The Government had constituted Tax Administration Reform Commission (the TARC) headed by Dr. Parthasarathi Shome, on August, 2013, to suggest core reforms to the tax administration set-up in the Country. The TARC has now submitted its Third Report dated December 2, 2014 called the “Third Report of the Tax Administration Reform Commission”. The said Report makes several critical and far-reaching suggestions which are intended to radically change the working of the Income tax and other Revenue Departments.
The Third Report focuses on impact assessment on taxpayers’ compliance cost of new policy and administrative measures of the tax Department, States need for reform in this area and action to be taken on immediate basis. The Report also highlights measures for deepening and widening the tax/ taxpayer base and recommending a system to enforce better tax compliance.
Some of the key recommendations of the TARC are as under:
- Improvement in basic approach to compliance verification – Currently, the focus appears to be primarily to find fault in assessments. This approach overlooks two important outcomes that the process can lead to namely, compliance improvement and compliance measurement. The process, therefore, needs to be made far more collaborative and transparent. It should be a part of the auditor’s task to provide help and suggestions to taxpayers to improve compliance, which is the common practice internationally;
- An open discussion about the issues arising in audit, and taking on board the views of taxpayers on those issues before taking a final position should be encouraged as an integral part of the process.
- As part of this process, when the Commissioners finalise the audit points in audit committee meetings, they should be required to give an opportunity to the taxpayers being audited before they take a final view on the audit points;
- As part of the quality management of audit, the DG (Audit) should independently seek feedback from the taxpayers being audited on their experience during the audit and their perception of how the audit parties conducted the audit;
- The performance evaluation of audit also needs to be made more broad-based.
In its Third Report, the TARC has noted the following with concern:
- In practice, in large number of cases,penal provisions are being applied to what are essentially tax disputes. This is true of both the Departments, and is particularly true in the case of Service tax. Investigations are conducted and Show Cause Notices are issued by Service tax field authorities and the DGCEI alleging deliberate violation of legal provisions where the provisions lend themselves to different interpretations and there is no evidence of intentional tax evasion;
- In practice, when any new information is accessed by the authorities, which according to them indicates a violation, it is taken as wilful suppression of fact with intent to evade payment of duty and notices invoking severe penalties and the extended period of demand are issued even though there is no evidence to show deliberate concealment of information or to indicate mala fide intent;
- Some of the notices on the Service tax side also reflect a superficial or misconceived understanding of the nature of business practices in the service industry and fail even to identify the service, the service provider and the service recipient;
- A large number of disputes are generated because taxpayers feel compelled to contest the imposition of penalties as well as unjustified invocation of the extended period of limitation, rather than voluntarily comply within the framework of law. The Departments’ success rate in litigation is woefully low;
- Such a situation leads to loss of credibility for the Departments. The enforcement wings should not be frittering away their resources on cases that can best be left to the compliance verification function and resolved through normal dispute management mechanisms.
- The administration needs to prize quality over quantity if deterrence is to play an effective role in its management of compliance. Therefore, far more attention needs to be paid to selecting the right cases and investigating them with thoroughness and competence.
To view the complete report, please click on following link: