirror the structure of the headquarters, the difference primarily is that the focus is exclusively on operations and service delivery. Functional verticals are supported by a set of “horizontals” such as ICT, human resources (HR), finance, infrastructure and logistics. Overall, therefore, a matrix type organization would develop in which employees typically may have two lines of responsibility – one to the superior within their structure and the other for the delivery of their specialization in the given area of operations. The advantages of this function based structure are the following.
The current structure in both the CBDT and CBEC, as seen in Appendix III.1, is not aligned on a functional basis, unlike in most modern tax administrations. Consequently, it does not promote specialization in key functions in the core areas of policy and operations. While some degree of specialization is assured through the directorates, there is only a feeble link between policy and implementation as the directorates have little role in overseeing the implementation of the programmes and processes they design. They operate primarily as staff adjuncts of the Board. Hence, implementation is marked by lack of uniformity, unevenness of quality and variability of performance. For example, in the CBEC, the Directorate of Audit is responsible for the design of the audit programme in terms of development of audit procedures, manuals etc. However, the delivery is left entirely to the field formations headed by Chief Commissioners and Commissioners. The staff, in turn, is subject to the usual rotation. Consequently, there is little coherent control over the delivery of the programmes and its quality and effectiveness remain variable and inconsistent. The present structure also does not recognize that different areas of work require different capacities and capabilities, skills and mind-sets, and these need to be developed for fulfilling organizational goals. As functions and responsibilities in the existing structure are mixed up, there are also no clear lines of accountability that could enable proper performance management and consequently performance improvement. On account of fuzzy responsibilities and the absence of a proper structure behind them, key functions get performed sub-optimally. For example, there is no single organizational pillar that is responsible for taxpayer services and the responsibility is diffused across various field formations and directorates. Consequently, there is neither coherent design nor delivery of the whole range of taxpayer services nor are there clear lines of responsibility or accountability for performance. Although the implementation of ICT in both the CBDT and CBEC has the potential to release them from the constraints of geography, this has remained under-realized as the structures, processes and attitudes remain embedded, to varying degrees, in the traditional territorial and paper-based approach to working. To overcome these weaknesses, and in the light of international experience, it is necessary to introduce a functional structure in the organization so that
All these, as already discussed above, would require the tax administrations – direct and indirect taxes – to start exploring synergies to drastically improve both compliance management as well as taxpayer services and not function, as at present, in separate silos as that limits the opportunities that can be exploited. This is a vital issue that needs to be addressed. One such example in this context is as given for LBS. Keeping in view the required synergy between direct and indirect taxes, organizational restructuring on the basis of headquarters and field functions, with a matrix of accountability and responsibility for overall performance, we recommend restructuring of the two Boards, their directorates and field formations. While recommending restructuring along functional lines, we are also recommending a layered approach towards greater integration of the direct and indirect tax administrations. Briefly, it is as follows:
While for the large business segment, we have already recommended in Para III.4.b of this chapter and shown in Diagram 3.1 how the two Boards would act jointly and how all core functions would be integrated in LBS, for medium and small taxpayer segments, efficiencies would be achieved through better customer focus to make compliance easy, and through more effective and timely dispute resolution so that this segment of taxpayers are not deterred from tax compliance. This is based on the principle that different taxpayers have different needs and so they need to be serviced accordingly. While the medium and small taxpayer segments need to be increasingly brought into the tax-fold and nurtured for better compliance, large business have more complex requirements. They also contribute a major chunk of revenue. The complete integration of the direct and indirect tax administrations for this segment would enable the tax administrations to harness the synergetic dividend and address the needs of large taxpayers more coherently. Keeping in view the above principles of delivery to the taxpayers, the following organizing principles are recommended:
While setting out these principles, we would like to emphasize that structures should not be regarded as being cast in stone. There is need for dynamic administrations that are continuously look at the need for and possibility of change to achieve a good fit with the dynamic environment in which they operate. It is also necessary to ensure that charges entrusted to members of the Board should be along functional lines as far as possible. To some extent, this alignment already exists, but it needs to be further accentuated. With this alignment, the relevant Principal Chief Commissioners/Director Generals will report to the respective member and chairman of the respective Board. This arrangement will be applicable only to medium and small taxpayer segments. For LBS, fuller integration has been recommended with both Boards operating jointly and in a unified manner. The head of LBS, whose performance will be monitored by both chairmen jointly, will co-ordinate with the concerned members of the Boards as required. Another area of synergy that needs immediate attention is in the case of central excise and service tax. Both these taxes are consumption taxes, excise tax being applicable on goods at the time of their production and service tax being on services rendered. But in the CBEC, there are, at present, separate members for central excise and service tax and separate commissionerates being set up for the two taxes. One reason often given for the development is that service tax is new, and there is a separate act to administer it that. However, it is important to note that service tax has matured and developed, and it is time to administer both taxes together, particularly since GST is on the horizon. Keeping this in view, we recommend that there should be one member entrusted with both the taxes. Further, Section 3 of the Central Excise Act, 1944, states that the duty of excise shall be called central value added tax (CENVAT). Hence, the practice of referring to this duty as duty of excise should cease and it should be referred to as CENVAT. For the CBDT, since personal income tax (includes taxes on all persons, except corporates) has different concerns, processes and priorities than corporate taxes, we recommend that there should be separate members for personal income tax (PIT) and corporate income tax (CIT). Further, increased co-ordination between the two Boards would be required to be achieved through the mechanisms of cross-organizational and cross-functional committees to ensure broad consistency in areas such as strategic planning, common risk management framework, customer services, compliance verification and enforcement strategies, etc. These committees can be joint bodies of members and other officers from both Boards brining even better synergy in operations. These committees will also provide a forum to share best practices in the two Boards and an opportunity to learn from each other to achieve the common goals of improving customer experience and enhance tax collections. Both the Boards need to have a separate chief financial officer (CFO) at the level of a Member, unlike at present when the financial adviser is an outsider to the tax administration. The CFO would primarily be responsible for financial planning of the tax administration, making inter-se allocation between the different requirements of the tax administration and reporting to higher management. The role of the CFO in tax administration is particularly important as it is recommended that the two tax administrations would institute a number of taxpayer focused programmes and enhance ICT linkage in the organization. All these may not be possible as long as the financial adviser continues to be an outsider to the tax administration, often making a contribution only at the far end of the process of examining proposals. The contribution of the financial adviser in this structure, thus, remains minimal and is often limited to attempts to reduce expenditure. No guidance of the sort that an internal person would give is received on matters of strategies and tactics as they relate to project conceptualization and development, budget management, cost benefit analysis, forecasting needs and securing new funding. There should also be a member in each Board to bring about business excellence. The responsibility of this member would be to see that the principles of quality assurance are applied in the tax administration to improve performance, based on the principles of customer focus, stakeholder value, and process management. The responsibility of the member would also be to see that key practices in business excellence are applied across functional areas and if there is need to make some changes, suggest them to the management so that the organization carries out continuous and breakthrough improvement. Based on the above requirement, there should be ten members in each Board and a Chairperson. The structures of the CBDT and CBEC are given in Diagrams 3.6 and 3.7, respectively. The work allocation for each of the members and the chairman in each Board is given below. a) CBDT
b) CBEC
Both the Boards will be involved only in policy design; programme implementation would be the work of the directorates. III.5.a Structure, role and functions of Directorates in key areas At present, the directorates under them assist the two Boards in the discharge of their functions. There is already a degree of functional orientation in the directorates. They broadly fall into two categories. Some of them have field operations in their domain while others mainly act as attached offices of the Boards, functioning primarily as headquarters organizations and assist the Boards in developing policies and programmes in the functional areas assigned to them. Examples of the former are DG (DRI), DG (CEI) in the case of CBEC, and DG (Exemptions), DG (Intelligence and Criminal Investigation), DG (International Taxation) and DG (Investigation) in the case of CBDT. These are already specialized organizations and no major structural change in their configuration appears warranted. However, some changes to improve their output have been suggested in Chapter VI of this report for DG (Investigation), and DG (Intelligence and Criminal Investigation). In respect of DG (Export Promotion), DG (Safeguards) and DG (Valuation) in the CBEC, no change appears warranted. Action in relation to them is needed more in terms improving performance by infusion of technology, HR policies designed to promote specialization and augmentation of skills in emerging areas of risk, which aspects are also dealt with in Chapter VI of this report. Against this background, we recommend the setting up/restructuring of the following directorates, which are concerned with the core processes of tax administration, as functional verticals separately under each Board:
These functional verticals would be supported by the following directorates, which perform enabling functions – the “horizontal” support layers in the organization.
These directorates will perform the headquarters functions, such as the development of manuals, framing of policies etc., and monitor the delivery of services and performance of the field formations that report to them. Each of the directorates will be headed by an officer of the rank of Principal Chief Commissioner. The structure would follow the matrix form. The officers working in each of the directorates will perform the functions within the vertical and will report to their superiors and will have a reporting relationship to other relevant functions to ensure that policies, instructions etc., are properly carried out and the specific needs of the respective verticals are communicated to the support function. This is intended to achieve a closer integration between the functional verticals and the enabling horizontal functions. Each of the directorates would be embedded with the support functions of ICT, HR, administration and finance. This is to recognize that each of the verticals have separate ICT, HR and finance requirements and so these functions are required to be embedded in the vertical itself and then work in a matrix like reporting to the specialized ICT, HR and finance verticals. Another salient feature of the recommendation connected with the above matrix-like approach of functioning is that the placement of people in various functions should be, as far as possible, on the basis of careful selection based on their aptitudes, attitudes and inclinations. And once placed, they should have reasonable tenures unless they are required to be shifted for reasons related to performance or the special need of the officer concerned. This will make for growth of expertise and overall stability in the administration. More on this has been dealt within Chapter IV of this report. A brief outline of the respective roles and functions of the directorates is given below. We first describe the vertical functions and then horizontal functions. i) Vertical Functions Strategic Planning and Risk Management, Communication and Co-ordination The primary task of this vertical would be to institute rigorous a entries-wide risk management framework to promote effective tax governance. Its main functions would be:
The structure of the proposed directaorte and its reporting channel are given in Diagram 3.8 below. It may be mentioned that the DG, an officer of the rank of Principal Chief Commissioner, of this directoarte would report to respective chairman of the Board, and through them to the Governing Council so that the Governing Council can take a more synergistic approach on various matters for the Boards together with uniform application.
It is equally important to note that while risk management might differ in details between the CBEC and CBDT, both face similar, if not the same, risks. Hence, while there may be differences in operational aspects, they must evolve a common risk management framework, which is why we have recommended that it must be approved by the Governing Council. A brief note on enterprise risk management is in Appendix III.7. Taxpayer services, Taxpayer Education and Communication The responsibility, work delivery, and overall structure of this directorate have been dealt in detail in Chapter II. However, the only point to be emphasized here is that a number of customer facing functions, which are currently dispersed across different parts of the organization, will be handled in this vertical to ensure customer focus in taxpayer services. This vertical, to be headed by an officer of the rank of Principal Chief Commissioner, will take responsibility for customer services other than those handled in compliance verification and dispute management. It would have its own field organization spread across the country for delivery of taxpayer services. Its main functions would be:
In the field, efforts should be made to set up common front offices for direct as well as indirect taxes so that taxpayer convenience is maximized. Large Business Service Based on appropriate criteria such as revenue, turnover etc., large businesses (including their subsidiaries, associated companies etc.), say the top 1,000 taxpayers, would be serviced in this vertical. The organization, the criteria etc., should be a matter of taxpayer segmentation by the tax administration and the inclusion or exclusion of a business in this should not be a matter of option for the taxpayer as it is under the current scheme of LTUs. The coverage will extend to all taxes – direct and indirect, except customs. To achieve this, the two Boards need to be given greater autonomy in their functioning, while being made more accountable for higher levels of performance. The exact nature of autonomy needed is discussed a little later. The paragraphs that follow deal with structures for high level governance and policy making, and then deal with the restructuring of the organizations under the two Boards to make for better co-ordination and integration between the two to ensure greater efficiency and effectiveness in order to take the Indian tax administration closer to international best practices. Bringing customs within the fold of this service, however, needs careful examination by the Boards. Internationally, only a minority of tax administrations have brought customs within their large taxpayer operations. Admittedly, there are difficulties in bringing customs within such operations, having regard to the differing nature of customs operations. However, there appears to be no reason why operations such as post-clearance audit, where there are obvious advantages to be gained from having a multidisciplinary approach, should not be covered here. The LBS would have its headquarters headed by an officer of the rank of Principal Chief Commissioner from either service of IRS – direct taxes or indirect taxes, to be selected jointly by the two boards. The Principal Chief Commissioner heading the LBS function would be assisted by the required number of officers of the rank of Chief Commissioners and below from both the services. It would also have officers specializing in specific areas such as identified industry clusters (such as financial sector, manufacturing, ICT-enabled services, etc.), specific areas of taxation (such as international taxation, taxation of services, transfer pricing, etc.) depending on client profiles and the significance of specific areas. The LBS functional vertical would also have support functions, such as ICT, HR, and finance embedded within it. These officers would have reporting in a matrix type structure with direct reporting to the line superiors in the LBS, and functional reporting to the respective functional vertical. For example, an Additional Commissioner would report for all purposes to his superior, i.e. the Commissioner, but can report to the transfer pricing vertical in case he is required to do so. Similarly, if there is a transfer pricing officer working in the LBS, the officer functions would work under the Commissioner for all functions but guidance on work performance or fulfilling data requirements can be done through the DG (International Taxation) vertical to ensure access to updated information on the subject. The headquarters should primarily be responsible for developing programmes and policies, and monitoring the performance of field units. The Principal DG would report to both the Boards and co-ordinate with the concerned members in the Boards. The two Chairpersons would jointly monitor his performance. The delivery of LBS can be through Large Taxpayer Units located in major cities headed by Chief Commissioners from either service, and assisted by Commissioners and officers below them. Compliance Verification including Audit (Scrutiny in direct taxes) This vertical, separate under each Board, would look after the entire spectrum of compliance verification activities, which would include scrutiny of assessments and audit of taxpayers. The headquarters will be responsible for audit policy and risk management. It would also be responsible for developing audit strategies and for co-ordination of audit activities. The plans and priorities for audit for each year, based on emerging issues, will be developed in this compliance verification vertical. DG (Compliance Verification), an officer of the rank of Principal Chief Commissioner, will also monitor the performance of audits, which will be conducted through the field units. The vertical will comprise units as shown in Diagram 3.9 below.
The functions of this directorate will be as follows:
The delivery of the audit programme of this directorate will be through field units under Chief Commissioners reporting to DG (Audit).There will be regional units of the directorate in major cities for co-ordination and liaison with the Chief Commissioners in the field. A typical structure of the field function is given in Diagram 3.10. This structure is the same as exists at present, except that the headquarters functions of the Chief Commissioner has been augmented considerably for greater focus on delivery and co-ordination.
A similar structure will exist for the CBEC. Dispute Management This vertical (separate under each Board), to be headed by an officer of the rank of Principal Chief Commissioner, will have the exclusive responsibility for dispute management that covers policies and measures aimed at dispute prevention, the processes and machinery for alternative dispute resolution and normal dispute resolution through litigation. All related functions will reside in this vertical and will be performed independently of other functions. This has been dealt in an exhaustive manner in Chapter V of this report. The headquarters of this directorate, as given in Diagram 3.11, will have the following units to perform the main functions:
There will be regional Chief Commissioners in the field. Their structure is given in Diagram 3.12.
It should be noted that the Chief Commissioner would also be responsible for Alternate Dispute Resolution (ADR) and Early Dispute Resolution (EDR) management. In ADR management, this would mean the appointment of arbitrators, including third party arbitrators, and making sure that timelines are adhered to by the arbitrators. Inspection, review and performance analysis will be another dimension of the work of the Chief Commissioner. Performance analysis would not only mean review for HR purposes, but also to make the process meaningful for taxpayers. The administration of the TDRC (discussed in Chapter V of this report) will also be the responsibility of the Chief Commissioner. Business Excellence This function will be headed by Member in each Board, with two directorates headed by Principal Chief Commissioners. One directorate will be Business Excellence and Continuous Improvement and the other will be Inspection. Business Excellence and Continuous improvement Customer focus and continuous pursuit of excellence have been identified as key foundational values for the tax administration. All high-performing organizations regard continuous improvement and business excellence as critical values. This requires the capability not only to craft effective strategy but also to continuously refine it, based on changing external conditions. These organizations work in an integrated fashion so that their internal processes and people development plans enable them to delight the customers. Proof of the effective functioning of an organization is provided by results. Chapter IV discusses performance management in detail. The business excellence function is charged with evaluating overall organizational effectiveness, formulating plans to overcome deficiencies and continuously improving performance quality. It looks at the process of preparing robust strategic and operational plans, capability enhancements to meet customer service goals and assess the tools and approaches for performance review. It will also be responsible for the quality assurance function, building internal capability to continuously improve the efficiency, and for benchmarking the organization against global best practices. Along with the people function, it will have a key role in the process of institution building, such as how leaders are selected and developed and so on. The business excellence function will be responsible for continuously updating the Balanced Scorecard and helping each function in reviewing its performance through the use of this tool. It will thus be the custodian of the Balanced Scorecard. Monitoring the effectiveness of the organization structure and the efficiency of the organization will also be part of this function. To achieve this, it will regularly review business processes and ICT capability to continuously improve service capability, analyse quality issues for improvement, review annual performance to incorporate learning into improving the system and benchmark with global best practices. Inspection Inspection is an internal control, and provides an opportunity to make policy corrections in the overall delivery of programmes and helps in minimizing operational mistakes to ensure orderly, ethical, economical, efficient and effective operations. Such controls are designed to fulfil accountability obligations and safeguard resources against loss, misuse and damage. An inspection determines whether the services are of desired level and in conformity with policy objectives. This vertical will prepare guidelines and SOPs for inspection. The existing DG (Inspection) on the CBEC side and DIT (Inspection) on the CBDT side can be transformed to be the respective inspection directorates of the two Boards. These directorates will need to be completely revamped to achieve the overall goal. It will be responsible for carrying out administrative and technical inspections of the field formations. It will also have regional offices for co-ordination with field units and to carry out inspections and studies in their regions. The vertical will be responsible for residual processes, such as compilation of residual manuals, SOPs etc., which do not fall within the domain of any other vertical. The responsibility for statutory forms, however, will be with the respective legislation/policy vertical but with ICT, taxpayer services and quality assurance inputs. Collections/Debt Recovery This process has been dealt with in detail in Chapter VI of this report. At present, this function is being largely handled by the AOs in the case of direct taxes and officers designated as tax recovery officers (TROs) on the indirect taxes side. TROs on the direct tax side are responsible for collections only in those cases that have been certified to them by the AOs. The nodal agencies, namely the Directorate of Recovery in CBDT and Chief Commissioner (Tax Arrears Recovery) in the CBEC, have a largely monitoring role. There is urgent need to have a separate vertical in each Board so that the key recovery policy as well its implementation is carried out in a coherent manner. The tax collection vertical would also be responsible for managing the central database so that all relevant information on taxpayers is available at one place. Records of tax arrears should also be maintained in this directorate and its field units, along with the database of tax defaulters for enforced recovery. This database should be shared on a regular and seamless basis between the CBDT and the CBEC. Co-ordination with other government departments like the Ministry of Corporate Affairs, SEBI, IRDA etc., will also be carried out by this directorate and its field units. The Principal Chief Commissioner/DG should be allowed to take the help of recovery agents like financial institutions in India are.22 In the above context, it is important to mention that the process of enforced debt collection is a highly time-sensitive function and requires fast access to accurate information concerning all aspects of a taxpayer’s affairs, including complete information on tax debts and outstanding tax returns and other information (e.g., asset data) that can be utilized to assist enforcement of the law. ICT systems can facilitate these activities by providing a number of tools that would improve the efficiency and effectiveness of collection enforcement activities. These would include the following:
Another area of work that can bring a differentiated approach to recovery work would be to develop a risk-oriented approach towards taxpayers. Coercive collection measures can be adopted on that basis to reach all tax debtors (equality before the law). This risk-oriented approach would make a distinction between good, not-so-good and bad taxpayers. The objective database can be used to develop a scorecard methodology and give a “score” to each debtor, indicating the likelihood of tax debts being settled within the stipulated time period. The choice of measure to collect tax debt can also be based on that “score”. As a result, taxpayers will receive differentiated treatment based on fixed and objective risk profiles. Many tax administrations have set up models for tax debt analysis, such as discrete event simulation and system dynamics.23 Both are simulation techniques. These models allow debt movement through the system, and allow the tax administration to take a proactive approach. The directorate should move towards that level of exactitude.
In its functions, the Principal DG will be supported by centralized facilities like a call centre and have its own field organization to undertake its tasks on a full time basis. The DG should have full powers of duty deferment and write offs, which should be appropriately delegated to field officers below him. The structure of the directorate is given in Diagram 3.13. Regional Chief Commissioners will deliver the recovery functions in the field under a separate structure as shown in Diagram 3.14.
The CBEC will also have a similar structure. In the CBEC, there will be no separate field units for excise, service tax or customs. Enforcement Voluntary compliance is the most effective and efficient way of collecting taxes, but not all taxpayers comply voluntarily with their tax obligations. It is for these non-compliant taxpayers that enforcement activities need to be launched. Non-compliance can be for different reasons. Some taxpayers may be willing to comply but fail to do so because either they make a mistake or they do not know their obligations or they do not understand what they are supposed to do. But there is another category of taxpayers that commits fraud deliberately and sometimes consistently. Enforcement activity is for such taxpayers. Currently, the enforcement functions in the CBEC and CBDT are handled through DG (Revenue Intelligence), DG (Central Excise Intelligence) and DG (Investigation), respectively. These directorates are already specialized in their functions and do not require any change. However, much greater co-ordination is needed in terms of greater use of ICT and extensive sharing of information between them, both at the headquarters and field level. There is also need for adoption of HR policies that are conducive to the development of specialization. While DGs in the present role are field functionaries, there is need to have a directorate, to be headed by an officer of the rank of Principal Chief Commissioner, who would have the responsibility to co-ordinate and develop programmes in the CBDT, as seen in other verticals. This directorate should co-ordinate tax information and identify the modus operandi in cases of tax frauds. The directorate should be responsible for integrity, expertise and effectiveness of the enforcement wing. This directorate will also be responsible for the working of the Directorate of Prosecution. In the CBEC, each commissionerate has an in-house preventive and intelligence wing. With functional restructuring, these wings can be brought under the respective DGs, namely DG (RI) or DG (CEI). Under the CBDT, the DGs (Investigation) already function along these lines. In Chapter VI, we have also recommended that a Directorate of Prosecution be set up under each Board to supervise prosecution. At present prosecutions are launched locally under the respective Chief Commissioners. While there is a prosecution policy to guide field officers, there is a need to apply it consistently and on the basis of expert examination of cases. This can be the mandate of the directorate of prosecution, which can be manned by people with skills, experience and background in criminal trial (including criminal lawyers) so that prosecutions are launched on a consistent basis, with due application of mind, and are effective. While prosecution may continue to be carried out in the field, launching prosecution may be on the advice of the Directorate of Prosecution. International Co-operation in CBEC A number of initiatives are being undertaken in the area international customs co-operation under the auspices of the World Customs Organization and under different multilateral forums. It is desirable that India participates and takes a leadership position in its areas of strength and also gains from international co-operation. Currently, only a small cell in the CBEC handles this work. In view of the increasing volume of work and the increasing importance of international co- operation, it is recommended that a separate directorate with adequate resources is established to fulfil this role effectively. Most customs organizations have such set ups. This will be exclusively a headquarters-based set up to assist the Board. ii) Horizontal or support layers Information and Communication Technology Information technology is the key underpinning of all modernization efforts and although it has to be positioned as a support function, it necessarily has to be seen as more than just that. To enable the achievement of its potential, it needs to be seen very strategically as a potent value lever for the organization. Far more resources, therefore, need to be dedicated to this function and its importance should be reflected in the strategic thinking of the Boards. This has been discussed in detail in Chapter VII of the Report. However, the key point to be emphasized is that ICT coverage must be comprehensive in that it must extend to all processes across all functional domains so that manual processes are eliminated. Further, where there are multiple systems, they must be interlinked or integrated so that the required information is available to officers on their desktops. Considering the size and complexity of the organizations under the two Boards, this is a huge task and both organizations are woefully under resourced. Compared to the total staff strength of the CBDT of 78,500 after the recent cadre-restructuring, the sanctioned staff strength of the Directorate of Systems is stated to be around 630; while the sanctioned staff strength is 84,875 in the CBEC, the Directorate of Systems has a strength of only around 200. Therefore, the two DG (Systems) need to be substantially strengthened. Among other things, we have recommended the creation of a special purpose vehicle (SPV) for robust ICT implementation in Chapter VII of this report. Notwithstanding the creation of such an SPV, a strong ICT team is still required in-house for both the CBEC and the CBDT. This directorate would be the interface of the respective Board with the SPV. The DG (ICT), in the rank of Principal Chief Commissioner, should be the Chief Information Officer (CIO) of the Board and should be involved in key business decisions. This position is required in each Board. The main domains and critical functions that will have to be managed in this directorate are discussed below.
As mentioned earlier, in each key vertical, there would be an ICT team embedded, which would give support to that vertical. They will ensure adherence to norms, standards etc., laid down by DG (ICT), co-ordinate training and development efforts, change management efforts etc on behalf of the CIO. Their responsibility will also be communicating feedback, requests, etc., from the field to the CIO. Besides, this function will handle co-ordination with field functionaries.
The CIO should provide thought-leadership in technology adoption and promote a high level of business-ICT integration so that it gets embedded in both decision making and business processes. It will have to develop the ICT strategy for the respective organizations including decisions on overall technology architecture, outsourcing and technology support for advanced analytics, data mining and data warehousing technologies. Such ICT strategies should be a subset of the overall business strategy. Experience shows that one of the gaps most difficult to bridge is the one between business leaders and ICT specialists. There is an acute scarcity of senior leaders who have an understanding of the potential of ICT and key aspects of ICT governance and this is a serious constraint in achieving business-ICT integration. A key function of the DG (ICT)/CIO should be that of a “translator” between technology and business leaders to bridge this gap and, therefore, it is necessary that he is involved in important decisions relating to business strategy.
This deals with management of operational systems and covers aspects like
Behind each critical business application, a team is needed to support key functions, some of which are
This is a highly critical function considering the confidentiality and sensitivity of data held by the two departments. This has to be an independent function separate from the other ICT teams. The chief information security officer will also act as the Chief Risk Officer for ICT. The main functions would be
This will deal with the development of proof of concept to try out futuristic out-of-the-box ideas. It will involve continuing research on emerging trends and technological developments and close interaction with academic institutions and product and service firms to gain insights into the potential for new development. HR, Capacity building, Competency development This is another critical area in which the CIO will play a key role. It hardly needs emphasis that effective ICT implementation needs a wide range of skills. ICT skills, in terms of using business applications, will be a basic requirement for all staff. More advanced skills are needed for senior officers in terms of using the various reporting tools etc., and officers posted in the ICT wing would need highly specialized training in specific technical areas. Participation in technical seminars and events will be essential since this adds to the knowledge base of officers. Besides, every new roll out of application or a major change needs to be accompanied by a robust training effort. CIO/DG (ICT) will have to closely interact with DG (HR) and the respective training institutions to ensure that these needs are met.
This is an important, though often neglected, area. ICT contracts are extremely complex contracts and unless experience and skills of contract management are available in the organizations, projects suffer. If an SPV is set up, as we have recommended, many of the functions would be performed in the SPV. However, the crucial aspects of strategic control, technology architecture, and decisions on new developments, security and data policies and service management would still need to be performed within the DG (ICT). Human Resource Management Traditionally, in the government context, this has been largely an administrative function focused on personnel management in terms of compliance with relevant rules and procedures. Even though the DGs (HRD) or the Chief Human Capital Officer (CHCO), an officer of the rank of Principal Chief Commissioner, have been given a little wider mandate, they seem to lack adequate support and infrastructure and the organizational context in which to fulfil the wider mandate. We have dealt with the “People” function separately in Chapter IV of this report. Hence, here we touch only on the salience of the function and its critical role in the context of the governance framework that we are recommending. Today, in the HR function, for example, transfer policy and action is capricious at best, ruthless at worst, and there are several cases of irrational decisions that can be cited with ease. There is little accountability on senior officials for taking meaningless action on transfers resulting in an unnecessarily costly impact – pecuniary and non-pecuniary – on dedicated officers. This is often carried out as part of a poorly thought out transfer policy that is unstable, unpredictable and unpractised in civilized HRD environments. There is drastic need for change in this area and possibly some naming and shaming of officers taking such decisions. It cannot be gainsaid that the key element in any transformational effort is the people in the organization. A policy is only as good as its delivery and to ensure that the tax administration meets it performance goals and the expectations of tax payers, careful attention needs to be paid to all aspects of people management. Hence, the role of DG (HR), who, in fact, should be regarded as the Chief Human Capital Officer, is very critical. Congruent with the organization’s plans in relation to ongoing and future activities, he will be responsible for the development and maintenance of HR policies, policies and processes for performance management and performance appraisals, capacity planning and development, meeting the requirement for specialized skills etc. There, thus, needs to be an intimate link between functional areas and the DG (HR). In the proposed matrix structure, officers handling these functions will have a line of reporting to DG (HRM), apart from reporting to their superior in the vertical function. This will ensure the development of such a close link. Diagram 3.15 shows the structure of the DG (HR).
The same applies to the two other support functions listed below, namely, infrastructure and logistics, and finance and accounts. Finance and Accounts We have already discussed in this Chapter the role of a CFO at the level of a member in each Board. In line with the reasons stated in Para III.4.e, there is also a need to have an officer, DG (F&A), in the rank of Principal Chief Commissioner in each Board to carry out operations. The directorate under him will be responsible for fund allocations, financial evaluation of different projects and programmes, and will act as a financial monitor for the organization. He will, thus, have a stake in the success of the projects and programmes of the organization as he will be intimately involved in crucial decision making. Financial control will, however, continue to be an important part of his functions; but it will be only one of the functions. The role of CFO has been detailed in Appendix III.8. There should be a separate vertical under the DG (F&A) for financial control and audit. Functionaries of this vertical will be embedded in different functions of various vertical and horizontal functions. These officers will report for functional purposes to the Chief Commissioner, but for guidance purposes, will look towards the DG (F&A). Such a structure will allow delegation of financial powers at each level to bring celerity into the decision making process. Diagram 3.16 shows the structure of the DG (F&A).
Infrastructure and Logistics This function will be responsible for the provision of all physical infrastructures such as premises – offices, residential accommodation, guest houses, deals with hotels etc, vehicles and other facilities. It would deal with the acquisition of equipment involving large capital outlays, for example, container scanners, X-ray detectors etc. for customs. Each of the infrastructure and logistics directorates in the two Boards will be headed by a person in the rank of Principal Chief Commissioner as is the case even now. The role of the directorate would be to address organization-wide infrastructural gaps. For example, one of the most common reasons cited for delays in the field and inadequate taxpayer services is that records are often not available due to poor record management. DGs (Infrastructure and Logistics) of the two Boards need to explore a national solution to this problem. Outsourcing is a viable option that has been adopted by many organizations. The CBDT’s CPC is a good example that needs to be emulated elsewhere. Diagram 3.17 shows the structure of the infrastructure and logistics directorate.
III.5.b Restructuring field formations along functions Field formations under both the Boards currently consist of regions/zones headed by Chief Commissioners under whom the Commissioners, Additional. Commissioners, Deputy Commissioners etc., function. In income tax, there is a degree of segmentation in as much as in major cities, there are separate charges for corporate cases, salaries etc. However, all major functions such as assessment/audit, enforcement, recovery, etc are under the charge of a Chief Commissioner or Commissioner. Commissioners (Appeals) are independent. However, their reporting channel is to the respective regional/zonal Chief Commissioner. Thus, field formations are currently largely organized to handle all key functions in a particular geographic region. In order to bring about a functional orientation, field offices would need to be restructured along the core functions of taxpayer services, compliance, audit, dispute management, enforcement and recovery, etc., as discussed above. Thus, the field formations will be under the chief commissioners responsible for the above core functional verticals under the respective directorates general. The location and geographical jurisdiction of the Chief Commissioners will be determined by the workload and needs of a particular function. Similarly, in central excise, in the audit vertical, there will be zonal or regional Chief Commissioners who will be exclusively tasked with functions relating to dispute management. They will be assisted by teams of Commissioners, Additional/Joint Commissioners, Deputy/Assistant Commissioners and other officers and staff. The field work will be handled by audit commissionerates, which will have the required number of audit parties under them. Audit teams will be organized along functional specializations either according to industry/service sectors or taxpayer segments. In large metropolitan centres, the commissionerates themselves could be organized along the key industry/service sector segments such as banking and insurance, software, real estate, automotive, etc. Similarly, in the dispute management vertical, all the key functions will be supervised by a zonal/regional chief commissioner who is tasked exclusively with this function. He will supervise the work of:
He will be responsible for reviewing and monitoring the achievement of performance targets in the area of dispute management and giving feedback to the DG (Dispute Management) about emerging issues of significance. The horizontal functions, such HR, finance and ICT, will be embedded in this vertical and officers discharging these functions will follow the matrix pattern of dual reporting, i.e., they will report to their superior in the functional vertical and will have the so-called “dotted” line reporting to the concerned horizontal. This will ensure, on the one hand, that policies in the respective domain such as HR, finance etc., are properly implemented and, on the other, that the needs and concerns of the functional vertical are communicated to support functions. A similar pattern will be followed for the other verticals such as taxpayer services and collections/debt recovery. There will be field organizations headed by Chief Commissioners reporting to the Principal DG in the respective vertical, with embedded support functions like IT, HR, finance and administration in a matrix structure as illustrated above. To sum up, the recommendations above will lead to a functional restructuring of the CBEC and CBDT and their directorates and field organizations. Barring commonalities in governance and in certain functions, they will operate separately in respect of the medium and small taxpayer segments. However, for the large business segment, they will operate jointly, as already discussed above in detail. Appendix III.9 gives the estimated number of Principal Chief Commissioners and Chief Commissioners in each Board for different functions. III.5.c Redesigning roles and functions in field formations to promote clear lines of responsibility and accountability With the reorganization of the structure and functions along core functional verticals, there will be enhanced clarity in role definitions of officers and a greater scope for setting appropriate performance targets to achieve performance goals in the respective functional areas. This would usher in clearer lines of accountability as they would be responsible for specific functions within the respective domain. Officers, for example, working in the customer relationship office would have performance goals focused on that area only and would be judged on their performance in that area. The matrix structure, as already discussed above, would also promote greater integration between the functional vertical and the horizontal support layers and provide a greater voice to the “internal customer” when it comes to servicing his needs. III.5.d Promotion of specialization in key areas – industry groups, taxpayer services, technology, finance etc Functional orientation would also promote specialization in the respective area. However, this is dependent heavily on the adoption of HR policies that promote such specialization. While this is dealt with in detail in Chapter IV of this report, it needs to be stated here that the objective of functional orientation can be achieved only when the assignment of people to these functions is based on an assessment of their competencies in the relevant area, stability of tenures in that area and continued learning to upgrade their skills in specified areas. It is a truism that tax compliance gets affected by various factors such as industry structures, the peculiar economic factors affecting specific sectors, the behaviour of players in the given sector etc. Tax administrations can respond to challenges appropriately only when they develop specialized knowledge about such factors; therefore, there needs to be continuing research to discover risks and adopt appropriate strategies to mitigate them. It is, therefore, essential that such specialization is encouraged by selecting suitable officers and providing them sufficient tenures to develop specialized knowledge/in key sectors. The other dimension is that different functions require different skills and mind-sets. The officer who has a natural bent and interest in development and collection of intelligence regarding smuggling may not fit as well into a customer service role. Similarly, someone who has acumen in information technology may not do a great job as an auditor. In the current system of transfers and placements, the likelihood of mismatches between people and assignments is quite high and HR policies need to change to attain a better fit between the organization’s requirements and the skill sets and aptitudes of officers. III.5.e Structures congruent with the potential offered by IT and designed to promote consistent levels of performance and services There are some processes in which the key driver is efficiency and there are others where it is effectiveness. Examples of the former are processes like return processing, refunds, duty drawbacks etc., and of the latter, processes like dispute resolution, in-person customer services etc. In the former category, international experience shows that great savings of cost are possible through centralization, which is made possible by ICT. The CBDT has already adopted this approach when it set up the first CPC at Bengaluru and then followed it up with the TDS CPC at Ghaziabad. The benefits of this are beyond doubt and the CBEC needs to emulate this example and centralize the processing of returns in central excise and service tax. Even in customs, it would be possible to centralize the processing of bills of entry and shipping bills. There are multiple design options possible. If centralization in a single facility is not possible, work can be concentrated in a few major customs houses organized along specialization in terms of tariff lines. Thus, if the best expertise in the ICT sector is concentrated in Bengaluru, it can be given the responsibility for processing all bills of entry across the country, while some other customs house manages other sectors. Only physical examination, when required, needs to happen in the respective location. On the other hand, where decentralization is required because of the need for say, a tax payer’s convenience, a robust ICT processing and knowledge management system will, for example, enable greater devolution of functions to the front desks so that the taxpayer needs can be serviced more quickly and effectively. III.5.f Appropriate placement of functions The guiding principle for placement of functions should be that (a) as far as possible solutions are delivered at the front desk and the customer should be unaware of the complexities at the organization’s back end and (b) where special skills are required to address a particular issue, that knowledge or skill should be brought into play at the earliest possible stage. For example, we have recommended the early dispute resolution mechanism in the dispute management vertical, comprising panels of officers in dispute resolution panels and alternative dispute resolution so that a taxpayer gets direct access to authorities empowered to resolve issues. Therefore, routine tasks should be delivered at the front desk through adequate delegation and, as far as possible, through the use of technology remotely as in-person services tend to be more expensive. In designing ICT solutions, extensive provision for self-help will further reduce the load on the administration. On the other hand, there should be seamless escalation to expert knowledge within the organization when relatively more complex issues have to be addressed. III.6 Role of Knowledge, Analysis and Intelligence (KAI) and its integration for operational effectiveness This has been discussed in detail in the Chapter VII of this report. As noted earlier, the use of data analytics in the two Boards in policy development as well as in operations is much less than warranted. There is huge potential for improvement in this area, given the wealth of data available to the two organizations. In this age of big data, successful organizations use information and knowledge as the key lever to transform their operations and tax administrations are increasingly following the lead of the private sector in using data analytics to refine their policies and operations. This requires advanced analytical capabilities both in terms of technological and human skills. Both Boards have moved to the acquire business intelligence tools, reporting tools, etc., in their data warehousing projects. However, the benefits of these technologies cannot be fully realized until the data held by the two Boards is unified. And the real leverage will come when the combined tax data is linked with data from external sources for the purpose of analysis. The potential is immense in both policy and operational areas. With advanced tools that are getting increasingly refined, it is possible to discover hidden risks and potential opportunities, build predictive models, create simulations on historical data for ‘what if’ analyses and build sophisticated rule sets to screen transactions. To catalyse analytics efforts, the trend among forward looking organizations is to create a centre of excellence, which works with businesses to develop and deploy analytics rapidly. Most often, it includes data scientists, business specialists, and tool developers. Centres of excellence can become hotbeds of learning and innovation as teams share ideas on how to construct robust data sets, build powerful models, and translate them into valuable business tools. The KAI centre would be the hub of such analytical activity and would release the huge potential for exploiting the value lying in the rich data that the Boards hold and are acquiring every day. Its goal should be for it to be so successful at building data-analytics capabilities that the organizations can tackle increasingly ambitious initiatives and programmes with an emphasis on analytics innovation and breakthrough insights. Talent is a critical issue in this area. The skills required are typically a combination of advanced ICT and analytical skills and strong business knowledge combined with experience in making business decisions based on data analysis. While it may be possible to train some willing and capable IRS officers, it will not always be possible to create such skills in-house and they may have to be sourced from outside. Considering the acute scarcity of such skills, what will be needed is a creative way to source and retain talent; this is an example of an area where autonomy from normal governmental structures and processes is needed. In view of this, and in view of the fact that it is highly ICT intensive, it would be best incubated in the SPV. Its locus in the organization would normally be that part where it will be most impactful and this would appear to be the DG (SRPM). It must, however, service the deep analytical needs of the other verticals such as customer services, compliance management, enforcement etc. The KAI centre must necessarily be a shared service between the Boards for best results. Given the highly specialized nature of the tasks, it is also essential that the KAI centre is led by a highly qualified expert in the field. Having regard to the requirement of intensive research orientation, the KAI centre would need to be empowered to develop close links and relationships with reputed national and international research institutes, universities and private sector bodies specializing in data analytics. III.7 Autonomy and independence coupled with responsibility and accountability –relationship with Ministry of Finance (MoF) The powers and functions of the two Boards and the lack of clarity in their secretarial functions, as also the lack of financial and administrative authority in the present set-up, have attracted considerable debate time and again. This anomalous arrangement is exacerbated by the separate arrangements for financial powers to the line departments under the two Boards – separate demand for grants exist for the two departments, but the two Boards do not have any financial power and have no role in projecting and prioritizing financial requirements. Similarly, service structuring as well as placement is again often dealt with by the Department of Revenue which not only results in avoidable delays but also undermines the authority of the two statutory Boards. The present system is also quite contradictory to international best practices, which is that revenue bodies, either functioning as departments of the government or as completely autonomous organizations, report directly to the minister. The Revenue Secretary occupies the apex position in the Revenue Department and is selected from the Indian Administration Service (IAS). He is likely to have little experience or background in tax administration at the national level and little familiarity with tax, including international tax, issues that are increasingly taking centre stage in emerging global challenges in taxation. Yet s/he is the final signatory on decisions on tax policy and administration matters prior to their arrival for the Finance Minister’s consideration. The TARC found that this has translated to the Indian tax administration’s attention and concerns – in the form of the Revenue Secretary’s control over the CBDT and CBEC - to mainly represent the Revenue Secretary’s area of familiarity, i.e., general administration, in which s/he may be highly competent but which is likely to possess only thin links to the most challenging matters of tax policy making or modernizing tax administration in the light of current global practices. In a sense, this peculiar practice has assigned the ultimate responsibility for administration and financial control lying with the Revenue Secretary – This is not the first time that a government committee has found that this admixture is anomalous, and that the post of Revenue Secretary is superfluous. It was considered by the Tax Reforms Committee, 1992, chaired by Prof. Raja J. Chelliah. The Committee’s views were as follows:
The TARC’s finding regarding the role of the Revenue Secretary is congruent. It is surprising that government has so far not visited this matter and, as will be developed in detail in this report, it is time to give renewed attention to it due to its adverse impact on the efficacy of the tax administration in India. Interestingly, the Chelliah Committee not only recommended abolishing the post of Revenue Secretary, but also emphasized financial autonomy for the two Boards. To quote,
Selected matters relating to the administration/financing structure had been examined in the case of the CBDT by the even earlier Wanchoo Committee, 1971. It recommended making the Board an autonomous body, independent of the Ministry of Finance, with the Chairman enjoying a status equivalent to that of a Secretary to the Government of India as in the case of the Post & Telegraph Board. The subsequent Choksi Committee, 1978, reiterated that,
This issue of the administrative set up of direct taxes was also examined later by the Estimates Committee of Parliament. In its 10th report (1991-92), the Committee made the following recommendation in Para 3.77 of their report:
With regard to the Committee’s observation that the two Boards are “fairly distinct from each other and do not require more coordination than that is necessary”, the TARC notes that since 1991-92 international experience has clearly moved counter to the Committee’s observations and as noted in Chapter III, the dominant global trend is in the direction of unification of direct and indirect tax administrations and treating corporate tax and VAT/GST together as business taxes. The TARC has worked along similar lines. First, it agrees that the post of Revenue Secretary does not merit presence in a modern tax administration. Instead, a Governing Council should be introduced with the chairs of the Boards alternating as its chairperson. In this manner, the TARC adds to the tenor of the Chelliah Committee in that India should benchmark itself with modernizing tax administrations by not only removing the position of Revenue Secretary but by replacing it with a Governing Council that should include members from the non-government sector as well. The Governing Council will oversee the functioning of the two Boards and approve broad strategies to be adopted by the tax administration to fulfil the objective of a more co-ordinated approach to the administration of the two taxes – direct and indirect – and create a structure which is independent.24 Such a co-ordinated approach also improves the focus of the tax administration towards its customers, or taxpayers. Second, synergy in tax policies and legislation between the two tax areas is to be achieved through a Tax Council, headed by the Chief Economic Adviser (CEA) at the Ministry of Finance. The Tax Council will bring the rigour of economic analysis and high precision in legislative drafting to tax laws so that tax laws are not only of assured quality, but are also coherent across tax types. The TARC found that the CEA is more equipped to deal with the links between tax and economic policies than the Finance Secretary (who was given a role by the Chelliah Committee). This new pattern reflects prevalent global practice in which tax and the economy are recognized to be intrinsically linked. That link needs to be established in India rather than linking it with external administrative control, apparently to accommodate an administration oriented service. The proposed structure would result in more autonomy in the functioning of the tax administration, which is unlikely to be achieved in the present structural framework as it fails to empower tax departments to carry out their assigned responsibilities efficiently. The Task Force and Direct and Indirect Taxes, 2002, chaired by Dr. Vijay L. Kelkar, had also recommended that both the CBDT and CBEC should be given requisite autonomy (Para 3.69 of the report on direct taxes and Para 7.2.2 of the report on indirect taxes).25 The present functions of the DoR could easily be handled by the two Boards. The TARC could not identify the rationale for entrusting such functions to a separate body. Functions such as prevention and combating abuse of narcotic drugs and psychotropic substances and illicit traffic therein, Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, and the administration of central sales tax can be looked after by the CBEC while the enforcement of the Foreign Exchange Management Act, 1999, and Prevention of Money Laundering Act, 2002, can be looked after by the CBDT. The administrative functions relating to the Authority for Advance Ruling, Settlement Commission and Ombudsman can be delivered through the respective Boards. The Governing Council and Tax Council will operate as single entities over both the Boards to achieve better tax governance. The Councils anticipate the eventual convergence of the two Boards. Over the next five years, the two tax departments would move to a unified management structure, i.e. a common Board and operate the services for both taxes, as shown in Diagram 3.5. This would pave the way over another five years to a fully integrated tax administration with corporate tax, excise duty and service tax, together comprising taxes on business. When major functions of the tax administration are organized along functional lines, and not on merely tax lines, it will enhance taxpayer as well as staff convenience. This reflects current global practice. This would, of course, not be at the cost of specialisation in different tax types. III.8 Recommendations The Commission recommends that:
Chapter IV People Function Table of Contents IV.1 Current structures, processes and practices IV.2 Global practices
IV.3 Way forward a) Organizational alignment
IV.4 Vigilance administration a) Code of ethics
IV.5 Recommendations Appendix IV.1 Directorates General of Human Resource Development Appendix IV.2 Directorates General of Vigilance Appendix IV.3 Statement of vacancy positions in CBDT and CBEC Appendix IV.4 Balanced scorecard for Indian tax administration Chapter IV People Function IV.1 Current structures, processes and practices Human resource development, i.e., people function in both the Boards is under the overall supervision of Member (P&V) and discharged by different sections of the Board through the Joint Secretary (Administration) and two directorates general, namely Directorate General (HRD) and Directorate General (Vigilance). The latter is also the Chief Vigilance Officer (CVO) of his Board. These directorates act as links between field formations and the Boards. All decisions for and on behalf of the President of India are taken in the ministry and the directorates dealing with HR functions provide necessary technical support to the ministry for the discharge of various functions. Besides, the two national academies, namely, the National Academy of Customs Excise and Narcotics (NACEN) and the National Academy of Direct Taxes (NADT), which service the capacity building and training needs of the two tax administrations, also report to the respective Member (P&V).The HR organizational structures of the Member (P & V) of the two Boards are indicated in Diagram 4.1 below.
A brief write up on the DGs (HRD) and the two national Academies is in Appendix IV. 1. A short note on DG (Vigilance) is in Appendix IV.2. The two departments, i.e. the income tax (I-T) department and the customs and central excise department (C&CE) headed respectively by the CBDT and the CBEC, are two of the many central government departments. Unlike in the matter of tax policies, where they enjoy relative autonomy, in matters of HR policy, they are guided by the nodal department of the central government on personnel matters, namely the Department of Personnel and Training (DoPT). The DoPT issues circulars, memorandums and notifications on various personnel matters from time to time, spelling out the view or the decisions of the Government of India on personnel and service matters. The CBDT and CBEC have to frame their HR policies in conformity with the prescriptions of the DoPT. Even the broad parameters of the performance appraisal scheme prevalent in the central government have been framed by the DoPT (on the recommendations of the Administrative Reforms Commission) and the departments have been asked to devise their appraisal forms in conformity with such guidelines. All employees of these departments are central civil servants. Their code of conduct is governed by the same Central Civil Services (Conduct) Rules and disciplinary proceedings are governed by Central Civil Services (Classification, Control and Appeal) Rules that are applicable to all other employees of the central government. Moreover, the protection of Article 311 of the Constitution is also extended to them. Government departments in India do not have the freedom to fix their own pay bands. These are decided by the central government on the recommendations of the pay commissions, which are set up from time to time. New pay scales and provisions for all kinds of pay and allowances, including performance related pay, can only be introduced after going through the associated process of approval by the union cabinet. Recruitment in the departments is done through the annual Civil Services Examination of the Union Public Service Commission (UPSC) for the IRS cadres and the Combined Graduate Level Examination of the Staff Selection Commission (SSC) for subordinate employees, such as inspectors and tax assistants. The qualifications for these examinations and the schemes of these examinations are framed by the two commissions according to qualifications and norms for such recruitment prescribed by the Government of India (DoPT) from time to time. They are common competitive examinations for entry into central government and the entrants are expected to be equipped for the specific responsibilities that they are required to discharge on joining the departments they are assigned to through training by the recruiting departments. Promotions to the IRS, and by the selection method within the IRS, require consultation with the UPSC; the departmental promotion committees are chaired by Chairman/Member of the UPSC. Fifty per cent of the vacancies in the IRS at the entry level are filled by candidates sponsored by the UPSC and the other 50 per cent by promotion from the Group B cadres in the two departments. Promotions from one grade to another in the two departments, like all other government departments, are governed by the respective recruitment rules and guidelines issued by the DoPT. The rules have to conform to the model rules circulated by the DoPT and can be notified only after approval by the DoPT and in consultation with the Union public Service Commission (UPSC). Guidelines of the DoPT in matters such as determination of seniority and promotions are binding on the departments. In terms of the relevant guidelines and instructions, the selection of officers for promotions, depending on the grade in question, broadly falls into two categories – “selection” method in which there is a comparative assessment of candidates under consideration and “non- selection method”, which involves no comparative assessment and follows the principle of seniority, subject to the rejection of the unfit. Where the method is “selection”, there are benchmarks for the overall level of performance prescribed namely “Good”, “Very Good” and “Outstanding”. To be considered suitable for promotion, the candidate has to attain the prescribed benchmark. Earlier, those obtaining a higher grading of performance would supersede others, thus getting accelerated promotion over their erstwhile seniors by virtue of better performance. However, that has been done away with from February 2002 and now all those obtaining the prescribed benchmark are promoted in order of seniority. Thus, any sort of comparative assessment of officers has been done away with and promotions are almost completely seniority- based. There is little or no discrimination based on performance as far as the officers’ career progression is concerned. A major reason why this has happened is that the very basis on which performance assessment is based, i.e., the Annual Performance Appraisal Reports (APARs) introduced about three years ago, has itself got thoroughly debased. The APARs were developed as an improvement over the previous system based on confidential character rolls (CCRs), which was perceived to be too subjective and opaque as the assessment of an officer was not disclosed to him, unless it was adverse. The APARs were designed as a more open system with numerical scores that have to be disclosed to the officer being assessed. In actual experience, this has led to a complete deterioration of the performance appraisal process. One can do no better than quote the findings recorded in the booklet on Performance Management and Evaluation System published by the Performance Management Division of the Cabinet Secretariat.26 It candidly observes:
The process has promoted mediocrity and ceased to provide an incentive for performers to excel. Besides, the emphasis on seniority also means that officers are reaching senior positions in service, particularly the Board, with very little service left, leaving them with little time, energy and motivation to conceive and implement any medium or long-term plans. Clearly, there is a need for a meritocratic system that recognizes and rewards performance and provides for early identification of high performance, potential leaders who would reach key positions in time to make a difference to the organization. One of the central weaknesses of the performance appraisal system is that it is not based on reliable performance data. And this is because most processes in government still continue in the paper environment, making it difficult to collect and collate reliable performance metrics. The most critical requirement for a reliable performance management system is that the entire operations of an organization must, as completely as possible, shift to the digital platform so that performance can be measured reliably. Once this is done, the institution of a robust and reliable performance measurement and assessment system that enjoys every employee’s confidence no longer remains Both the Boards are the cadre controlling authorities for the respective IRS personnel, meaning that they handle issues of recruitment, transfers, promotion, disciplinary matters etc. of Group A officers. Similar functions in relation to Group B and C staff are handled by the cadre controlling chief commissioners in the field. On the whole, the HR function in the two Boards is primarily focused on administrative compliance with the personnel policies, rules and procedures that have government wide application. It is widely acknowledged that the entire system of personnel management in India has today become captive to a regime based on entitlements for government servants with little regard to their actual performance or contribution. The two Boards are not an exception to this. A large part of the energy and effort of those assigned the HR function in the two organizations is expended in dealing with such service matters and routine transfers and posting. The two Boards have a detailed transfer policy based on categorization of stations as Group A, B and C for the IRS and these policies prescribe the maximum tenures for officers in the three categories of stations at a time and over their service spans till the grade of commissioner. These policies also prescribe regular rotation of officers between what are called “sensitive” and “non-sensitive” posts within individual stations. Efforts are made by both Boards to select meritorious and suitable officers for the relatively more important postings. However, whatever else may be said regarding the merits and demerits of these policies, one thing is clear and it is that they are not calculated to promote specialization as they give little weightage to it nor do they take into consideration the individuals’ willingness, aptitude and attitude in relation to specific aspects of tax administration. Like in the case of the IRS officers, the officers at the Group B and C levels are also rotated regularly between different assignments, the so-called “sensitive” and “non-sensitive” ones, at the regional or zonal level and also within the local commissioners’ charges. The upshot is that during the transfer season, both organizations see a large part of their employees moving between assignments and, in that period, there is a general dislocation of work and lack of continuity in approach. Further, frequent changes also affect adversely accountability for work. This, in turn, affects the quality of service that the taxpayer experiences. In income tax, officers in the field expressed difficulties arising from the scheduling of transfers around the time when workload is at its peak, causing severe disruptions of work. Thus, it would appear that, as in the wider government, the HR function in both the Boards has largely remained in the paradigm of the old personnel management function, with its focus on establishment and administrative compliance with laid down rules and policies, control over employees and a very weak focus on the development of people. This contrasts sharply with the aspirations reflected in the vision/mission statements. For example, CBDT’s Vision 2020 categorically addresses this point thus: 4.2.7 Aligning HR Strategy to Goals
Positive changes in this direction have, however, commenced with the setting up of director generals of HRD under each of the Boards. Both the DGs have been given the mandate, inter alia, to assist the Boards in capacity development, develop strategies and human resource plans congruent with the departments’ vision and goals, and develop a Performance Management System (PMS). The TARC gathered that the DG (HRD), CBDT, has made good progress in developing a PMS for the income tax department and the relevant documents have been developed. Although the directorates have been in existence for some time, they continue to suffer from a shortage of officers. They have been staffed by diverting officers from other directorates and field formations and often have to depend upon such field formations to loan the required people to them. At the time of their creation, no separate sanction of posts was secured for them and the senior and junior staff and officers are drawn from the overall strength of the two departments. Inevitably, the staff strength remains highly inadequate for them to carry out even the limited scope of work they are currently handling. Besides, since there is no separate vertical for the people function, most of the people working in the directorate come with no or almost no training in HR Further, despite setting up the two directorates under the respective Boards, no change has been effected in the Department of Revenue (DoR). Matters relating to appointment, placement and promotion of senior officers have not yet been devolved to this directorate, despite an order to that effect on September 8, 2010, in the case of the CBDT. In fact, the erstwhile sections in the DoR, Ministry of Finance, continue to exist without any rationale. There is thus divided responsibility and accountability and consequently inefficiencies in the management of the HR function. Overall, it is clear that while the two DGs (HRD) have been given a wide and ambitious mandate, including measures for capacity building and development of a robust framework for performance management, they have neither been empowered nor enabled by adequate staffing and infrastructure to perform their assigned tasks. They appear to be functioning largely as appendages to the Boards, assisting them in the administrative dimensions of HR management, such as tracking APARs, compiling seniority lists, and preparing papers for transfers. It is not that the central government is unconcerned about the need for improved performance management. The Performance Management Division (PMD) in the Cabinet Secretariat has set up a system of target setting, in percentage terms, of government departments by themselves and evaluation against those targets through a results framework document (RFD). Both the Boards have adopted the RFD and notified the various responsibility centres that implement specific schemes or projects, which are assigned a relative weightage in the overall departmental percentage. This is expected to enable evaluation of both the various units of the department, and the department itself. However, the implementation of the RFD has not made any significant impact on the functioning of the departments. This could be attributed to a number of reasons. First, for example in the case of the CBDT, it largely covers the attached directorates and not the department as a whole. While RFD of the CBEC does cover specific customer facing activities, there is little linkage between performance areas and performance measures selected on the one hand, and the strategic objectives of the department on the other. In many areas, measures appear to be neither outcome oriented nor customer focused. Apart from such weaknesses, the most important limitation of the RFD process is the absence of a link between organizational performance measures and individual performance. In the view of the TARC, while the RFD cannot by itself suffice as a performance management framework, it nevertheless could be used as a basis for developing one. The 2ndAdministrative Reforms Commission (ARC), set up in 2005, had recognized that the performance of organizations ultimately depends on the performance of individuals. Therefore, the ARC was of the view that the appraisal formats of civil servants needed to be more specifically linked to the tasks assigned to them and to the goals of the department/organization in which the officer is working. The commission also recommended that this should be supplemented by preparing a computerized data base wherein the details of the officers reported upon as well as the reporting and reviewing officers are captured for further analysis. This would enable the department to take a view subsequently on how numerical ratings can be moderated, taking into account individual disposition. Based on this recommendation, formats of the APAR were revised. However, this appears to have brought about little, if any, increase in the reliability of the APAR as a measure of officers’ performance. The ARC had also recommended that the government should expand the scope of the present performance appraisal system of its employees to a comprehensive performance management system (PMS). And, in implementing a performance management system in government, it emphasized that the PMS should be designed within the overall strategic framework appropriate to the particular ministry/department/organization. It also recommended that the government seriously examine the issue of performance related pay. The Performance Management Division (PMD) of the Cabinet Secretariat is reported to be working on a scheme of performance related pay. The Sixth Central Pay Commission also dealt with this issue. After constituting a study group to examine the issue, it made the following observations:
The recommendations of the ARC and the Sixth Pay Commission have been accepted, in principle, by the government. The PMD in the Cabinet Secretariat was set up as a result to implement these recommendations. However, as already explained in earlier paragraphs, the work of the division is still in progress and an effective Performance Management System is yet to be set up while the PRIS is yet to be notified. On the whole, at the government level, the issue of performance management remains intractable and one of the weakest aspects of governance. If the tax administration in India is to be transformed to reach global benchmarks, as it clearly must if the country is to remain internationally up to date in its tax administrative practices, it cannot afford to wait for the whole government to reform itself; instead, it must forge a new path. Measures have, therefore, to be taken to release it from some of the constraints that prevent it from doing so. IV.2 Global practices Governments in most countries give varying degrees of autonomy to their revenue bodies for determining the numbers and types of staff to be hired, the skills and qualifications required for specific jobs, the duration and types of employment contracts, and the location of staff. This, however, is sometimes constrained by the overall budgetary allocations at governmental level. While very few have the autonomy to depart from public service pay structures, most of the tax administrations are stated to have autonomy in location of staff, skills and qualifications required, the duration of contract for hiring of the staff, and also the types of staff to be hired. Most allow lateral entry through open recruitment into the tax administration, especially at senior executive levels. Indeed, very few countries follow the sort of service/cadre structure that India maintains, of which the two revenue services are a part. IV.2.a. People approach Almost every tax administration recognizes the need to develop human resources management strategy, policies, systems and procedures to achieve the tax administration’s objectives. Many tax administrations have conducted assessments of their current and future skills and capability needs and have developed plans to enhance staff skills through structured training and professional development. Most adopt policies that promote the growth of specialization and allow their personnel to advance in their chosen areas of specialization, without limiting their tenures to short periods. Their career advancement schemes tend to be merit based and performance linked, often with weightage being given to specific areas of training and acquisition of higher professional qualifications. Many tax administrations train their staff in the areas of commercial awareness, risk management and financial management. While undertaking staff development in the area of commercial awareness, the tax administrations often utilize their networks with external organizations including legal and accounting firms. In South Africa, staff are given wide exposure to commercial awareness through dialogue with large corporates on a regular basis and participation in commercial forums, etc. All these are intended to make them appreciate the economic climate for businesses and how they navigate and operate in that situation. The “network” approach may also be reflected in other areas of training. There is an increasing trend among tax administrations to partner with educational bodies for training purposes, with some working with universities to develop externally accredited training programmes. Apart from training for enhancing staff skills, many countries also have more comprehensive training programmes. A large majority of tax administrations have targets for increasing staff capability, and this is closely linked to the higher objective of increasing organisational capability. New Zealand, for example, emphasizes the development of leadership qualities. Some tax administrations have started adopting 360° assessments for staff performance appraisals. This involves appraisals of employees not only by their superiors but also by their peers and subordinates. Such appraisals sometimes also include the feedback from customers. India does not have such an appraisal system. Tax administrations also carry out regular staff surveys for measuring staff engagement and their satisfaction. Australia recently completed a job profiling project to identify and categorize the work performed by all positions. This was intended to enable it to streamline recruitment processes and implement more robust work level standards for each job. It was also to help in deepening manager/employee conversations on performance and identify training requirements. The Finnish tax administration regularly carries out a VM Baro job satisfaction survey to measure job satisfaction. The survey responses are discussed individually with staff members and the decisions on areas for development and concrete measures are taken jointly by all those involved. This process has helped the Finnish tax administration to improve job satisfaction over the years. The Singapore IRAS conducts an Organizational Climate Survey (OCS) biennially to gather staff feedback on its development and initiatives. The feedback helps the IRAS to identify areas needing improvement to make it a better workplace for staff. The US IRS Personnel Management Office conducts an annual employee survey to obtain feedback on a wide range of workplace issues. The UK’s HMRC also conducts staff surveys regularly. All these examples and strategies undertaken by various tax administrations demonstrate that effective human resources management is a key requirement in every tax administration. In fact, over the last decade or so, the tax administrations’ attention to human resources management has increased and considerable importance is being accorded to performance management. Organizations have started guiding and steering their staff to undertake more varied roles and encouraging them to take leadership roles. Human resources management has also been helped by the efficient use of information technology (ICT) to measure and manage performance. In fact the ambit of performance management is also increasing – Canada is reported to have redesigned its performance management policies and tools to shift the emphasis away from paper-based reporting and towards continuous feedback. So, tax administrations are undertaking a more rounded approach to performance management, which is focused not only on tax collections and audits but also on improving internal processes, thereby underscoring the importance of relating individual objectives and behaviours to the overall objectives and values of the organization. By contrast, thus far, there has been no staff survey in the Indian tax administration. IV.2.b Performance measurement system A good performance measurement system would, in sum, have the following characteristics:
Performance measurement is an ongoing process of ascertaining how well, or how poorly, an organization fares in achieving its goals and objectives. It provides information/feedback relative to the goals of the organization and its programmes, and enables the identification of areas that require corrective steps to improve its performance. It involves the continuous collection of data on progress made in this regard. Performance indicators, or measures, are developed as standards for assessing the extent to which these objectives are achieved. The terms performance measurement and performance management are often used interchangeably. However, performance management is a broader term that includes not only performance measurement but also the determination of the appropriate level of performance, the development and reporting of performance information, and the use of that information to assess the actual level of performance against the desired level. It refers to the process of looking after the objectives, approaches, institutional arrangements and performance information systems put in place to measure performance. One common aim of benchmarking tax administrations is of course to improve their operation, for instance, by providing somewhat more objective “grading” or “ranking” appraisals of tax administrations. Such benchmarking may provide useful guidelines, but is not an independent evaluation on the basic objective, vision and initiatives of the tax administration, as it is ultimately a gap assessment between actual performance and a hypothetical ideal performance and is, therefore, a qualitative approach. In practice, tax administrations often employ both the approaches – performance measurement – (a quantitative approach) and benchmarking – (a qualitative approach). Tax administrations mostly use economic and efficiency indicators. Although these are useful as internal management tools, they can sometimes lead to flawed conclusions if mistaken for effectiveness indicators. For instance, a tax administration’s expenditure as a percentage of revenue collection would decline if tax revenue increased as a result of higher tax rates, without any change in the tax administration's efforts. The number of taxpayers penalized, or the amounts collected from fines, are often proposed as alternative performance indicators, but these can also be misleading. When the tax enforcement effort increases, taxpayers are likely to respond by reducing evasion. On the other hand, evasion cases detected can also be expected to increase as effort intensifies; thus, the link between higher expenditure or evasion control by a tax administration and its outcome in term of reduction or increase in observed evasion has to be carefully interpreted. Effectiveness indicators, therefore, have to be drawn up carefully when linked to such quantitative indicators. A comparison of the key performance indicators used by selected tax administrations is given in Table 3A.9 of this report. IV.3 Way forward IV.3.a Organizational alignment In an increasingly globalized and competitive world, the quality of governance has a direct impact on the competitiveness of a country’s economy. Among the diverse areas of governance, the quality of performance of the tax administration is likely to matter more than most other factors in the economy as it directly affects the business climate and cost competitiveness of industry on the one hand and the ability of government to raise revenues fairly on the other. A poorly performing tax administration, beset with arbitrariness, constrains the growth of the economy. Hence, the people function assumes critical importance. Performance improvement necessitates a framework and processes that link the organization’s goals developed from its mission, vision and values to the performance of teams as well as individuals. The tax administration involves a large number of knowledge workers, working together to administer fairly the tax policies to an expanding base of tax payers. The mission is to use tax policy and its administration to facilitate economic growth while, at the same time, promoting a culture of voluntary compliance. The core values driving it should be integrity, fairness, transparency, openness, customer focus and administrative efficiency. Currently, the general perception among tax payers is that the tax administration is focused on only one dimension – that of revenue generation. This perception gains strength from the manner in which goals are set at each functional unit of both the direct and indirect tax departments. These goals, in turn, drive the performance of individual tax officials. Therefore, the whole system of goal setting, performance assessment, incentivization and promotion appears to be focused on only this dimension. This single-minded revenue focus can never meet the criteria of the mission and values mentioned above. What is required is a robust framework that is holistic in its approach to issues of performance management. There are four dimensions or perspectives that an organization should look at as it develops its strategies, operational practices and departmental and employee goals. For the tax administration system, we would suggest the following perspectives: revenue, taxpayer, internal processes and learning and development. The first stage for the adoption of this framework, called the balanced scorecard, is the development of a strategy map, which maps out the themes in respect of each of these four perspectives and shows how all the strategic objectives are aligned to meet the needs of the mission, core values and vision of the tax administration. For instance, the TARC recommends that the taxpayer service needs to be oriented towards easy tax compliance by making it web-based and automated, and by through restructuring the organization along functional lines. The service orientation is enhanced by instituting a relationship manager, thus transforming the image of the administration as an organization that is as much focused on taxpayer service as it is on revenue generation. Each of the attributes of taxpayer service will lead to better compliance and minimization of revenue leakages, resulting in revenue collection that reflects underlying tax policy. However, the focus has to be not only on a revenue perspective or a taxpayer perspective, but also on an internal process perspective, which can create an effective, efficient and goal oriented organization. There are four sub-processes that will make the internal process more responsive to the needs of the taxpayer as well as of revenue. These cover operational management, dispute resolution, innovation, and regulatory and social processes. The fourth perspective, which is the focus here, covers learning and development in the institution building process dealing with the development of human, information and organizational capital. Capacity, competency and values of the organization are developed through this perspective, which in turn helps in developing and administering more efficient processes to meet the service needs of different types of taxpayers. This then leads to generation of revenues as targeted. Therefore, organizational strategies are defined along these four perspectives and they need to be well aligned. A pictorial representation is given in Diagram 4.2 below.
For each of the four perspectives, it is necessary to define strategic objectives, the key initiatives around which the organization will be aligned, the lead and lag measures through which organizational performance will be monitored and the targets that will be set for each of the initiatives. The balanced scorecard framework essentially focuses on implementing the strategy that flows from the organization’s mission, values and vision. Individual objectives will have to be so set as to meet the overall objectives of the tax administration. Therefore, individual goals of tax officials in the field should be set to ensure that tax policies are fairly administered in the process of revenue collection and it will be driven by service orientation in dealing with tax payers. At the same time, individual goals will ensure efficiency in administration. The goals will also focus on the continuous development of individual staff skills and competency. Aligning individual and organizational goals will be achieved effectively through the balanced scorecard approach. There cannot be a transformation of the governance system unless individual actions are guided by the vision and values of the organization. Each individual employee has to focus on meeting the needs of each of the four perspectives of the balanced scorecard as depicted in Diagram 4.2. Through the collective action of its employees, the organization will have to move from a uni-dimensional to a multi- dimensional approach. Unless the employees live the values and vision, the mission of the tax governance system will not be served. IV.3.b The People function - role of the DG (HRD) There is thus an urgent need to enlarge and transform the role and function of the DGs (HRD). As noted earlier, performance management goes much beyond performance appraisals and comprises measures to improve the organization’s human capital, such as skill sets, expertise, leadership, and the morale and quality of its people. The DGs (HRD) should therefore be seen as the custodians of human capital in the two organizations and perform the role of human capital officers of the two Boards. They should accordingly be empowered and enabled to perform this task by equipping them directly with adequate numbers of the right type of people and strengthened to perform this most critical role. It is for this reason that TARC has recommended a separate functional organization for this role in Chapter III of this report. Apart from the routine tasks of administration, one of the important first tasks of the people function would be to create a skills inventory, which would form the basis of manpower planning. This will take into account the requirement of skills, competencies, specializations and the levels at which these are required to meet evolving needs over the medium and long-term. This would lead to actions for recruitment, including hiring of specialists, capacity building and training initiatives and career and cadre management. The other major task that they need to undertake is the building of a robust performance management system (PMS) that enables the measurement of performance on the basis of a set of carefully selected performance indicators in key performance areas. This cannot happen unless the two organizations carry out all their key tasks on the digital platform as has been highlighted in Chapter VII. On that basis, the DGs (HRD) will have to work in close collaboration with the DG (Systems). The TARC learnt that the DG (HRD) of the CBDT has already made progress in the development of such a system, called the HRMS, which is to be integrated with the income tax business application (ITBA) being developed to automate all core processes of the I-T department. The TARC is not aware of any such system being developed in the DG (HRD), CBEC. Therefore, the CBEC should initiate urgent steps to develop such a system and make the required resources available to the DG (HRD). Since DG (HRD) of the I-T department has already done considerable work, collaboration and knowledge exchange between the two DGs (HRD)’s will go a long way in getting such a system up and running in the CBEC in a much shorter time, concurrently with the development of systems to fill the gaps in their current automation of essential business processes. IV.3.c Recruitment The starting point in HR management is recruitment. As mentioned earlier, recruitment to the departments is through the UPSC (Union Public Service Commission) for the IRS and through the SSC (Staff Selection Commission) for the junior cadres. The TARC believes these two commissions have stood the test of time and continue to enjoy public esteem for the conduct of their recruitment examinations. The TARC believes that no change in this aspect is needed. However, in the light of the TARC’s recommendations to professionalize the tax administration by restructuring it along functional lines and create specialized excellence in identified areas, it will be necessary to enable lateral entry of experts in certain key roles. The rules need to be amended for this purpose. While providing for such entry, it is important that while the initial appointment may be on a contract of, say 5 years, such experts should, subject to their being found suitable and willing, be able to integrate with the organization and mainstream their careers in the department at the end of the contract period. This recommendation is fully in line with emerging functions and practices across tax administrations internationally. In view of the inability of the current HR process to recognize and reward merit, there is also a need for providing the right opportunity to junior officers joining Group C cadres either by direct recruitment or promotion, to move on a fast track on the basis of intelligence and ability. One way of doing this will be to earmark 33 per cent of promotional vacancies in the cadre of the ITOs in income tax, and appraisers and superintendents in customs and excise, to be filled by a limited departmental competitive examination for inspectors, tax assistants, etc., who would be eligible to sit for the examination after 5 years. The examination should test the candidates’ abilities and knowledge in related areas like tax and business laws, accountancy, departmental processes, ICT familiarity and communication. Similarly, a part of the promotion quota for the IRS could also be filled by limited departmental competitive examinations at a higher level than the examination for inspectors, etc., open to the feeder cadres in the respective services. This will provide a fast track for meritorious candidates, create an incentive to perform and improve the quality of people in these crucial cadres. It is, after all, officers in these grades that the tax payer most frequently has to interact with and the quality of their performance has a decisive impact on perception about the organization’s performance. The regional training institutes should also conduct coaching for employees sitting for the examination. Since both the departments have undertaken a major cadre restructuring exercise that will result in an increase in the number of posts, they perhaps need special measures to fill up these posts. While the direct recruit posts in the IRS will get filled from the Civil Services Examination of the UPSC, considering the long lead time for the SSC recruitment, a special drive may be necessary to fill posts in Group C cadres and this will need to be taken up with the SSC. The recruitment each year also needs to be on the basis of a recruitment plan that takes into account longer term considerations such as future needs in specific areas and the career expectations of officers in terms of timely promotions. The absence of such a plan, combined with a short-term approach, has often led to either stagnation or cadre gaps in many cases – the former resulting from excessive recruitment and the latter resulting from under-recruitment. These considerations need to be balanced with short-term requirements to ensure that such aberrations do not occur. IV.3.d Performance management It would not be unfair to say that the tax administration in India, whether under the CBDT or CBEC, is widely perceived to be unfair, arbitrary, inconsistent, taxpayer unfriendly and characterized by moral hazard. There were many complaints made to the TARC by the chambers of industry along these lines. Ignoring these matters would be tantamount to belittling what appears to be a crucial issue for the tax administration to address and resolve without delay through a reliable performance management system. To reclaim ethical standards of the staff, their functioning needs to be founded on their empowerment while basing it on a set of values, important among which are the following:
Some of these values already find expression in the vision and mission documents of the two Boards and in their citizen’s charters. However, there is a yawning gap between what is contained in these documents and the reality on the ground. That gap needs to be bridged. This requires structures and processes and, above all, leadership that creates an alignment between organizational aspirations and goals, and individual capabilities, motivations and aspirations. Only such a link will lead to a high performance organization that enjoys the trust and confidence of its stakeholders. That is the object of a sound performance management system and the quality of its people, particularly its leadership, is a key determinant of organizational success. Hence, for the management layer of the two IRSs, I-T and C & CE, the TARC is outlining below an approach to such a system, based on the balanced scorecard, which is widely prevalent in many high performing organizations.27 Creating a shared vision and value system Before embarking on creating the balanced scorecard, we need to define the vision which will be ingrained in the strategic and operational focus of the organization. As stated already, a large and complex organization can deliver results only if employees at all levels share a common vision and work as per an ingrained value system. The shared vision should result in the following:
An organization operates on a set of values, which are consciously nurtured within it. Given the critical importance of generating confidence and trust among taxpayers in the integrity of the organization, the competency and ethical dimensions are of crucial and equal importance. Therefore, shared values should result in the following:
Objectives of Performance Management System A performance management system (PMS) is a platform for developing and motivating employees to give their best to the organization. It is not a paper or virtual plan but is an active and continuous engagement between the organization and its employees. PMS plays a significant role in the development of people to perform their tasks efficiently and in building their competency. It does this through a structured system of employee engagement, communicating the expectations of the organization through the goals set for a function, creating a performance measurement system, specifying the rigour with which performance appraisals will be conducted, setting up an incentive system which recognizes the employee’s contribution while at the same time, contributing to enhancing the performance of the organization through periodic evaluation of its own performance in enhancing the human capital value of the organization. PMS will not just concentrate on measuring and managing individual effectiveness. It will pay attention to the effectiveness of teams and in the alignment of individual objectives to team goals. If PMS is not actively and continuously tracked and evaluated, it will remain an unimplemented concept not worthy of reference. An effective PMS should evaluate each person on two dimensions – result orientation and values. This has been represented by the Diagram 4.3.
Stars are those who achieve results and achieve it through a value system built on adhering to the organization’s rules and policies and in an ethical manner. The value system of an organization is often tested by the manner in which it treats purely high result oriented individuals, who, unlike stars, achieve results at the cost of team work and ethical behaviour. These are the problematic cases. Unless it displays a “no tolerance” approach to these individuals, the organization will not be perceived to have the right value system. Effective tools to eliminate such individuals at the earliest are currently not available; even the mechanism that partly addresses this issue is rarely used. Rule 56 (j) of Fundamental Rules provides the government absolute right to retire a Group A or B government servant on attaining the age of 50 years (or 55 years if he has joined service after the age of 35 years). Under the guidelines, this provision is to be used for weeding out inefficient government servants or those of doubtful integrity. It is essential that this instrument should be effectively used. It can be argued that the removal of a non-performing civil servant or the one having doubtful integrity only at the age of 50 may be too late. It may be mentioned that the 2nd Administrative Reforms Commission (ARC) in its 10th report had recommended a system of two reviews, first on completion of 14 years and second after 20 years of service for assessing the suitability of retention of civil servants. The first review would primarily serve the purpose of informing the civil servant about his or her strength and shortcomings of future advancements, and the second review at 20 years would mainly assess the fitness of the civil servant for further continuance in the service. The services of the civil servants found unfit in the second review should be discontinued. In the spirit of the ARC’s recommendation, the TARC feels that the criterion for retirement under Rule 56 (j) should be modified to include review on completion of 20 years of service. Through a process involving mentoring and providing learning and development opportunities, PMS should play a key role in moving the incompetent towards the star category. Laggards need to be given an opportunity to improve their result orientation, while remaining under close observation in respect of their value system. Therefore, PMS will drive the organization to move everyone towards result orientation and working with values. The challenge for the organization is to recognize the categorization and bravely, fairly and squarely, embrace the action needed to segment employees in a transparent matter and continuously attempt to push the employees towards the stars quadrant. Goal setting The starting point of a performance appraisal system is the fixing of goals for the year, which will emanate from the balanced scorecard developed for the organization. The overall goals will need to be cascaded down to each function and each role in a functional unit will have defined goals. These goals will be different for different functions. The performance appraisal system cannot have the same measure for all functions. Each function will be evaluated based on measures appropriate to it. The weightage assigned to each of these measures will vary with the roles and responsibilities of the person. Currently, the RFD sets goals for the organization at the responsibility centre’s level. Earlier in this chapter, we have briefly referred to its key weaknesses, important among which are the absence of a link to individual performance and lack of customer focus. The RFD needs to be reconstructed using the balanced scorecard approach. In Table 4.1, an example of the performance goals and objectives for the dispute resolution function has been shown, based on which the team and individual goals for this function will be developed. A similar goal setting exercise will have to be done across all critical functions. It may be noted that the framework will have to be visited well before each financial year for each function at the level of the Boards and passed through the governing council. Team and individual operational goals, based on the role and specific functions that the team and the individual would be discharging, will flow from the objectives that are set. At the same time, the goals and targets will be based on both quantitative measures and qualitative factors. As already stated in the report, the measures will arise from the detailing of the strategic themes and objectives, which will lead to lead and lag indicators, taking into account both efficiency and quality factors. Qualitative factors typically look at effectiveness of approach, leadership qualities displayed, alignment with team objectives, and initiatives taken to accomplish a task. These qualities are judged through examples. It is not enough if a person is a star performer if the team or unit to which he or she belongs has not achieved its desired goals. Aligning of individual and group goals is important. If this is not aligned, it would result in behaviours that maximize individual performance, but the group will not deliver results. The key goals of the dispute management function, as illustrated in Table 4.1, would be to achieve a state in which (a) unnecessary or avoidable disputes do not arise (b) the disputes that do arise are resolved quickly and satisfactorily and (c) litigation is handled effectively. The performance areas, therefore, are dispute prevention, dispute resolution and litigation. A strategic plan needs to be developed around each of these areas and these need to be broken into following objectives that together enable the achievement of the goal:
Table 4.1: Performance management in dispute resolution function
Key initiatives need to be launched to achieve each of these objectives. For example, to achieve the objective of pruning down the number of disputes by eliminating unmerited disputes, the key initiative would be to launch a special drive and appoint task forces with the required skills to undertake a thorough review of each of the pending cases against properly defined standards and parameters. It will be necessary to enable the task forces with adequate resources to perform their tasks. Suitable delegation of authority will also have to be made to enable quick and appropriate decisions. Performance targets and the performance indicators will have to be developed carefully, making sure that that they have a logical basis and are congruent with and relevant to the key goals and objectives that are set. In the above example, the target set is the withdrawal of 50 per cent cases pending at various levels as on the start date, by the end of the year. The figure of 50 per cent is derived from the overall success rate(s) of the department, which can be seen in Tables 5.4 and 5.11 of this report. As can be seen, judged against the success rates at various levels, the target of withdrawal of 50 per cent pending cases cannot be considered unreasonable. This is an example of a lead indicator and a quantitative measure of performance that can easily be measured at the end of a given period. The other performance target against this key initiative is a success rate of 75 per cent in the cases that are allowed to continue after passing the review test. This is linked to the target success rate set for the next two key objectives, namely prevention of unwarranted dispute initiation and prevention of unwarranted departmental appeals. The standard used for reviewing pending cases should be applied in the future as well. And the assumption is that if you get quality dimension right in your key initiatives, the success rates in appeals and litigation should surge. This is a qualitative measure and an example of a lag indicator as it can only be measured, when the cases get decided in future. Taking the same example, the task forces could divide the work among different teams which handle different categories of cases, based either on the type of cases or the forums where they might be pending. Considering that the success rate(s) of the administration could vary across such categories, the team and individual performance targets could be calibrated accordingly – while keeping the overall performance target of 50 per cent in mind. Similarly, intermediate milestones will have to be set to measure the progress towards the final target. The combination of lead and lag indicators will move the administration to focused attention to performance. Thus, to prevent unwarranted dispute initiation, the two key initiatives are pre- issuance review of notices/draft assessment orders and pre-dispute consultation with taxpayers. This must occur without fail in all cases it is prescribed – hence, the number of cases reviewed is the performance indicator and the performance target of 100 per cent would require it to be ensured that these actions happen in all cases where these measures are prescribed. The 75 per cent target success rate would, on the other hand, be the lag indicator that would measure the quality of these interventions as manifested in the success rate. The subsequent entries in the Table can be understood the same way. It gives the framework within which organization level objectives, key initiatives and performance targets would be translated into the team and individual level actions and measures. It needs to be emphasized that it is necessary to track lag indicators since they clearly have a bearing on the effectiveness of the specific office, even though it may not be possible to link them to an individual’s performance as the concerned individual may have moved away. As part of an institution building process, the lag indicators, positive and negative, need to be taken into account while assessing the team’s performance as this motivates people to leave a positive legacy. Performance appraisal process PMS goes beyond merely appraising a person’s performance at the end of the year. As indicated, it is a continuous process of change. It is oriented towards developing a person in order to meet his or her career goals. The performance appraisal system should be part of a PMS which, as we have defined earlier, has as its core a development agenda for the person. There are progressive organizations that require evaluation of the performance of the person not just by the supervisor, but also by his or her subordinates, peers and customers. A 3600 profile, involving appraisal by such groups, should only be attempted when the measurement systems are mature. For the present, it is recommended that the appraisal system be extended in a planned manner to include feedback from subordinates. The performance appraisal system typically results in evaluating the performance of the person in discharging his or her tasks during the year. It is usually carried out to come up with a rating. In many systems, it also helps in determining the annual salary increase, which is not the case in government. However, where a person meets the criteria for promotion to the next level, the appraisal system helps in framing a recommendation for promotion. After completing the appraisal based on multiple factors, the appraiser should be able to give an overall rating to the person. When the measures are well defined and are relevant to the function, it will be possible to defend the rating arrived at. The rating will determine the position of a person among his or her peers. When the process is rigorously followed, it would lead to determining the effectiveness of the person in meeting the targets and the manner in which it has been achieved. The PMS, as we have described, gives the necessary support structure for enhancing the competency of the individual and ensuring that the goals of each individual is well aligned with that of the organization. No organization can succeed in its endeavours unless it is based on meritocracy. Rating becomes a very important supporting tool for assessing the merit of the individual. Training of appraisers is essential to make the appraisal process a rigorous one. In any appraisal process, there will be a tendency to give a high rating to everyone. Unless this is curbed, the truly meritorious performers will be demotivated. The appraisal report should form the basis for a discussion between the appraiser and appraisee. These discussions have to be conducted with an open mind. The strengths and weaknesses of the person will be elaborately discussed through these reports. If there is disagreement on the rating after the discussion is completed, the areas of disagreement have to be recorded and the appraisal would be taken to the review process. This is an area where a major change needs to be brought about in the departments. There is need to train both appraisers and appraisees for performance appraisal discussions. At present, the discussions are advised but are not known to happen in an effective manner in a substantial number of cases. Focus on performance against specific goals, aligning the individual to the organization and building the culture of the organization around effectiveness and values cannot take place unless the performance assessment process is rigorously followed. For this to occur, goals themselves have to be deepened and broadened as indicated well before the beginning of the financial year, as opposed to a virtually unchanging and exclusive goal of achieving a targeted revenue collection. The outcome of PMS should result in each officer being fully competent to perform the task on hand, having the necessary resources and support infrastructure, assisted by a review process that promotes quality and ensures that decisions honestly taken are accepted. The performance appraisal system has to result in further accentuating this environment of openness and respect for independent decision making. Since the performance appraisal aims to develop the capabilities of the person to meet his or her career goals, the discussions at the time of appraisal should not be done only once a year. It is recommended that formal appraisals are prepared twice in a year – mid-year and year end. An outcome of the discussion of performance has to be an improvement plan, listing the actions to be taken to overcome weaknesses. Apart from an improvement plan for the appraisee, it will also ensure that the superior takes responsibility for his juniors’ performance and ensure individual contribution to the team performance. Every person performing a supervisory function needs to give importance to the performance appraisal process. This is a key initiative for the creation of a high performance organization. Also, this is an important instrument for the development of an individual and, therefore, an organization founded on values will pay particular attention to this aspect. Finally, it needs to be emphasized that a comprehensive ICT system is a sine qua non for effective performance management. This is because for PMS to be reliable and capable of enjoying the confidence of those affected by it as being fair and objective, it must be fact-based. This can only be achieved through an ICT system that captures all key performance matrices, reliably and contemporaneously. Recognizing performance Although recognition of performance usually takes place through increments as well as through work and responsibility allocation, in the case of the two departments, it will largely be the latter until a system of performance linked monetary incentives is in place. PMS will have to ensure that in respect of tasks for which such incentives are fixed, there are checks and balances to ensure that the activities are fairly conducted. Recognition of performance is not just a pecuniary phenomenon. Assigning work to a person based on his or her area of specialization and inclination, ensuring longer tenures to enable an individual to make a difference to the function, and fast tracking for promotions are non-pecuniary ways through which a person should be motivated. PMS ensures that the organization develops its personnel to realize their capabilities in full. The human resource development (HRD) function in the governance structure should use inputs from PMS to create its learning and development practices, formulate its capacity plans, and assign work allocation which links the organization’s requirements with individual specializations. The system of pecuniary and non-pecuniary incentives will have to lead to a prepared and motivated workforce. Career planning Parts of the PMS, other than performance appraisal, relate to performance improvement, career counselling and career development in the context of the current and future requirements of the dministration. Building a cadre of professionals who can meet the current and future challenges and requirements of the tax administration is one of the key tasks of the HRD function. Tax legislation is becoming complex, as it attempts to reconcile different objectives at the organizational and individual levels. Taxation of Indian and global multinationals, the importance of intellectual property in economic activity and issues arising from the distribution of economic activities around different countries are some of the emerging issues at this time. Taxpayers have different requirements based on their size, their area of operation and the complexity of their business models, which involve capital raising, mergers and acquisitions (M&As), etc. Added to this is the change brought about by computerization in the interaction with taxpayers and in the use of analytics in administering the system. All these activities require the use of specialist officers, who have grounding in the core process of tax administration. Currently, there is considerable focus on training on the job. Obviously, given the complexity of emerging patterns of global as well as domestic economic activity, this process of relying solely on the inherent ability of officers and subordinates to learn and perform has severe limitations. Hence, provision of highly specialized talent from outside will be one the tasks of the people function. Added to this is the requirement for the tax administration to move towards a formal process of identifying specialized fields currently and in the future, provide avenues for officers to move into specialist roles, and have a reasonably long tenure in these areas to become effective and to shape administration processes. Career counselling and planning are the key functions required to develop the professional organization required for the future. One powerful way of talent renewal is to allow officers to move outside the organization and gain experience in specialist areas by taking sabbaticals to academic and research institutions and other bodies in the non-governmental sector, without getting into conflict of interest situations, so that they return with fresh knowledge and with broadened horizons. Just as the TARC recommends opening of the tax administration to infusion of talent laterally, it believes that HR policy should allow movement of meritorious officers outside the organization not only to government or public agency locations, but also to the private sector in the taxation field for defined periods of time. The determining factors should be that conflicts of interest are avoided and the areas of work the officers engage in are of relevance to the operations and strategies of the administration. In the scheme proposed, there will be three phases in the development of an officer’s career. The first phase is the building of general competency in the tax administration. This should run for the first 9 to 10 years of an IRS officer’s career, during which period there would be rotations among different functional areas. The second phase will require tenure in two or more specialist areas and it could run for another 8 to 9 years. If a person demonstrates the ability to reach top rungs of the leadership, he will be among the select few to go into the third phase. Nurturing the careers of all officials to cater to capacity and competency requirements, providing training and mentoring inputs to specialize, and to identify people with special aptitudes for particular specializations and for assuming leadership positions are the tasks of the people function. While charting the career path of an officer in the second phase, the person’s inclination and potential for the area of specialisation should be given due weightage. A person electing for specialisation in a particular area will be expected to deliver a high standard of performance in that area. There is a need to identify leaders at the end of the first and second phase and help them in developing their careers. While career planning will be an ongoing programme for everyone, far greater intervention than the normal annual exercise is required when a high performing officer is scheduled to move from one phase to another, as described above. It is recommended that a very detailed assessment of the potential of the officer is carried out at these transition points. The TARC recommends the setting up of an assessment centre in respect of the transition from the first phase. In respect of the transition from the second phase, selection will be based on a review process by a panel, which takes into account all-round performance and future potential for the top rungs of the organization. The panel should include outside experts as well. Such a system will create incentives for officers to excel and create a fast track for them to reach leadership positions early enough for them to have the drive and time to perform in leadership roles. If we map the suggested transition stages to the current grade structure in the two revenue services, they correspond to the junior administrative grade (JAG) (joint commissioner) and the senior administrative grade (SAG) (commissioner), respectively.28 These could be regarded as the appropriate transition points and a percentage of posts filled every year (say, 20 per cent) should be earmarked for the fast track. While arriving at the exact percentage for fast track, it should be borne in mind that the select pool of high performance officers should be large enough and have the right age-profile for filling the top leadership positions, such as identified posts at the level of Chief Commissioner, functional heads at the level of Principal Chief Commissioner and Members and Chairperson of the Boards. Further, important positions having greater strategic significance, such as in international taxation, transfer pricing, custom valuation, compliance verification KAI, SPRM, TPA, enforcement, etc., in the grade of Commissioner and principal Commissioner should ordinarily be filled by officers on the fast track. This will prepare them for top leadership. While normal promotions go by the defined zone of consideration, all officers eligible for the grade in terms of number of years of service could be permitted to apply for the fast track.29 The intention is to move the prevailing career progression of staff away from one that is characterized by a path that could safely be predicted by the ranking in one examination at the entry level and the age at the time of entry. In the latter case, if no controversy arises during the career, an officer’s path is already chalked out and does not depend on his performance, ability or potential. This is widely believed to have led to the freezing of decision making and stifled dynamism. Assessment Centre An assessment centre evaluates the different competencies of officers by more than one assessor using a number of techniques. Assessment centres have been used in many countries since the mid-1930s. The annual performance assessment processes, even when coupled with interviews, are not sufficient to gauge the potential of officers across many dimensions. For an organization to sustain high levels of performance, it needs to identify high performing individuals early in their careers. As has been suggested, this will be taken up after the first 9-10 years of the career of an IRS officer. Every person eligible for promotion to the JAG grade will be eligible for being assessed at the assessment centre. At this stage, the applicant candidates will be screened, on the basis of their past performance as reflected in their service record, for evaluation at the assessment centre for fast track. Since the officer has performed well in setting up a good foundation in his or her career in tax administration, the officer will be ready to move into one of the many specialist areas. At this point, it is essential to evaluate the person’s potential in different dimensions including in-depth knowledge in areas of specialization, ability to resolve problems as also to handle stress, display managerial competence, leadership capability, team working and communication. In addition, there will be assessments of the officer’s capability to embrace change as well as act as a change agent in the organization. Therefore, potential has to be judged across many dimensions. It will not be appropriate to rely on the recommendations of only the appraiser and to base decisions only on a tool such as performance assessment. The officers will go through multiple exercises in the assessment centre and these exercises will be both individual and group oriented. They will consist of workshops, tests and interviews. For example, managerial, leadership and team work competencies will be assessed through case study classes, group discussions and role plays. Tests and interviews will also be part of the activities in the assessment centre. There is a need to get an objective view point of the potential of a person and this is achieved through the formal assessment centre where independent assessors with both operational and behavioural competencies come together to evaluate the potential of a person. The officers will be given feedback on their performance, such as how they react to emergency situation etc. Therefore, these serve to help officers improve themselves on different dimensions. An assessment centre will provide the necessary rigour to decide on whether the individual officer can go to the next higher career level, which will lead to fast track career advancement. Obviously, not all will pass this test. Assessment centre typically does not rank persons based on their performance. They are either found to be suitable for the next move or they are not. For those who are not found to be suitable, the feedback will guide them towards an improvement plan and they can come back for one more assessment after two years. However, if they fail to make the grade even in review, they will not make it to the fast track and their promotion line will be the normal one based on satisfactory performance and will end say at the level of the Chief Commissioner. However, they cannot be appointed to posts in the grade of Commissioner and Chief Commissioner which are identified for fast track. The remaining 80 per cent of vacancies can be filled up on the basis of the conventional promotion system. The annual schedule of assessment for promotion should be so arranged that the assessment centre cycle precedes the conventional promotion through the DPC. There will be no need for officers selected for fast track by the DPC as they have already passed far more rigourous and all-round evaluation. In the final select panel drawn up for promotion, the fast track officers will be placed en block above the others in the select panel in the order of their inter-se seniority. The people function will have the responsibility for setting up the assessment centre. There has to be periodic evaluation of the effectiveness of the centre. Data will have to be collected covering a period of time on the individual assessment made and the performance of the individual. This will help in improving the process. Further, the assessment centre will show up areas where there is general lack of skills amongst the employees. These will be provided as input to learning and development activity so that appropriate training courses can be devised. Considering that an assessment centre is a very high value resource, it would be preferable for it to be a shared service for both the Boards - a common assessment centre could service both. Leadership selection After an officer goes through the second phase where he or she will assume key roles in operational areas as well as display specialist capabilities, he will be evaluated for taking up leadership positions. As already noted earlier, this maps to the promotion to SAG, after17 years of Group A service. The persons assessed for fast track after 17 years of Group A service can be eligible for promotion to the SAG grade irrespective of the zone of consideration. At that stage, 20 per cent of the vacancies in each year for promotion to the grade of SAG can be earmarked for the fast track officers. For the other officers, the normal process of promotion through DPC can continue on the balance 80 per cent posts. The non-fast track officers who are in the zone of consideration for the DPC to SAG grade will also be considered for review by the assessment board. If they are assessed suitable for fast track, they too will get into the fast track. This will provide an opportunity to the late bloomers also to compete for top leadership positions. The fast track officers will form the exclusive pool of top performers from which further promotions to the positions of functional heads of different vertical as well as horizontal functions and later to Board level positions, would be made, as already mentioned above. The responsibility for selecting the next rung of leaders will have to rest with the top management of the tax administration. We are emphasizing this as emerging leaders will have to display their capability in running an effective and efficient organization and will work within its cultural attributes. These candidates will have to go through a process of selection by an assessment board including an interview. The assessment board will have representation from the top leadership of the Boards as well as independent evaluators, some of whom will have in-depth expertise in areas such as organizational behaviour, strategic management, etc. It may be emphasised that the process outlined above is a schematic depiction. The people function will have to undertake a detailed exercise, including simulations, to work out the percentages to be earmarked for the fast track so as to ensure adequate availability of high performing officers to fill top leadership positions. Effective leadership can occur only if the leadership team comprises people who are positioned into leadership roles early enough for them to be effective. In the tax administration context, this should start with function heads. Hence the leadership selection process must ensure that the officers in the leadership pipeline for these positions reach them early enough and have sufficient tenures to effectively help setting the agenda and ensuring its effective execution. This will achieve many important outcomes. First, it will prepare them for Board level positions. Secondly, their early involvement with these roles will provide the required dynamism as well as continuity. Thirdly, by virtue of their having had sufficient experience in key leadership positions, the agenda will be set with deep knowledge of policy as well as operations and unaffected by short termism. The transformation of the Indian tax administration into a forward looking high performance, and concurrently an autonomous, empowered and yet accountable, organization as envisaged in the recommendations of the TARC, necessitates high quality of leadership. Therefore, the process of early identification of effective leaders, grooming them for leadership positions and giving them sufficient tenures as leaders is crucial for creation of such a high performing organization. Competency development The goal of PMS is also to develop the individual employee. Tax administration is a knowledge intensive field. A key focus area for HRD is to create a competency profile for each role and provide facilities to acquire knowledge in those areas as well as to get proper certification. It is suggested that a system be created to ensure that an officer gets at least 10 days of formal training in a year. This will need to be accomplished through in-house training classes, attending external training programmes (especially in personality and leadership development areas and specialized technological skills) and also through web-based training. Officers should be encouraged to pick up at least two areas of specialization during the second phase of their careers. These areas could be specializations like transfer pricing, international taxation, service taxation in key areas, customs valuation, intelligence and investigation, audit, ICT, etc. Officers should be assessed for their abilities and potential in the areas of their choice and efforts should be made to place them accordingly and allow growth by giving them long tenures in such functions. The expectation from officers would be that consistently perform well in the chosen domain. They should also be encouraged to acquire additional formal qualifications and certification in many of the competency areas. The training academies, NADT and NACEN, will have to play a crucial role in this. The latter aspect is addressed later in this Chapter. Mentorship Mentorship is a very important aspect of the development of an individual in an organization. It is particularly important from the perspective of promoting the right behaviour, right values and codes of conduct. It includes counselling an officer for proper growth in the organization according to his potential. In many organizations, the mentor also has a say in the career advancement and placement of an individual. Even though there was no formal programme, this used to happen in the civil services earlier when senior officers would take young trainees attached to them under their wing and guide them through their careers. In fact, most seniors would take this as an important part of their responsibilities. Over the years, possibly because of the larger numbers of officers coming in, this informal practice has virtually disappeared. Mentorship is an important tool for shaping young officers into effective leaders and sustaining a value based organization. The TARC believes that there is value in creating a formal mentorship programme, as many good organizations do, in the IRSs. Needless to add, the choice of mentors needs to be made with care and this is a matter for which guidelines would be useful. Achievement of objectives of PMS PMS would be seen to have accomplished its tasks if it would help in the creation of a high performance oriented organization meeting the needs of the four balanced scorecard perspectives and in complete alignment with its values, vision and mission. Unless the process of performance assessment, career planning and competency development takes place in an integrated fashion, the tax administration cannot meet the expectations of either the government or the tax payer. Consultation with the Union Public Service Commission (UPSC) and DoPT Under the current DoPT instructions, promotions within the Central Group A services by the selection method are to be done on the basis of the recommendations of departmental promotion committees (DPCs) that are chaired by either the chairperson or a member of the UPSC. There are some exceptions to this such as the Indian Foreign Service (IFS), Indian Audit and Accounts Service (IAAS) and the Railway services. Involvement of the UPSC brings about a degree of consistency across different services and a degree of rigour in adherence to procedures. However, the system the TARC recommends for the IRS marks a major departure from the promotion systems in the Indian civil services and will necessitate changes in relevant policies and rules. The UPSC does not conduct assessments through assessment centre. The TARC realizes that, if a merit based system is to be implemented, the IRS must move in the direction that has been laid out in this report. The constitutional mandate of the UPSC under Article 320 does not extend to promotions within Group A services. Its consultation has been mandated by a government decision and the convention has for long been followed, barring some exceptions. The TARC believes that if there is adequate HR competence built in the people wing of the departments and, as recommended, a large number of outside experts are involved in the assessments, excluding promotions in the IRS from UPSC consultation becomes immediately feasible as in the other cited services. The TARC notes that even the proposal for dispensing with UPSC consultation needs prior consultation with UPSC. Therefore, the TARC recommends that the UPSC may be consulted if the TARC’s recommendations are to be accepted and if, in the consultation, the UPSC indicates willingness to associate itself with the process, that option should be considered. As regards other matters in which the UPSC is involved, which is appointment to the IRS whether by direct recruitment or promotion, the TARC recommends no change in this regard. Accordingly, the departmental competitive examination that the TARC recommends for promotion from ITOs in income tax and superintendents in excise and customs will need to be conducted by the UPSC. As regards the DoPT, considering the fact that the Cabinet Secretariat itself has recognized the failure of the performance appraisal system in government, it should not be difficult to make a case for departure from their norms. IV.3.e Transfer policies A key factor in performance management is the issue of deployment of people. The present transfer policy in both the Boards has been built on the principles of job rotation across the various regions or, in some cases, within the same jurisdictional region. The central idea behind job rotation is to address moral hazard and corruption. It is posited that the officer/staff should not work in the same area or job lest they should develop undue linkage. The transfer policy is thus vigilance centric. The present job rotation policy has obvious disadvantages in some important aspects, of which, the most important is that it promotes a generalist approach to tax administration and does not allow development of specialists. There is also no attention to career planning, succession planning and skill up-gradation. Transfer policies in the two Boards are applied in a unilateral manner as a rule of thumb.30 Undue attention to job rotation is often said to be one of the key reasons why neither of the tax administrations have developed any modern HR policy, and the only HR policy worth the name is fixated on the transfer policy. In their approach in this matter, the two tax administrations clearly deviate from global trends and best practices. Such a generalist approach has also not helped in the development of a responsibility and accountability matrix for centre of excellence in Nofficers/staff with clear emphasis on delivery on the key objectives of modern tax administrations. As it operates across the organization at various levels, in the transfer season, the administration is in a state of flux for prolonged periods as officers move in and out of assignments and work suffers, affecting taxpayers. It is time to assess whether the present job rotation policy addresses that and develops a clear understanding in officers and staff about of organization’s goals and requirements, so that they can be part of it in a more associative manner. It would, therefore, be necessary to build a structure in which a performance management system, placement policies and training are part of the same matrix as a triad, each limb having the same importance as the other two. The irrational rotation of officers and staff either through jobs or places does not fulfil the desired objective and approach and, in fact, militates against developing a sound and professional tax governance structure. To a significant extent, this appears to be the outcome of the top administration being staffed by non-specialists, i.e., with little knowledge of the rudiments of taxation, whether tax policy or tax administration. This is another characteristic that is rare in a global context. Indeed, the organization has to set out a path for officers on their career plans and training so that they can deliver on the job. Development of specializations would have to be part of such a placement policy. Another area that requires strict adherence is bringing predictability, stability and certainty to the placements. The placement of officers/staff have to be carried out at least 3-4 months in advance so that one, the officers/staff get adequate time before the actual movement so that the individual is able to complete the job at hand and take care of the personal issues in case of movement across the region, and second, the organization gets time to train the officers/staff on the new job and make him aware of the requirement of the new job. The inability to do so has caused considerable dissatisfaction, with a deleterious impact on performance. Therefore, rotations have to be in line with broad career planning for the officers/staff, and succession planning and training or skill up- gradation for the organization. Personal difficulties faced by an officer/staff should be considered sympathetically and a decision taken within a period 7-10 days, so that there is no uncertainty for the organization or an officer/staff. Rotation across regions should be in the same vertical at the appropriate career stage so that the process of specialization is on track. The present transfer and postings are carried out through a placement committee. This could continue. The HR directorate in each Board, however, should be tasked to be its secretariat and to issue placement orders. DG (HRD) in the respective Boards should function as the member- secretary of the placement committee. HR Directorates would need to use the HR management system, along with overall career planning of the officer/staff and training requirement of the individual before any placement can take place. The present administrative Sections (Ad VI, Ad VIA in the CBDT and Ad V in the CBEC), along with the posts of Joint Secretary (Administration) in the two Boards whose roles are generalist in their approach and delivery, would have no relevance in the new scheme and should be abolished. Leave Policy Another oft ignored aspect of the people function is the implementation of leave policy. This appears to be randomly applied at least in selected observed cases. The policy has broad scope for leave accumulation, but granting of leave appears inexplicable and unrelated to the accumulation of leave. Rather, it appears to be linked to the professional relationship between an officer and his superior. The right of the officer to take accumulated leave has sometimes been ignored, revealing a lack of information or of training of managers in modern management principles in which rights such as the days of acquired leave, or stipulated number of days of training, comprise the right of a worker and has nothing to do with a work relationship. There is no redressal for the worker in such circumstances. What is worse, there is no accountability assigned to the errant superior. The TARC gathered the impression that the management tends to wield a tough stick on an officer who s/he falls foul inter-personally of the system. IV.3.f Capacity building The primary responsibility for capacity building devolves on the two academies, NADT and NACEN. Details of their activities have been summarized in the Appendix IV.1. Both have been doing an excellent job in providing general professional training. Earlier in this Chapter, TARC had recommended a much larger role to the function of DG (HRD) to develop a robust performance management system. The training strategies need to achieve a close link with the capacity building needs of the organization as identified in performance management strategies. Training and development must occupy a central place in the people advancement of the administration. The best people in the organization should be posted in the academies and they should be exemplars to young officers entering the department. It is the imprint left on young minds that shapes the future growth of entry level officers and the administration must ensure that the imprint is of the right kind. In an ever changing environment with new business models emerging globally, the academies need to adopt a more active posture. They should proactively suggest what newly emerging areas need new training curricula and engage with the Boards to develop plans to implement them. There is need to have a culture of continuous learning and collaboration for tax officers and staff. Such effort would require enhanced organizational capacity for NADT and NACEN trainers and more collaboration with the field and other related organizations such as economic think tanks, regulatory bodies, universities and other academic institutions as well as reputed training institutions in the public as well as private sectors. Such engagement will enable the development of customized programmes that address the diverse capability-building needs of various levels of the tax administration. There is need to clearly identify key learning and development objectives and this should involve an iterative process of research, consultation and analysis. The training curricula need to adequately cover both critical and technical tax issues, and management competencies. A stronger bonding would also be needed between the field and the two training academies so that more innovative, high-quality workplace programmes, resources and services could be developed. This, at present, is missing. It should not be the responsibility of the two academies alone to identify the areas of training; the top management in the field should also participate in identifying the training needs of officers and suggest the course content that would be required for officers and staff. The two academies can set up from time-to-time groups for designing the courses. Outside faculty and business leaders should also be associated in such groups and such focused programmes should aim at meaningfully addressing current and future requirements of the tax administration. raining should not be viewed as an isolated activity, it should be one of the key drivers for continuous improvement and organizational change to transform it into a learning organization. To achieve this, traditional training methodologies need to be changed and much greater rigour needs to be brought to the training courses and measures taken to ensure they are taken seriously. The certification given at the end of courses should be based on the evaluation of trainees. The active participation and performance of trainees in certain key courses should be an element in their performance evaluation. There is also the need to link specialized training to deployment of officers. It is often found that officers who receive specialized courses in a given area often get posted to some other work area and the training they receive loses relevance. Placement policies need to be altered to ensure that cohesion is brought about between specialized training and deployment of officers. Ideally, officer’s posted to work in an area which require specialized knowledge and skills should be made to go through training needed to acquire specialist knowledge before assuming office. In critical areas, the academies need to transform themselves into hubs of research. At present, the permanent faculty at both NADT and NACEN comprises only the IRS officers and other departmental staff. The academies need to be organised into academic departments in areas such as law, economics, management, etc. These departments should be manned by competent academic faculty on a full-time basis. These faculties would also anchor research in the relevant selected areas through research projects. Programmes similar to fellowship programmes can be developed where either internal or external candidates can be awarded fellowships for research. In case of internal candidates, they can be treated as being on duty. These fellows will also perform teaching duties at the academies. Presumably, it was similar considerations that led to setting up of centre of excellence in NACEN.31 However, the NACEN experience has been far from satisfactory. Because it is poorly resourced, it has been able to achieve little in productivity. This experience underlines the need for the leadership in the CBDT and CBEC to give serious attention and priority to ensure that such facilities are properly resourced and managed. Besides the above, the following points need attention:
While the training courses for the IRS officers are generally well structured, an equally serious effort needs to be made to train Group B and C officers. This is of critical importance as it is these officers who are the face of the two departments and lack of skills at that level severely affects the administration’s image. It is learnt that often there is a large gap between fresh recruits joining the department and the induction training being delivered to them, largely due to lack of capacity and resources. The capacity of the academies, which is already stretched, is likely to be further strained as both the services will be recruiting more officers at all levels following the restructuring. The staff strength of the academies needs to be substantially improved if they are to meet the challenge. The NACEN, in particular, appears to be ill-equipped to deal with this. It was designed for a batch size of 50 while the current intake is twice that number. The situation gets aggravated when two batches overlap for a part of the training period. The NACEN is learnt to have proposed the creation of a separate academy for probationary officers at Rishikesh (Uttarakhand) and use the existing infrastructure at Faridabad to train in-service officers, and for mid-career training programmes (MCTP) and international programmes only. The proposal needs to be accepted. Similarly, the NADT too is facing a capacity crunch. Both the academy and the RTIs need infrastructure upgradation. The TARC also feels that the regional training institutes (RTIs) and ministerial staff training units (MSTUs) should be merged for better use of training infrastructure. The national training policy recommends that 2.5 per cent of the salary budget should be devoted to training. From the data in the Appendix, it is seen that there are gaps between the funds allocated and this norm – the gap being consistent and much larger in the case of the NACEN. We cannot make out from the figures alone whether the gap is on account of funds not being available or because of the NACEN has been unable to formulate projects to seek funding. It is desirable that at the minimum, the national training policy is followed and funds as per norms are made available to the academies. Another point that was represented to us was that in the case of the NADT and NACEN, the expenditure is considered an item of non-plan expenditure, while in the case of the LBSNAA, it is considered as plan expenditure. We are unable to understand the rationale for this difference and believe that all three should be treated on the same footing. IV.4 Vigilance administration Corruption in administration is undoubtedly a crucial issue. And tax administrations, by the very nature of their functions, are among the more vulnerable sectors of government. Data taken from the CVC’s annual reports indicates that about 6 per cent to 7 per cent of complaints handled by the CVC fall in the areas of the CBDT and CBEC. Their two CVOs together handle about 10 per cent to 12 per cent of the total complaints handled by CVOs across the government and the two departments account for approximately a little under a quarter of the prosecutions sanctioned against government servants on the advice of the CVC.32 These figures, in particular the last one, underline the sensitivity and vulnerability of the two tax administrations. Therefore, a properly functioning vigilance machinery is a critical element of people management. In dealing with different aspects of the PMS earlier in this chapter, the TARC underlined the centrality of values in driving performance. It also noted how a wide gulf exists between the lofty values and goals articulated in the vision, mission and citizen’s charters and the actual practices and behaviour on the ground. The need to link the two cannot be over emphasized. As the subsequent discussions in this section show, the current state of vigilance management is beset with many difficulties, not the least of which is intractable delays. The punitive approach to vigilance administrations has inherent limitations. Therefore, a more proactive approach is needed if the right type of behaviour is to be actively propagated in the two tax administrations. The TARC believes that the way to do this is to adopt a code of ethics and this must be done quickly by the two Boards together. IV.4.a Code of Ethics The 2nd Administrative Reforms Commission (ARC) went into the important question of a code of ethics for civil servants. It noted that many administrations abroad had adopted detailed codes of ethics for public servants while, in India, there was no such code. With regard to the CCS (Conduct) Rules, 1964, it observed that they enunciated a code of behaviour, which “while containing some general norms like ‘maintaining integrity and absolute devotion to duty’ and not indulging in ‘conduct unbecoming of a government servant’, were generally directed towards cataloguing specific activities deemed undesirable for government servants. These conduct rules do serve a purpose, but they do not constitute a code of ethics.” Hence, among other things, they recommended: Public Service Values’ towards which all public servants should aspire, should be defined and made applicable to all tiers of Government and para-statal organizations. Any transgression of these values should be treated as misconduct inviting punishment. While the recommendation has been accepted, the TARC is not aware of the progress towards implementing it. Even as the government takes action on the ARC’s recommendation, the TARC believes that there is value in the two Boards developing and adopting a code of ethics and they should do this jointly. The code should be based on the values that are expressed in the vision, mission and citizen’s charter that the organizations need to imbibe and promote. In the TARC’s view, the importance of such a code of ethics is twofold:
While the code cannot be statutory for now and, therefore, its violations may not attract punitive consequences, it will have to be a vital aspect of performance management and deviations from it will have a weightage that can be calibrated according to the gravity of violation in the performance assessment of employees. This will be one of the most powerful ways of promoting desired behaviour. IV.4.b Preventive and punitive vigilance There are two dimensions of vigilance management: preventive vigilance and punitive vigilance. The former focuses on measures that deter the occurrence of moral lapses or unacceptable conduct while the latter focuses on punishment for such conduct. The preventive dimension operates at the systemic level by reducing opportunities for corruption and misbehaviour. It focuses on aspects like simplification of procedures, transparency, accountability, reducing discretion, and infusion of technology. Punitive vigilance, on the other hand, focuses on detection and punishment for breaches of conduct rules and prosecution of offending civil servants in egregious cases, such as those involving corruption. To maintain standards of integrity in the organization, the leadership must place strong emphasis on both. As mentioned in the section on performance management, strong adherence to desirable values must be the overriding consideration and the performance management system must take this into account. Technology will play a very large role in preventive vigilance. Maximizing transparency is a quick way to reduce inappropriate conduct. Other measures, such as setting CCTVs in areas with public interaction, creating systems in which all significant work happens in the digital environment with proper audit trails and opening up the internal working of the department to public view are powerful ways of reducing corruption. Many of the recommendations the TARC has made in the other chapters will contribute significantly in the area of preventive vigilance. Both the Boards, when they devise new policies and procedures, should take this aspect into account and use this as one of the touchstones for assessing the impact of the changes being contemplated. On the punitive side, an effective vigilance system will ensure that misconduct is swiftly detected and punished. This is an area which is a matter of grave concern for the administration as well as the charged officers because of the excessive delays in the conclusion of disciplinary proceedings. For the administration, delays imply the misconduct remains unpunished for long periods, affecting the tone and morale of the administration and its public image; for the charged officer, especially if he is not guilty, the process itself becomes the punishment, thereby demoralizing not only him, but also others in the organization. Care, therefore, must be taken to ensure that proceedings are not launched lightly without adequate diligence and, when launched, they must be concluded swiftly. We have indicated some measures to cut down delays in the finalization of disciplinary proceedings later in this chapter. IV.4.c Empowering officers to take proper, judicious and timely decisions, sustaining a culture of independence coupled with accountability A vital aspect of governance is the need to balance an effective vigilance administration with sustaining a culture of taking fearless, independent and unbiased decisions. In our extensive discussions with trade and industry as well as field officers, one theme that recurred consistently was that the fear of vigilance, along with fixation of revenue targets, was the main cause for excessive risk aversion at the original and appellate levels of the departments, resulting in unjustified, high pitched assessments that lead to a surge of avoidable disputes, resulting in added costs and harassment for the taxpayer. It was mentioned that there have been a few instances in which Directorate of Vigilance has gone to the extent of reopening old/closed vigilance files or asking field officers about the reasons for not filing appeal against a tribunal order or enquiring why an assessment was made in a particular way. A view was expressed that the fear of vigilance intrusion in their quasi-judicial function and close scrutiny of adjudication orders forces them to pass orders against the taxpayers even if there was hardly any evidence on record. On the indirect tax side, mention was made of a circular issued by the DG (Vigilance), CBEC,33 advising chief commissioners in field that the committee of Chief Commissioners Or Commissioners performing the review functions under the respective laws may also examine adjudication/appeal orders from the vigilance angle, keeping in view the guidelines laid down by the Hon’ble Supreme Court in the K. K. Dhawan case34 and refer suitable cases involving substantial or recurring revenue implications for further vigilance investigation. This was based on a vigilance audit of the Directorate of Vigilance, CBEC, carried out by the CVC in 2009, in which the auditors recommended the scrutiny of adjudication orders passed by field officers from a vigilance angle. The fear of vigilance was widely attributed to this circular. On the other hand, DG (Vigilance), the CBEC informed the TARC that starting from 1997 till date, only 18 adjudication orders have been taken up for scrutiny in the Directorate General of Vigilance. This indicates that, on an average, only one case in a year i.e. 0.001% of total quasi- judicial orders passed in the department, have been taken up for vigilance scrutiny. Thus, any apprehension in field formations regarding vigilance scrutiny being very intrusive did appear to be somewhat unconvincing. While the TARC fully agrees that quasi-judicial authorities cannot be given blanket exemption from vigilance scrutiny, the wide perception needs to be addressed as it is clearly leading to excessive and avoidable disputes, and causing heavy reputational damage to the administration. Recognizing the causes of poor performance of dispute management in the two departments, the TARC has given a number of recommendations in Chapter V to improve the quality of that function. Implementing those recommendations will significantly improve the quality of orders and address the concerns of industry. Coming to officers, the TARC cannot help observing that the fear that is said to be driving officers to take decisions that they themselves know to be incorrect appears, in large measure, to be misplaced and the TARC observes that, in many situations, it is used as an aid to take the easy way out. The onus of discouraging such a lackadaisical attitude towards the quality of decisions clearly lies on the senior leadership of the organizations. The TARC, in Chapter V, has recommended, among other things, that the review of orders should be based solely on merit and not on the basis of their revenue consequence. The supervisory officers can use this tool to send a clear message to officers that their performance will be judged on the basis of correctness and the quality of orders, irrespective of whether they are in favour or against the department. There is no short cut to this and the cue for the change in attitude must emanate from the two Boards. In K. K. Dhawan’s case, the Supreme Court had prescribed the following tests to examine the conduct of officers acting in a quasi-judicial capacity:
These are robust principles and CVC instructions require that these be applied. In its instructions vide circular No. 39/11/07, the CVC has instructed CVOs, while referring cases to them, to critically examine whether any of the criteria were attracted and give detailed reasons for their conclusion. However, the impression created by the CBEC’s circular that every case is to be looked at from the vigilance angle needs to be moderated by specifying that this should apply only to cases that prima facie meet the criteria laid down in Dhawan’s case. Having said that, it also needs to be recognized that with the growing complexity of the taxation landscape, a very high degree of familiarity is required for those who have to scrutinize the tax officers’ decisions and such familiarity may not always be available within the CVC’s establishment. It was obviously in recognition of this that the practice has been established that the CVO in both Boards, unlike in other departments or PSUs, be appointed internally from the serving IRS officers. A panel of three officers of chief commissioner’s level, known for their integrity, is sent to the CVC for selection for appointment as CVO. Hence, considerable weightage should be given to the views and recommendations should normally be accepted by the CVC and where there might be a difference of opinion, the panel should be consulted and allowed to explain its views before the CVC takes a view in the matter. At present, all senior level posts in CVC, including that of CVC, vigilance commissioners, additional secretary and Joint Secretary are usually filled up from the IAS, IPS and the banking sector only and the representation of the revenue service does not go beyond the level of director. Having regard to the complexities of decision making in the banking and financial sector, usually one member is drawn from the banking sector. The TARC believes that taxation is an equally complex area, requiring specialized knowledge and background, and, therefore, a case exists for a similar dispensation in relation to the tax administrations. It is necessary to establish the convention of appointing one of the vigilance commissioners from among IRS officers, considering that the two departments together account for a significant part of the overall CVC workload. Similarly, at least one joint/additional secretary level officer in the CVC secretariat should always be from one of the two (direct and indirect tax) services. This will go a long way in ensuring better appreciation of the decisions that might be examined in the CVC. It will also address the issue arising from perceptions about vigilance that have created a risk averse atmosphere leading to high tax payer dissatisfaction and costs on the one hand, and high reputational damage to the tax administration on the other. IV.4.d Dealing with complaints Another theme that recurred in our interaction with officers was the perception that the culture of making anonymous complaints was affecting the quality of decisions. The data mentioned above reveal that the two Boards account for a significant proportion of complaints across the government and there does seem to be a culture of complaints that is beyond acceptable levels. There should be a uniform policy that anonymous complaints, without exception, will be consigned to the paper shredder. The argument that some solid evidence may emerge post-facto from an anonymous compliant holds no ground. The careers of some excellent officers have been jeopardized or irretrievably slowed down due to anonymous complaints that bore no fruit. Thus, the policy laid down in DoPT OM No. 104/76/2011-AVD.1 on October 18, 2013, should be strictly followed.35 IV.4.e Delays in finalization of disciplinary proceedings Government has been grappling for long with the problem of delays in disciplinary proceedings. A committee, under the chairmanship of Shri P.C. Hota, former Chairman of the UPSC (Hota Committee), had gone into this question in great detail. Its report refers to a study by the Indian Institute of Public Administration on the causes of delay that came up with the following findings:
There are other measures that the TARC recommends for timely finalization of disciplinary proceedings:
IV.5 Recommendations The Commission recommends that:
Chapter V Dispute Management Table of Contents V.1 Current status
V.2 Global best practices V.3 Gap
V.4 Way Forward
V.5 Dispute Resolution and Litigation V.6 Liquidation of Undesirable Legacy V.7 Recommendations Appendix V.1: Tables and Graphs Appendix V.2: Global Best Practices Appendix V.3: Appeal process of some advanced tax administrations in direct taxes Chapter V Dispute Management V.1 Current status The credibility of the tax administration of a country depends to a very great extent upon the credibility of its dispute resolution mechanism. This is in terms of how quick, consistent, transparent and fair the dispute resolution mechanism is in the eyes of the taxpayer. The quality of the tax administration is also influenced by its ability to ensure that avoidable disputes do not occur or are not prolonged. This requires clarity in laws, rules and procedures and the adoption of a transparent and collaborative approach towards taxpayers. India has an elaborate structure of tax administration, including, in particular, administrative practices for dealing with disputes. The comprehensive system has become more significant in the wake of the ever-growing size and quantum of cross-border transactions, frequent disputes emanating from interpretational uncertainties, and the rapidly emerging convergence between international tax policies across nations. It cannot be said strongly enough at the outset that this is an area in which there is widespread dissatisfaction among stakeholders and that the administrative machinery suffers from a crisis of confidence among taxpayers. It is widely perceived to lack in objectivity, fairness and adherence to timelines. On the direct tax front, the I-T Act, 1961, functions as a self-contained tax code covering within its scope diverse aspects – rules for levy and collection of tax, procedure for assessment of income, dispute redressal mechanism and others. The I-T Act, which is more than five decades old, has been amended several times through successive Finance Acts as part of Parliament’s annual budgetary exercise. In the recent past, the key driver for tax reforms has been the macro-economic challenges faced by the government on account of the stiff fiscal deficit targets set out by Parliament. There has also been a steady reduction in marginal tax rates for taxpayers and rationalization of the rate structure to reflect best international practices. Further, various amendments have also been made for broadening the tax base through enhanced focus on voluntary compliance requirements and stricter anti-abuse rules in legislation in line with international best practices across the globe. However, an environment of a large number of tax disputes results in a perception of risk and uncertainty among potential investors. In particular, mounting disputes in transfer pricing (TP) and international taxation cases have adversely affected the external investment scenario. There has been rationalization of tax rates in the case of indirect taxes too. This was done to carry out structural changes reflecting international best practices and to align the central indirect tax system with an anticipated Goods and Services Tax (GST) regime. The implementation of rules permitting cross-utilization of input tax credits for payment of taxes on goods (excise duty) and services (service tax), introduction of new valuation rules and attempts to simplify export refunds related procedures are some of the key aspects exemplifying the central government’s resolve to modernize the indirect tax regime. Service tax law has undergone a massive makeover since its introduction in the Finance Act, 1994 through two decades – from a ‘positive list’ based taxation regime (with 119 services comprising the taxable services’ list by 2012) to the introduction of ‘negative list’ based taxation in July 2012. Tax administration has had its set of challenges administering the erstwhile ‘positive list’ based taxation. The fundamental jurisdiction of the Finance Act to levy service tax on various activities was challenged in courts on multiple grounds such as violation of Article 14 of the Constitution of India, and the overlapping of powers of the centre and states to levy tax on certain activities. Besides, the definition of each service as provided under Chapter V of the Finance Act, 1994 was vague. This led to a large volume of litigation. The advent of the ‘negative list’ in service tax has not solved these problems. It has added to litigation in certain areas where the tax department has interpreted an activity as a taxable service while the taxpayer has disagreed. Similarly, there have been disputes in the area of valuation and classification under the excise and customs laws. If amendments in tax laws are too frequent, then the frequency of such amendments tends to make legislation unstable in terms of understanding or interpretation for an average taxpayer. This could force the taxpayer to grow sceptical, thereby incentivizing tax avoidance. Factors such as the mechanical application of laws, arbitrary tax demands, protracted litigation, multitude of conflicting judgments by tribunal benches and jurisdictional high courts have further dampened the investor/taxpayer’s faith in the tax administration and policy makers. On the other hand, the tax administration has also suffered because of the long drawn out dispute resolution process as billions of rupees in revenue have been locked up in disputes for years. To combat the loss of taxpayer’s confidence in tax administration without losing sight of the daunting task of having to contain the fiscal deficit at the macro-economic level, policymakers have consistently looked towards ‘tax reform’, embracing best international practices with renewed interest. In the past, several expert committees have been set up by the government to address specific issues plaguing the tax administration. Policymakers, while deciding future tax policies, weigh upon recommendations put forth by such expert committees. The move to replace the I-T Act with the Direct Taxes Code and consolidate most indirect taxes (including state levies) into GST highlights the intent of the policy makers to simplify and re-align tax practices. The setting up of the Tax Administration Reform Commission (TARC) is in line with this thinking, with the government, for the first time, naming a National Commission to exclusively examine and recommend measures for reforming the tax administration. V.1.aPresent organizational arrangement for dispute resolution Central Board of Direct Taxes (CBDT) Provisions relating to appeals are governed by Chapter XX of the I-T Act. Sections 246 to 251 deal with appeals to the Commissioner (Appeals) (CIT (Appeals), Sections 252 to 255 with appeals to the Income Tax Appellate Tribunal (ITAT), Sections 256 to 260 with reference to the high court (for orders passed by ITAT before October 1, 1998), Sections 260A & 260B for appeals to the high court (with effect from October 1, 1998), and Sections 261 & 262 for appeals to the Supreme Court. Chapter VI of the Wealth Tax Act, 1957, deals with the appeal processes for wealth tax cases. Diagram 5.1 gives the appeal process. Diagram 5.1: Appeal process in the I-T Act
The procedure for filing an appeal by the taxpayer before the CIT (Appeals) is laid out in Section 249 and Rules 45 and 46. The appeal should be filed within 30 days of the date of serving the demand notice relating to an order of assessment or penalty. But if a copy of the order is not served along with the demand notice, the time taken for obtaining the copy of the order is excluded from the period of 30 days. The CIT (Appeals) can condone the delay in filing an appeal if there is sufficient cause for the delay. The CIT (Appeals) is empowered to make further inquiry as he thinks fit and to call for reports from the Assessing Officer (AO) on certain points. In such cases, the AO as per the directions of the CIT (Appeals) has to examine the points on which the inquiry has been sought afresh, and submit the results of his examination to the CIT (Appeals) through a report known as the remand report. But at times, considerable delay is seen in finalizing the remand report. This in turn impacts the delivery of the appeal order. Once the order of the CIT (Appeals) is received, the AO scrutinizes the appellate order to ascertain if all or some of the decisions of the CIT (Appeals) is/are unacceptable and whether a second appeal to ITAT is necessary. Based on his an analysis, the Range JCIT/Additional CIT submits an appeal scrutiny report to the Commissioner of Income Tax. The monetary limits for filing departmental appeals have also been laid down in Departmental Instruction No. 03/2011 dated February 9, 2011, as shown in Table 5.1. Table: 5.1: Threshold monetary limit for filing appeal in CBDT
Such instruction is to avoid filing appeals in small revenue cases. But the ceiling limit does not apply in cases where a revenue audit objection on the issue involved has been accepted by the department or where the CBDT’s order, notification, instruction or circular is the subject matter of an adverse decision or where prosecution proceedings are contemplated against the taxpayer or where the constitutional validity of the provisions of the I-T Act are challenged. But many times such guidelines are flouted, and cases are filed before the ITAT in a routine manner, many of which are often non-deserving cases. For a class of cases – cases involving international transactions, i.e., cases of TP and cases of international taxation – the Dispute Resolution Panel (DRP), a collegium of three Commissioners, was introduced vide Section 144C of the I-T Act to provide speedy disposal of disputes. This arrangement is optional for taxpayers and only draft assessment orders are reviewed by the DRP. An appeal thereafter lies before the ITAT. Earlier, there was no appeal available for the department after the DRP order, but since financial year (FY) 2013-14, the Commissioner can also file an appeal to ITAT in case he considers the order unacceptable to him. At present, the posts of CIT (Appeals) are filled in by junior Commissioners and the seniors are posted as administrative commissioners. Even the transfer policy guidelines of CBDT emphasize that.36At the time officers are promoted to, the NADT conducts a training course for the newly promoted Commissioners on appellate work, but there is no specific timeline for such training. This training is supposed to be compulsory but many do not attend the training and there is no accountability for missing the training. Often, the CIT (Appeals) are transferred mid-year, and instances of de novo hearing have been reported for the new incumbent, leading to increased compliance cost for the taxpayers and in the number of pending appeal cases. There are also instances of delayed orders after the hearings have been completed, leading to an increase in tax demand (due to mounting interest) for the taxpayers.37 The appeals to ITAT are governed by Section 253 of the I-T Act. Section 253(3) lays down the limitation period, i.e., 60 days within which the appeal to the ITAT should be filed. But the ITAT is also empowered to admit an appeal after the expiry of 60 days if it is satisfied that there is sufficient reason for the appeal not having been filed within the time limit. The department is represented before the ITAT by the Authorised Representative of the department (DR). Nowadays, Commissioners are also posted to represent before each bench of the ITAT. The CITs present search cases, revision cases by the Commissioners as well as cases above a monetary limit or complex cases. The Additional/Joint CIT represents other sets of cases. But the performance of the DRs in some cases has not been adequate. Instances of lack of preparation on the part of the DRs have come to notice. There are also instances of lack of co-operation by field Commissioners with the DRs. Since representing before a bench requires different skills, such as marshalling of facts, court craft, etc., it is important that whoever is posted as DR is given adequate training. The provisions relating to appeals to the high court are dealt with in Sections 260A and 260B of the I-T Act. An appeal can be filed by the chief commissioner or commissioner or a taxpayer aggrieved by the ITAT order. An appeal lies to the high court against the order of the ITAT if the high court is satisfied that the case involves a substantial question of law. The time limitation prescribed for such an appeal is 120 days from the date of receipt of the ITAT order. Where the high court is satisfied that a substantial question of law is involved, it formulates the question. Section 261 provides an appeal to the Supreme Court against any judgment of the high court on a reference made under Section 256 (before October 1, 1998) or an appeal made under Section 260A. On behalf of the department, it is CBDT that can file the appeal to the Supreme Court. This appeal would lie only when the high court certifies that the case is fit for appeal under Section 261. Pendency at various appellate levels in CBDT The tax administration in India is excessively dispute ridden. A large number of tax disputes are avoidable as evidenced by the low success rate of the government. Table 5.2 gives the number of disputes for two FYs, 2011-12 and 2012-13. Table 5.2: Pendency of disputes at various appellate levels in CBDT
Source: CBDT data It can be seen from the Table above that there was a reduction in the pendency of the number of cases filed in FY 2012-13 before the CIT (Appeals) over the previous FY 2011-12. There is also a marginal reduction in cases before the high courts, while there has been little change in the number of pending cases before the ITAT and the Supreme Court. The age-wise break up of pending appeals at various appellate levels during the last two FYs is given in Table 5.3 below. Table 5.3: Age-wise pendency of cases for CBDT
Source: CBDT data The Table shows that although the number of pending cases before the Supreme Court in the category of more than ten years has come down in FY 2012-13 over the previous year, the total number of pending cases has increased from 5,666 in FY 2011-12 to 5,808 in FY 2012-13. There is also an increase in the cases pending for one to two years and two to five years. The cases pending in the high courts have come down marginally from 31,373 in FY 2011-12 to 31,230 in FY 2012-13. The cases in all categories of pendency have increased; some reduction is however seen in the category of five to ten years. The total number of pending cases before the ITAT, however, has increased overall from 30,928 in FY 2011-12 to 31,015 in FY 2012-13. The total number of cases that were disposed of during the last two FYs is given in Table 5.4. It also provides a comparison of the success rates in the cases filed by the department and the taxpayer. Table 5.4: Disposal of dispute cases for CBDT
Source: CBDT data * Values in bracket are in per cent. **In the case of CIT (Appeals), I-T Department is not an appellant. The percentage is on the basis of success in favour of the department or the taxpayer out of the cases disposed of by each appellate authority. The remanded cases are considered to have been disposed of, but they have not been included as a success case for the appellant. It can be seen from the Table above that the success for the department at each level is lower than that for the taxpayer. The age-wise disposal of cases during the last two FYs is given in Table 5.5. Table 5.5: Age-wise disposal of cases for CBDT
Source: CBDT data The Table above shows that the number of disposals by the Supreme Court during FY 2012-13 was almost half that during FY 2011-12 – 1,030 during FY 2011-12 and 536 during FY 2012-13. The trend has been similar for cases pending before the high courts. ITAT, however, showed higher disposals, in particular in the category of more than ten years of pendency, the disposal in FY 2012-13 being 2.47 times the disposal in FY 2011-12. A study undertaken by FICCI on dispute resolution found the average time at each level as follows:
Graphs 5A.1 and 5A.2 in Appendix V.1 show the number of pending cases under the top ten Sections of the I-T Act in which the disputes are pending before the high courts from June 2012 to September 2013. Central Board of Excise and Customs (CBEC) CBEC deals with three types of taxes, namely customs duties, central excise duties and service tax. While most of the disputes in each type of tax are similar, some differences exist in the process of dispute resolution in the cases of baggage handling in customs and in cases of customs duty drawback. In the case of baggage handling, the value limit of the baggage determines at what level the cases are to be adjudicated. Table 5.6 below gives the adjudication limits. Table 5.6: Adjudication limits in customs a) In cases other than baggage
b) In cases of baggage
In the case of central excise service tax, there is no difference between different levels, and the adjudication is carried out according to the norms given in Table 5.7. Table 5.7: Adjudication limits in central excise and service tax
For central excise and customs, an appeal before the Commissioner (Appeals) should be filed within 60 days of the date of communication of the decisions or orders appealed against. A further period of 60 days is allowed on sufficient cause being shown by the taxpayer. Appeals before CESTAT should be filed within 3 months of the date of receipt of the decision or order appealed against. The delay may be condoned if sufficient cause is shown by the taxpayer. An appeal before the high court should be filed within 180 days of the date of receipt of the decision or order appealed against. An appeal before the Supreme Court lies after the decision of the high court or the tribunal. Appeals against all cases of CESTAT, except those involving classification/valuation issues, lie with the high court while that of classification/valuation cases lie directly with the Supreme Court. In the case of service tax, an appeal before the Commissioner (Appeals) should be filed within 2 months of the date of communication of the decisions or orders appealed against. A further period of 1 month is allowed on sufficient cause being shown by the taxpayer. Appeals before CESTAT should be filed within 3 months of the date of receipt of the decision or order appealed against. Pendency at various appellate levels in CBEC For filing departmental appeals in the higher courts, CBEC has issued instructions, dated August 17, 2011, specifying the monetary limits for filing cases. These are given in Table 5.8. Table: 5.8: Threshold monetary limit for filing appeal in CBEC
The total number of appeals pending at various appellate forums during the last three FYs is given in Table 5.9 below. Table 5.9: Pendency of disputes at various appellate levels in CBEC
From the tables above, it is apparent that there is an increasing trend in the number of appeals filed at all levels; there is a marginal decline only for the cases filed in the high court for the FY 2011- 12. While the cases at the Commissioner (Appeals) are filed by taxpayers, both parties (as well as taxpayers) may file cases at other levels on the basis of the adjudication orders received by them. As may be observed from Table 5.10, the volume of cases filed before the CESTAT is large. Table 5.10: Age-wise pendency of disputes in CBEC
Source: CBEC Table 5.10 indicates that the overall pendency has increased at all levels in FY 2012-2013 from the previous FY 2011-2012. Although the total number of pending cases before the Supreme Court has increased from 2,863 in FY 2011-12 to 3,081 in FY 2012-13, the number of pending cases before the Supreme Court in the category of less than one year has come down in FY 2012-13 over the previous year. The pending cases in the high courts have increased from 14,695 in FY 2011- 12 to 15,113 in FY 2012-13, with all categories showing an increase. Pending cases in CESTAT have also gone up marginally, from 53,583 in FY 2011-12 to 62,163 in FY 2012-13. The cases in all categories of pendency have increased; some reduction, however, is seen in the less than one year category. The total number of pending cases before the Commissioner (Appeals), however, has increased overall from 27,825 in FY 2011-12 to 33,225 in FY 2012-13. Disposal of cases at various appellate forums in favour of both the department as well as the taxpayer during the last three FYs, 2011-11 to 2012-13 is given in Table 5.11. Table 5.11: Disposal of dispute cases in CBEC
Source: CBEC *Remanded cases are taken as appeal allowed in favour of the taxpayer. ** Values in bracket are percentages. From Table 5.11, it can also be seen that the cases filed by the department have had a lower success rate than those filed by taxpayers. The percentage is on the basis of success in favour of the department or the taxpayer out of the disposal by each appellate authority. Remanded cases are considered to have been disposed of and have been included in the success case for the taxpayer. It can be seen from Table 5.11 that the success for the department at each level is lower than that of the taxpayer except in the Supreme Court in the FYs 2010-2011 and 2011-2012. Table 5A.1 to 5A.3 in Appendix V.1 gives disposal and age-wise pendency of adjudication of cases under different sections of the statutes of indirect taxes for FY 2010-11 to 2012-13. The number of cases filed under various sections and rules of indirect taxes up to December 2013 is also available in Table 5A.4 to 5A.6 in Appendix V.1. The average time taken to resolve disputes at each level estimated in a study by FICCI is given in the Diagram 5.3 above.
Present Alternative Dispute Resolution (ADR) Mechanism At present, the ADR mechanism comprises the following fora in direct and indirect taxes –
Both commissions allow taxpayers to make a true and complete disclosure of their duty liability or additional income (as the case may be) before them, over and above what has been already disclosed before the respective departments. The applicant taxpayer has to pay the full amount of tax and interest on the additional duty or income disclosed before the commission before filing an application. The applications can be filed before the Income Tax Settlement Commission only if the taxpayer’s case is pending before the AO and the assessment has not become time-barred. The advantage of filing the case before the settlement commission is that there is finality of the case and the terms of settlement include determining the amount of additional tax and interest thereon and the manner of payment. But more importantly, there is waiver from levy of penalty and prosecution under any central law for these transactions. However, if the commission is of the opinion that the applicant has not co-operated with it, it can send the case back to the AO. Similarly, in order to avail of the benefit of settlement provided by the Customs and Central Excise Settlement Commission, a show cause notice (SCN) is required to be issued to the taxpayer. The application to the settlement commission cannot be made if the matter has already been adjudicated upon and is pending before a tribunal or any other court. Further, no such application can be made unless a) the applicant has filed a bill of entry/shipping bill in respect of import/export of goods or filed central excise returns showing production, clearance of goods and payment of duty in the prescribed manner as the case may be, b) the additional amount of duty accepted by the applicant exceeds Rs. 3 lakh and c) the applicant has indicated when the additional amount of duty accepted by him along with interest due has been paid.The statute requires the Customs and Central Excise Settlement Commission to pass the settlement order within 9 months of receipt of the application; in practice, the time taken is longer. Immunity from prosecution is granted by the Customs and Central Excise Settlement Commission in respect of the offences under the Act to which it relates. Similarly, the I-T Settlement Commission can grant immunity under the I-T Act and the Wealth Tax Act. The order given by either settlement commission is final and high courts or the Supreme Court can only interfere with such an order under Article 226 or 32 (writ jurisdiction) of the Constitution of India if it is shown that the order issued by the commission is a perverse order. An order is perverse if any of the following is true:38
V.1.b Analysis of weaknesses The focal concerns of the taxpayer and tax administration are (a) protracted disputes and (b) the absence of effective means to prevent disputes. While, at a macro level, it appears that divergent opinions between taxpayers and the tax administration result in disputes, a granular analysis of the situation is required for formulating appropriate reform measures. Accordingly, it becomes imperative to understand the root cause of taxpayer/tax administration concerns and identify trigger points for protracted disputes. A review of the situation at hand reveals some key causes, described below, for long-drawn out legal battles between taxpayers and the tax administration. Legislative ambiguity and lack of administrative guidelines The Ministry of Finance is responsible for making and amending laws on direct taxes and indirect taxes. The two Boards issue notifications/circulars on a need basis to supplement the primary legislation. This often leads to ambiguity and inconsistency in its application. In the absence of clear administrative guidelines in the context of such interpretative issues, the tax officers inherently have to exercise their individual discretion in addressing matters. The disputes are also attributed to lack of stakeholder participation at the time of law making and legal drafting. On several occasions, taxpayers and the tax administration have dragged each other to the courts merely because the provisions are capable of multiple interpretations. Quality of assessments Apart from the interpretational issues outlined above, the framing of assessments by tax officials, inadequacy of time to taxpayers to respond to the notices and not dealing adequately with evidence on record have also been significant contributors to the logjam at various stages involved in dispute resolution. The substandard quality of assessments40(whether in the form of non-speaking order or lack of judicial discipline or misinterpretation of judicial precedents) can be partly attributed to inadequate training/industry experience of tax officers and the practice of taking up assessments at the tail-end of statutory timelines. This also results in taxpayers not getting adequate time to respond to queries raised during assessment. Illustrative statistics revealed that, between May and October 2012, tax officers committed errors in about 88 assessments out of 325 high-value cases pertaining to corporate taxation with a tax effect of about Rs. 486 crore.41 Arbitrary/Aggressive additions In the recent past, it has been widely claimed by taxpayers represented by major chambers during stakeholder consultations held by the TARC in the five metros that revenue authorities have been making arbitrary/irrational demands because of the revenue target-linked performance evaluation and incentive policy for tax officers. While such an evaluation policy encourages revenue collection, the policy cuts both ways – from the tax administration’s standpoint, it creates undue pressure on tax officials to augment revenues leading to arbitrary/frivolous demands in certain cases; from taxpayers’ standpoint, it casts doubt on the sanctity of the entire tax administration, reducing the taxpayer’s willingness for compliance, thus indirectly creating incentives for non- compliance. In most cases, the fundamental cause of disputes between taxpayers and revenue authorities is the incompatibility of the interests of the two sides to a dispute. Some instances of undue assertion by the AOs, which may not be really legitimate, could also be a cause. Overarching revenue collection targets set out for tax officials and jurisdictional commissioners inherently conflict with taxpayers’ expectations of fair interpretation of prevailing legislation and due regard being accorded to judicial wisdom enshrined in tax jurisprudence; at times, power-driven motives are behind multiple frivolous tax demands that drag taxpayers into forced disputes with revenue authorities in India. The fact is that, in the absence of a reliable economic model capable of making meaningful revenue projections, budget revenue targets are set in the most rudimentary fashion and, subsequently, not revised to reflect the changing performance of the economy. Consequently, there is immense pressure on the tax administration to collect (non-existent) revenue, which results in the extortive behaviour of the pressured tax officer. This vicious cycle has to stop, with the brakes applied at the very top of the tax administration and tax policy making. Audit objections A major component of disputes in both CBDT and CBEC is demands pursuant to audit objections raised either by internal audit or by the CAG. Field formations may not be in agreement with the CAG’s audit objections. But the resolution of the matter with the CAG often takes a long time. To take care of that, the CBEC has issued circulars instructing that protective demands be raised in such cases. The logic for the prescription is that such protective demands would ensure that the matter does not become time barred.42 Besides the above, there are other cases in which the department has gone in appeal before higher appellate authorities, delaying resolutions even further. Cases having similar issues are referred to “Call Book”. The cases referred to “Call Book” are in four categories:
Table 5.12: Reasons for Pending Call Book Cases in CBEC
Table 5.12 relating to cases consigned to call book illustrates the dimensions of the problem. It is not clear whether the CBEC’s instructions are being consistently followed in the field and whether tax officials issue demands contrary to the CBEC’s instructions under Section 37B of the Central Excise Act, 1944. There is, therefore, a need to revisit the basic approach to action on audit objections to eliminate unnecessary demands. To begin with, just because there is an audit objection, there is no legal need on the part of the Boards to require field formations to issue protective demands, particularly in the cases where the latter are convinced that the taxpayer has complied correctly’. This practice of issuing protective demands has clearly emerged out of extreme risk-aversion on the part of the top echelons of the two Boards, to avoid taking proper decisions. It is time accountability is imposed on the Board to take due responsibility, the absence of which impinges directly on the taxpayer in an adversarial way. Indiscriminate resort to extended period in indirect taxes and lack of finality attached to concluded assessments It is often seen in indirect taxes that audits/assessments by the authorities are not initiated within the timelines prescribed by law (generally one year from the end of the relevant tax period). As a result, for tax disputes identified during audits/assessments, CBEC seeks to invoke demands for past periods alleging fraud or suppression on the part of the taxpayer. The experience in this regard has been that in a large number of such cases, the revenue department’s allegation of fraud, suppression, etc, does not survive before the courts as the transactions in question are found to have been duly disclosed by the taxpayer in his books of accounts. Most tax legislations permit revenue authorities to re-open assessments or subject assessments to revision in prescribed circumstances. The rationale underlying the existence of these powers with the tax department is to empower revenue authorities to protect revenue interest and take corrective action where taxpayers manage to defraud the tax department at the time of the original assessment. However, more often than not, the powers of reassessment or revision of assessment are exercised as a tool to undo inaction or incorrect action taken by the AO at the time of the original assessment. Not enough accountability currently exists in the present structure to ensure that the pre-conditions provided in tax legislation for invoking such actions are fulfilled before they exercise their powers. Thus, there is little accountability on the part of the AO who commits the error; instead, the effect tends to get passed on to the taxpayer, who has to undergo reassessment by another officer. Excessive litigation by way of appeals A direct consequence of the lack of objectivity and fairness in the original decision is that far too many cases get into tribunals and courts. These needlessly add to administrative and compliance costs and add uncertainty to the tax environment. The tendency to file appeals against orders in favour of taxpayers, without giving due importance to the merits of the case, is pronounced. Although both departments have come out with guidelines for litigation to control the practice, it appears to have had little effect. Apart from this, there is currently no time limit prescribed for disposal of cases. In places where such a time-limit is prescribed, it is not adhered to (this is discussed later).43 In cases where there is closure of cases, detailed reasons before closure are not provided, which consequently leads to appeals and counter appeals being filed. Weaknesses in the present ADR Mechanism AAR Historically, the AAR has remained one of the most popular ADR forums for taxpayers in India. One distinct feature of the AAR is that rulings pronounced by it are binding on the taxpayers and revenue authorities. However, the importance of AAR as an effective dispute resolution forum has been questioned during the last few years as parties to the dispute resorted to constitutional remedies against otherwise binding rulings of the AAR. In certain cases, the taxpayers/revenue authorities resorted to forum shopping by filing a special leave petition (SLP) before the Apex Court under Article 136 of the Constitution of India, instead of a writ under Article 226 of the Constitution of India. In a recent judgement44, the Supreme Court has stated that the ruling can in the first instance be challenged before the high court under Article 226 or Article 227 of the Constitution instead of directly in the Supreme Court as an SLP. An aggrieved party should not appeal directly to the Supreme Court unless it appears to the court that the SLP raises substantial questions of general importance or a similar question is already pending before the Supreme Court for decision. AAR has also come under criticism for inordinate delays in pronouncing rulings despite a statutory limit of 6 months.45 Delayed appointment of the chairman/member(s) of the AAR has contributed to such delays. Other key limitations that often come in the way of AAR being an effective forum for resolution of likely disputes are the following.
Settlement Commission There is a limitation for filing an application before the settlement commission. This has been a matter of debate and litigation as taxpayers feel that there should not be any limitation on the kind of applications and the number of times the taxpayers can file before the settlement commission, if it is to be a true ADR mechanism. A taxpayer can file an application before the settlement commission for dispute resolution only if the taxpayer’s case is pending before the AO and the assessment has not become time-barred. The taxpayer cannot approach the commission in case the dispute has reached the stage of appeal. This is true for both direct and indirect taxes. The application filed is to be considered and either admitted or rejected within 14 days of the date of the application as per Section 245D (1) of the I-T Act. After admission of the application, the application is to be decided within 18 months of its receipt. But the CAG, in its 2001 report46, has pointed out that the I-T settlement commission, in some cases, has taken between 12 months to 32 months to admit applications. Further, only 624 (36%) application were disposed of out of 1,729 settlement applications filed before the settlement commission between 1994-95 and 1998-99; 1105 applications were found pending by the CAG involving revenue of Rs.112.8 crore, including 22 cases, which were pending for more than 5 years, and 622 applications, which were pending for between 2 and 5 years. Thus, it can be seen that there has been considerable delay in disposal of settlement applications. One reason often cited for the delay is that at present, there are only four benches of the settlement commission for both direct taxes and indirect taxes. These are at New Delhi, Mumbai, Kolkata and Chennai. Such limited benches compromise the accessibility of the taxpayer and inevitably leads to delay. MAP While the MAP process offers an ADR route for cases, certain inherent limitations in the mechanism are the following.
As the MAP procedure is typically a special treaty-based procedure falling outside domestic law, the tax administration has to recognize that the competent authority has sufficient legal authority to enter into mutual agreements and to ensure they are implemented. The role of the competent authority, therefore, needs to be clearly recognized and understood in this context. DRP While the DRP was instituted to provide an alternate, yet fair, fast track dispute resolution forum to taxpayers, the implementation of the DRP as an institution has been far from satisfactory. The functioning of the DRP has come under intense criticism even by judicial authorities. The Karnataka High Court stated that the DRP should not be allowed to go beyond the proposed draft order nor should it be allowed to suo moto consider issues not raised before it.48 Even the ITAT argued similarly in another case involving Dredging International NV.49 It also stated that the DRP can only confirm, reduce or enhance the variations proposed in the draft order but it should not set aside any proposed variation or issue directions for further enquiry and passing of the assessment order. Practically, it has been observed that the DRP rarely affirms a position different from the one proposed by the AO. Statutorily too, the powers of the DRP is constrained vis-à-vis the powers of the first appellate forum, i.e. CIT (Appeals) – the DRP does not have the power to annul or set aside the draft assessment, nor can it work out a compromise or arbitrate in a dispute. The DRP is part of the assessment process (being part of Chapter – XIV of the I-T Act). It works on the draft assessment order, and hence, there have been questions on whether the DRP can give its ruling on a new issue.50 CIT (Appeals), on the other hand, has powers to enhance the tax demand by carrying out investigations. The Uttarakhand High Court had also raised questions about the independence of the DRP, but this seems to have been settled by putting officers not of the same jurisdiction on the panel to hear the cases.51 Further, the absence of independent experts within the DRP, tight timelines for the filing of objections by a taxpayer and the fact that the DRP is available to only limited categories of taxpayers – cases of international taxation and those of TP - are some of the issues which curtail the efficacy of the DRP as an ADR forum. The credibility of the DRP as an effective ADR forum received a major setback when a provision was introduced by the Finance Act, 2012, which enabled the Commissioner to challenge the DRP’s directions. This, in a way, meant that the department was challenging its own order. V.2 Global best practices Many advanced tax administrations have taken a strategic approach to dispute management by setting up a dedicated organization for dispute management. These setups function with adequate independence so that the taxpayer has sufficient confidence in the administration’s objectivity, justness and fairness. They engage in proactive measures to ensure that avoidable disputes are not generated and only a few matters turning on important issues escalate to litigation. They normally have standard operating procedures, which are made available to taxpayers. Another emerging concept in tax administrations is ‘enhanced relationship’ arrangements between taxpayers and the tax administration. The focal point of such an arrangement is a collaborative approach between taxpayers and tax officers, to establish and sustain mutual trust with commercial awareness, openness and responsiveness on the part of the tax administration. Tax administrations often also issue technical guidance, which has the force of being binding. Technical guidance is to ensure the consistent application of law and rules and to enhance the taxpayer’s understanding of law. Technical guidance also provides clarity and consistency in interpretation to minimize disputes in taxation. Many evolved tax administrations have also been adopting ADR techniques to resolve tax disputes out of court. This results in relatively fewer litigation cases. Some of these best practices have been discussed in detail in Appendix V.2. V.3 Gap Two issues emerge – one, about the present structure and processes, and the other, about the adequacy of people manning those structures. It is often felt that the present structures are not able to adequately deliver on the resolution of disputes. There is also no structure available to prevent disputes. Prevention of disputes is largely being done through administrative instruction and putting in place some monetary limits. On the adequacy of departmental persons engaged in the area of dispute, it is seen that most people are placed in these jobs without adequate preparation or training. Many countries identify training needs, develop training plans, undertake efforts to improve the outcome of the training and evaluate whether those trained can take on the job. But whether this is sufficient is debatable. In this context, the main gaps could be said to be the following. V.3.aLack of strategic approach to dispute management In India, even though dispute management is recognized as an important function of tax administration, there is neither an articulated strategy nor a cohesive and structured approach that aims to reduce disputes to the minimum and enhance the confidence of taxpayers by improving the quality of decisions. Indeed, there is no ring fencing of the number of disputes since AOs are likely to issue infructuous demands, as already elaborated, that are likely to lead to disputes. Effective management of disputes requires a comprehensive strategy that addresses key issues, starting from the causes to the final settlement of disputes. An example of this is the HMRC’s Litigation and Settlement Strategy that clearly sets out the strategic objectives and how they are to be achieved.52 V.3.b Lack of functional specialization and development of required competencies Dispute resolution is one of the multiple functions that officers in the field perform and one of the key reasons for the poor quality of decisions is the perception that their performance is assessed not on the basis of the quality of their orders, but by the amount of revenue sought to be generated. The dispute resolution function is performed by the officers irrespective of whether or not they have the required aptitude for the job. Guidance in terms of a proper and effective knowledge management system, case references etc. are also not made available to the officers. But as the business landscape is changing rapidly and complex business models are taking shape due to changes in technology and global integration, the need for tax administrators to develop specialized skills and knowledge in specific areas so as to take informed decisions is increasing day-by-day.53 The lack of such specialization also adversely affects the quality of decisions. V.3.c Lack of accountability for quality of decisions The quality of decisions delivered by tax officers is not a specific parameter in their performance assessment. Performance targets also do not provide for this. For example, the targets given for Commissioners (Appeals) are only in terms of the number of cases to be disposed of in a month. A view that was consistently expressed during our interactions with industry as well as officers was that the targets assigned were not realistic and if the officers were to pass well considered and good quality orders, they would not be able to achieve the prescribed number of disposals. The reviews of orders passed by lower authorities also clearly do not address the dimension of quality and seem to primarily focus on whether the orders were in favour of the revenue department or the taxpayer. What we have heard is that in the latter case, there is a pronounced tendency to take the matter to further litigation, irrespective of whether or not such an action is merited. This leads, on the one hand, to the growth of avoidable litigation and on the other, to sending wrong signals to investors. Further, the rate of recovery of demand made by an AO is not tracked in any manner, while the amount of demand raised is recognized. This is contrary to any rational manner of achieving recovery. V.3.d Taxpayer unfriendly approach – absence of trust and collaboration Currently, the process of engagement with the taxpayer where there is a potential or existing dispute is primarily adversarial and lacks trust or openness. Besides, there is neither a conscious effort on the part of tax administrators to establish facts nor an effort to understand the position of the taxpayer in an open and collaborative manner.54 This leads to an unsatisfactory outcome in a large number of cases, and escalates them to higher levels of formal disputes. The overall perception that is generated is that the existing system is not taxpayer friendly and taxpayers’ submissions do not affect the eventual decisions. In general, therefore, taxpayers do not have confidence that they would get justice at the hands of departmental officers. Thus, the first level where they can expect a fair order is the tribunal. The entire process thus functions in an adversarial environment. The approach should be collaborative and solution-oriented. V.3.e Retrospective amendments Retrospective amendments have further undermined the trust between taxpayers and the tax administration. Many seem to feel that it has become the order of the day. Many of the retrospective amendments have been introduced to counter interpretation in favour of the taxpayer upheld earlier by the judiciary. The most famous is the introduction of provisions for taxation of‘indirect transfer’ with effect from April 1, 1961, to overrule a Supreme Court judgment which held that Indian tax authorities did not have territorial jurisdiction to tax offshore transactions, and therefore, the taxpayer was not liable to withhold the taxes.55 An overnight change in the interpretation of a provision, which earlier held ground for decades, provides scope for tax officials to rake up settled positions. This approach to retrospective amendments has resulted in protracted disputes, apart from having deeply harmful effects on investment sentiment and the macro economy. V.3.f Lack of timeliness Even though tax law lay down the time limits within which a dispute should be resolved, the existing data as given in Tables 5.3 and 5.10 clearly show that in a large number of cases this is not followed. V.4 Way Forward It is possible to change the taxpayers’ perception about the handling of tax disputes only through a paradigm shift from the excessive emphasis on revenue collection by tax officers so that risk aversion in their actions guided purely by revenue considerations is eliminated. While the excessive emphasis on tax collection leads to the neglect of some other critical areas of performance of the tax administration, risk aversion leads to patently arbitrary and incorrect decisions that fuel avoidable litigation, which burdens taxpayer with excessive legal and hence, compliance costs. This has been dealt with elaborately in Section III.4.a of the report. Based on this analysis of the underlying causes of disputes and best international practices for dispute identification, prevention and resolution, the following measures are necessary to successfully prevent, manage and resolve disputes in India. V.4.a Organizational arrangements Independent function with its own structure, accountability and responsibility, delinked from revenue targets We have separately emphasized the need for restructuring of the two Boards and their field formations along functional lines while collapsing various functions into one vertical for large businesses. Dispute management, being one of the critical functions of tax administration, is one of the important verticals in the proposed structure, the details of which are dealt with in Chapter III of this report.56 The dispute management vertical should cover the entire gamut of dispute management commencing from policies and measures to minimize the occurrence of disputes to the efficient and satisfactory resolution of disputes. All functions relating to disputes – at the original as well as appellate level – should reside within this vertical and it should be categorically delinked from revenue targets. It should be driven by separate performance measures and targets that give due importance to the quality of the processes as well as recovery, and not by the extent of demand. In order to ensure independence and fairness in assessment proceedings, the AO issuing the show cause notice (SCN) in case of a dispute should not be the authority adjudicating the matter. In the present system of indirect tax administration, the authority issuing the SCN, the authority issuing the assessment order, and the Commissioner (Appeals) – all of them function under the administrative control of the same Chief Commissioner. Such a system does not allow an independent view on the SCN. With the functional and administrative separation of the compliance and dispute resolution functions, it is most likely that such independence would result in a number of SCNs or untenable notices getting dropped, thus reducing the number of unwarranted cases clogging the judicial machinery. Officers posted in the dispute vertical must receive adequate induction training and on-the-job training on areas such as basic principles of law and jurisprudence, principles of statutory interpretation, theory of precedents and principles of evidence. They should be given adequate support for discharge of their duty. Placement of dispute resolution functions at appropriate levels Dispute resolution requires officers with relevant knowledge, expertise and maturity. Currently, the only criterion adopted in indirect taxes to decide on the level of the adjudicating authority is the amount of duty. This applies to cases in which penal provisions are invoked. In all other cases of assessment, the decision rests with the AO, who usually is the Superintendent/Appraising Officer or Assistant or Deputy Commissioner. In direct taxes, all original decisions are taken at the level of the AOs, who are ITOs or Assistant or Deputy Commissioners. The Joint/Additional commissioners are required to monitor a specified number of cases to provide guidance to the AOs. A few cases may be marked by the Commissioners to the Joint/Additional Commissioner for assessment. Subsequently in this Chapter, we have discussed enlargement and strengthening of the scope of the Dispute Resolution Panel as it exists, and institution of a similar mechanism for the indirect taxes. Commissioner (Appeals) In other than technical and small value cases, the Commissioners (Appeals) should function as a 3-member Commissioners (Appeals) panel. Further, in important cases, the departments should be required to represent their cases before the Commissioners (Appeals). This will improve the independence as well as quality of decisions. CIT (Appeals) should continue to function as an independent appellate authority. Revenue authorities are called to appear in all cases before the CIT (Appeals), but they seldom do so. It should be mandatory for revenue authorities to appear before the CIT (Appeals) so that CIT (Appeals) has a chance to examine and cross-examine the taxpayer and then base its judgment as a true independent appellate authority. Effective process for proper outcomes The principle embedded in both direct and indirect tax laws is that of self-assessment. This means that the primary responsibility of the taxpayer is to exercise due diligence in complying with his obligations under the law and that of the tax administration is to ensure that conditions are created to enable the taxpayer to discharge his responsibilities. Such a system can function effectively where the approach on the part of both is based on a clear recognition of their shared responsibilities. This emphasizes that the relationship should be based on trust and collaboration. A large number of disputes could be eliminated if adequate participation from taxpayers is mustered starting from the law drafting stage itself. Like the practices adopted in the Netherlands, Australia and France, India should establish a process where tax officers and taxpayers, prior to starting the assessment, disclose the full facts of the case and come to an agreement on the interpretation and tax positions adopted. ‘Enhanced relationships’ should be established in India to provide certainty to taxpayers, especially in the Large Business Service (LBS), to elevate their confidence in the transparency of the tax administration in India. Hence, it is essential to agree on the facts of the specific case and interpret the same harmoniously and arrive at agreed positions. To improve its relationship with taxpayers, it is imperative that the tax administration uses conflict de-escalation measures. Towards this goal, the tax administration should encourage consultative participation from taxpayers in the tax administration process, and adopt an improved interpersonal approach in dealings with taxpayers. A symbiotic and near professional relationship between the tax administration and taxpayers would go a long way in reducing the overall cost of compliance and disputes. NADT and NACEN should institute a course on a regular basis to train people on‘enhanced relationship’. This would also require psychological training. Tax officers should not use a standard questionnaire for seeking information, and should customize the requirement based on the facts of each case (i.e. carry out an issue based/risk-based assessment). The revenue department can consider implementing a risk-based assessment strategy according to which detailed assessments should be done only in high-risk cases, i.e. cases with the highest probability of under-reporting. This will also result in better use of resources by tax officials with fewer cases and more time for assessment work. Appropriate procedural guidelines should be issued directing tax officials to start early on the assessments and avoid a last minute rush to complete the assessment. For instance, all non-TP assessments should be completed at least two months prior to the statutory due date, and the same can be spaced out evenly in the last 6 months. This would also give adequate time to appropriately complete the assessments involving TP matters after the orders from the TP officers are received. The current practice of assessing all TP cases applying a monetary threshold is also flawed. It is also necessary to frame guidelines for reporting to or monitoring by higher tax officials. In MAP cases, these guidelines should direct tax officers to assess the income of the taxpayer for subsequent years on the basis of directions by competent authorities who have settled disputes under the treaty for an earlier year if there has been no change in facts and the law. To ensure good governance, tax officials should be mandated to be articulate in framing the assessment or draft assessment order. Ideally, the orders issued by the tax officers should follow a standard template to ensure consistency of flow of content regarding the background of the taxpayer, business operations during the year, the issues including the legal issues involved, interpretation of legislative provisions and its applicability to facts and legal issues involved in the case, tax jurisprudence relied upon by the tax officers and the conclusion thus arrived. Consistency in drafting the assessment order would help minimize potential disputes that could arise from these. There should be emphasis on greater accountability and the power of revenue authorities to re- open or revise assessments should be restricted. Re-opening/revision of assessments should be initiated only by exception, not as a matter of routine. The action taken by revenue authorities to recover taxes for the earlier periods should be restricted and based on internal guidelines founded on rational reasoning. Clear guidelines must be instituted for tax officials to initiate and conclude investigations under tax legislations within the prescribed time limit. Additionally, re-opening of tax disputes for earlier periods should be subject to the approval of senior officers. The manner of investigation should be hassle-free and there should be no coercion or force from revenue authorities, leading to harassment of taxpayers, to recover taxes during investigation. The CBDT and CBEC should encourage consultative participation from taxpayers in drafting supplementary legislation/administrative guidelines. Such a collaborative approach to rule making would be in line with international best practice and will help achieve the desired result in the form of collaborative dispute resolution. Infrastructural support Lack of adequate budgets and resources has traditionally been a big hurdle in ensuring the effectiveness of the tax administration. Having a dedicated budget for staffing and training for the two Boards would help improve the productivity of tax officials and improve the taxpayer-revenue authority relationship by professionalising the approach to tax disputes. V.4.b Dispute Prevention Clarity in law and procedures It cannot be overemphasized that effective communication is fundamental to tax administration in general and dispute management in particular. A fair amount of disputes arise due to ambiguity and imprecision in laws, rules and regulations. Adequate care, therefore, needs to be taken at the drafting stage to ensure that the language of the tax provisions is unambiguous and consistent with the legislative intent. Appropriate procedures should be provided for in the legal machinery to necessitate compulsory consultation with stakeholders on the draft law, especially in the case of a substantive provision. The proposed/draft tax legislation should be made public to encourage taxpayers to identify potential areas of ambiguity that could lead to tax disputes. This would help achieve healthy interaction between taxpayers and the tax authorities to address risks in the existing pattern of transactions and the tax laws would be implemented with minimal transitional difficulties. This process is also an integral part of WTO Agreement on Trade facilitation, which India is a signatory to. Business should be allowed to play a greater role in the evolution of delegated tax legislations. Further, views put forth by stakeholders during consultations should be evaluated rationally and accepted, if helpful. Such a consultative approach would also help draft unambiguous laws as taxpayer views would be discussed and dealt with right at drafting stage. It is useful to mention that a similar approach was followed in the case of Direct Taxes Code Bill and GAAR. There should be a standard operating procedure for drafting tax laws and tax officials must, as a matter of best practice, refer to these guidelines. The following standard operating procedure should be followed in the process of framing laws, rules and regulations.57
Timely intervention by Boards to clarify contentious matters One of the practices in different tax administrations is to pro-actively clarify contentious matters and articulate the departmental view to provide guidance to taxpayers as well as to tax officials. These are often done through interpretative statements or practice statements. This goes a long way in preventing disputes. Section 119 of the I-T Act and similar provisions under the indirect tax legislations, Section 37B of the Central Excise Act, 1944, and Section 151A of Customs Act, 1962, empower the CBDT and CBEC to issue orders, instructions, etc to its officers. Such orders/instructions, to the extent they are beneficial to taxpayers, are binding on tax authorities. These delegated powers to issue administrative directions/guidance in the form of instructions have not been used as effectively as in some other advanced tax administrations, such as those of New Zealand, Australia, and Canada. It is imperative for efficacious implementation of the legislation that the CBDT and CBEC actively issue interpretation statements/rules on deductibility/taxability aspects of particular items, or on new pieces of legislation, such as the GAAR, taxation of indirect transfer of capital assets, approach and administrative practices to APAs, specific anti-abuse provisions, domestic TP, etc, and for indirect taxes on taxation of software/software related transactions, taxation of transactions relating to intellectual property rights, scope of the definition of ‘service’ under the new service tax regime based on a negative list, identification of establishments of service provider/service recipient for service tax purposes, etc. The process of development of such statements/instructions is also of vital importance. Considering the complexity of emerging issues, it is essential that subject matter experts are involved in the development of such instructions. Both the Boards should proactively engage with their own officers and taxpayers to identify issues that need to be clarified and not wait for the final outcome of litigation, as happens currently. Even though the instructions issued under Section 119 of the I-T Act, 1961, Section 37B of the Central Excise Act, 1944, and Section 151A of the Customs Act, 1962, are binding on officers under the two Boards, it is often found that they are not strictly followed. The Boards need to put in place an effective monitoring mechanism to ensure that they are followed in letter and spirit, any deviation is discouraged and the tax administration’s position in litigation is consistent with the position enunciated in such statements.58 The tax official must, as a matter of best practice, refer to administrative guidelines and in relevant cases, refer to preceding views taken by other tax officers relying on such administrative guidelines. A healthy practice of consistently applying administrative guidelines wherever appropriate would ensure accuracy of outcomes in assessment and minimize potential for dispute. Further, tax legislation and administrative rules/guidance should in parallel and continually address potential conflicts with international agreements (such as tax treaties, tax information exchange agreements), guidance by agencies such as OECD, UN etc. Avoidance of tax demands which are not on merits As discussed above, a large number of cases involving demands are pending on account of audit objections, particularly those of the CAG. Under the extant instructions of both the Boards, officers are required to issue demands, except where the audit objection is contrary to the Board’s instruction. It has also been reported that even where a Board’s instruction covers an issue, demands are routinely raised irrespective of merits. This practice of raising ‘protective’ demands is a negative practice.59 It is absolutely essential that demands for taxes are invariably raised on merits, whether or not they arise from the CAG’s audit objections. In Chapter III of this report, we have recommended a separate vertical for compliance verification or the audit function. One of the responsibilities of this function is to deal with matters pertaining to the CAG and PAC. If required, a view should be formed on audit objections at a sufficiently high level and the required instruction on the acceptability or otherwise of the audit objections should be conveyed to the AOs. Once a view is taken on merits, subsequent action should follow and the department should defend its action before the CAG. In other words, the current practice of raising demands irrespective of merits should be discontinued. This would eliminate a vast area of avoidable disputes. In the CBEC, there is also the practice of consigning contested demands to call book. This means that such demands remain pending until the final outcome of the audit objection. Data in Table 5.13 indicate that a large number of cases are pending for considerable periods of time. In the taxpayers’ accounts, these demands lead to the creation of provisions for taxation or contingent liabilities. If the recommendation we have made is implemented, it will be unnecessary to transfer such cases to call book and keep them pending as demand would only be raised and decided on merits. Hence, the procedure of call book should be abolished. Pre-dispute consultation It is desirable to avoid disputes where a collaborative approach can provide a solution. An administrative pre-dispute consultation mechanism may be instituted in both the organizations for resolving tax disputes at the pre-notice stage through an open dialogue with the taxpayer, in which both sides articulate and discuss their respective positions and views on the matter at hand. An amicable resolution would be possible when a common view emerges on the facts and the legal position. It is expected that this process, if followed in proper spirit, would lead to elimination of a large number disputes leaving only a few contentious matters in which mutual agreement is not reached. Such disputes would follow other legal channels. Tax officers should not be allowed to resort to coercive action for recovery during the consultation process. Officers who are competent to issue a notice should be the officers to engage in such consultation. They should adopt an open and receptive attitude and give full consideration to the taxpayer’s point(s) of view first before formulating their own opinion. The purpose of the mechanism is to actively seek a common ground in the case of a potential dispute; therefore, openness in dialogue is of crucial importance. At the conclusion of this process, a notice/draft assessment order would be issued only in respect of unresolved issues. Further, the proceedings should be duly recorded and signed by both. The points on which agreement has been reached should not be contested any further by either party. Proper control over quality of show cause notices/demands/questionnaires issued to the taxpayers The starting point of a formal dispute is the SCN in the case of indirect taxes. The quality of the notice, therefore, is critical to the satisfactory outcome of the dispute. There is need to ensure that notices issued meet quality parameters. The notices should be clear and transparent to meet the tests of legality and fairness. The factual basis of the allegations made and the correct invocation of relevant legal provisions would be essential. SCNs often suffer from the following weaknesses:
As in the case of indirect taxes, the I-T Act also provides for the issue of SCN under Section 142(2) for obtaining full information relating to income or loss to any person in relation to his assessment. Usually a standard questionnaire is issued for seeking information or production of documents and accounts. The tax officer should give a hearing to the taxpayer after the information is furnished. Typically, no such hearing is given and many times the assessment orders are issued. Such action clouds the transparency of the process. It is felt, therefore, that the process should be standardized in both direct and indirect taxes to bring certainty and precision in the process. Avoiding conflicts during audits While dealing with potential disputes during audit procedures, an attempt should be made to resolve them before the conclusion of the audit. Disagreement should be dealt with in the same manner as outlined above in relation to pre-dispute consultations. This goal can be achieved by imparting good training and instilling reasonableness in tax auditors.60 V.4.cPre-filing support to the taxpayers In order to ascertain the tax liability a priori, there should be an adequate mechanism to provide pre-filing support to taxpayers. At present, AAR and APA are two such forums. But these need to be expanded so as provide taxpayers authoritative guidance on various provisions of tax laws which have potential to create disputes. Many countries have forums to issue interpretative statements, industry-wise interpretations or clarifications of various provisions of tax laws, etc., on the request of taxpayers or otherwise. These forums are also segmented on the basis of taxpayers. Pre-filing support is intended to help taxpayers plan their business in advance and avoid disputes. These forums can deliver rulings within a specified period of time on questions submitted by taxpayers, which will help taxpayers file their tax returns. AAR In AAR, only non-resident taxpayers and specified categories of resident taxpayers can file applications to obtain binding rulings. The present functioning of the AAR has often been criticized for inordinate delays and inconsistency in decisions. It is imperative to ensure that the timeline for the AAR to provide its ruling is adhered to, as otherwise it would make it imperative for taxpayers to hold back business decisions. Further, the AAR mechanism should be accessible to all corporate and non-resident taxpayers on proposed transactions in direct and indirect taxes, thereby aligning the scheme of AAR in indirect taxes to the present provisions of the I-T Act. Apart from this, the mechanism should be allowed for all domestic cases as well. All decisions of AAR should follow a consistent principle. The present arrangement of only one bench of AAR at Delhi limits its accessibility to taxpayers; benches of the AAR should be constituted in other metropolises such as Mumbai, Bangalore, Kolkata and Chennai. The AAR bench in Delhi should function as the principal bench of AAR and should hear complex and high value cases. AAR benches outside Delhi could be chaired by retired judges of high courts. APA APA provides for an agreement between the taxpayer and tax department to fix the prices of future related party transactions, covered by TP rules. This can also be expanded to cover domestic TP cases. Group and Individual Issues There is a need to provide a forum where taxpayers can request interpretative statements, industry- wise interpretations or clarifications of various provisions of tax laws, etc. These issues, as raised by taxpayers from time to time, would form a bank of issues on which the respective Board can issue departmental views. This could be done in conjunction with the Tax Policy and Analysis (TPA) Division. This forum, thus, would act as a taxpayer service entity, ensuring greater certainty for taxpayers. The tax administration on its part should ensure that statements or interpretations are accurate and consistent, and statements on such group or individual issues should be binding on the tax administration. V.4.d Taxpayer Dispute Resolution Centre (TDRC) TDRC will function as a facilitation centre responsible for providing taxpayer service in the dispute management vertical. It would serve as a single point of contact for taxpayers guiding them on whether they should opt for the early dispute resolution (EDR) channel or the ADR channel. TDRC will communicate with the taxpayer and narrow down and determine the issue(s) involved in the dispute, i.e., whether it involves a question of fact, a question of law or a mixed question of law and fact. A taxpayer can ideally avail the EDR facility if the disputes are small, requiring simple rectification and those that can be disposed of summarily. EDR would also include a resolution through DRP. The ADR channel, on the other hand, comprises conciliation and arbitration. Ideally, disputes involving simple questions of fact should be referred for conciliation while those involving a mixed question of law and fact should be referred for arbitration. Substantial questions of law, however, would not be fit for resolution through these methods and TDRC should advise the taxpayer to opt for litigation for the resolution of such disputes. After the taxpayer moves to EDR or ADR and gets his issues resolved, the tax demand can be worked accordingly. The TDRC would thereafter communicate the final order to the taxpayer. The tax demand would thus crystallize at this time. If the taxpayer is dissatisfied with the resolution from the EDR or the conciliation process in the ADR, he can decide to object to it and a formal process of litigation can be initiated thereafter. Arbitral awards are final and binding and cannot be appealed against. However, an application for setting aside an arbitral award can be filed according to Section 34 of the Arbitration and Conciliation Act, 1996. TDRC should be headed by an officer of the rank of Commissioner and have a number of Additional/Joint Commissioners and Deputy/Assistant Commissioners. TDRC will need to be based in each of the important offices/centres, particularly in those places where the Commissioner (Appeals) is posted. TDRC could be based on taxpayer segmentation and also on the basis of the type of tax. It would be imperative that persons manning TDRC have adequate knowledge of law and processes. If required, professional legal help can also be sought by employing persons with a sound law background with adequate knowledge of tax laws. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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