Third Report of the Tax Administration Reform Commission (TARC) (F. No. TARC/Report/36/2014-15 Dated 30.11.2014), Recommends impact assessment. Recommendations are intrinsically linked to TARC’s main conclusions.
A brief on Impact Assessment
Improving the empirical basis for any decision on taxation – policy or administrative – through an analysis of its impact is a key function of a modern tax administration that aims to improve the process of decision making. Decision-making based on an empirical analysis of the positive and negative effects of a proposed measure or regulation helps ensure that the benefits of a tax action justify the cost of compliance imposed on taxpayers and the cost of administering such a tax. It also helps move towards better regulatory management. While a detailed cost-benefit analysis may not always be feasible, applying the principles of impact assessment helps ensure that decisions taken are practicable and feasible. Such impact assessment needs to be a continuous process to help think through the reasons for a tax change, to weigh various options to achieve desired objectives and to understand the consequences of a proposed change. Such analytical exercises help assess both the likely costs and benefits of a proposed policy change and the risks associated with the change that the policy seeks to achieve.
Tax policy or administrative changes, even if small, need to be followed by identification of cost to the tax department in delivering the change and its cost impact on taxpayers. To ensure effective and timely policy formulation, a tax impact assessment needs to be initiated as soon as policy ideas develop. These impact assessments will normally quantify the financial impact of a proposed measure on the exchequer, i.e., operational impact (how it affects the tax department), the financial impact on the taxpayer, i.e., the time and cost involved in understanding and filing new form, its economic impact such as distributional change (how it affects individuals, households or businesses of different segments ± large, medium or small), etc. Simply put, impact assessment is a set of logical steps to be followed while preparing policy proposals to provide evidence to decision makers on the advantages and disadvantages of possible policy options by assessing their potential impact. The advantage of such an exercise is to help design better policies and laws, facilitate better-informed decision making and ensure early co-ordination within the tax administration across various units to implement the new policy. The process also ensures the coherence and consistency of policies keeping in view key objectives within the administration’s overall vision.
In developing impact assessment processes, therefore, a key element is the involvement of stakeholders, as recommended in Chapter II of the TARC report. Consultation with stakeholders through hearings or conferences or other means reveals new dimensions not realised at the time of policy formulation. This is particularly important from the perspective of differing classes/segments of taxpayers, and helps focus on issues such as encouraging compliance and broadening the tax base, customer orientation, and equity and certainty in the application of tax laws.
A key to good regulatory impact assessment is the quality of the base data. If data problems are significant, its resolution can be expensive and time consuming. Hence, analytical methods that are less data-intensive can also be applied as is done by various tax administrations. More simply, in the absence of relevant data, an impact assessment exercise can be attempted in a qualitative manner so that a culture of developing impact assessment in quantitative terms can be developed over time.
Impact assessment helps understand how taxpayer services should be geared to reduce the time and cost of compliance to the taxpayer to ensure that its impact on the economy and societal welfare is neutral. It could also provide pointers to the changes in risk/compliance and enforcement programmes that would help reduce the administration’s delivery cost.
Although impact assessment by itself does not determine decisions, the analysis and its placement within the decision making process can influence policy by widening and clarifying the factors relevant to a decision, revealing alternatives available to arrive at the intended goal at the least possible cost to both the tax department and the taxpayer. It should not be viewed as an add-on technical tool in the decision-making system, but as a method to arrive at a decision on whether an action should be taken or not.
This chapter explores the use of impact assessment methods as part of regulatory management, discusses global practices and provides a way forward to build the capacity of the Indian tax administration to integrate impact assessment as an essential and obligatory step in the decision making process as part of the governance framework discussed in Chapter III of the TARC report.
i) Why impact assessment
a) Impact assessment process aids decision making and increases the involvement and accountability of decision makers at all levels, including the ministerial level, and demonstrates how the decisions of the government will benefit society at large. It should be initiated at the earliest. (Section X.4)
b) Impact analysis should be used because it improves the empirical basis for any decision making process, be it legislative or administrative. These empirically based studies help maximise benefits and minimise overall costs, and inform better regulatory management. (Section X.4.a)
c) Applying the principles of impact assessment to regulatory decisions can form an analytical tool which provides practical judgement to the feasibility and cost of any policy intervention. (Section X.4.a)
d) Impact assessment is a method of systematically and consistently examining the potential impact of government tax actions and communicating the information to decision-makers. The process helps in weighing various options to achieve desired objectives and to understand the consequences of the proposed change. (Section X.4.a)
e) Impact assessment can be used as a tool to review existing regulations and assess their impact, thus improving the quality of the regulations. The review and updating of laws, rules, and other instruments to decrease regulatory risk and uncertainty represent another important responsibility of the tax administration management. This is to systematically streamline the legislative corpus and remove unnecessary charges and burdens that get imposed and embedded due to laws, rules and their practices. (Section X.4.a)
f) An important challenge in carrying out impact assessment is to ensure political and high-level administrative support for it. Lack of such support could adversely affect the quality of impact assessment. (Section X.5)
g) Proper capacity will have to be built in the Tax Policy and Legislation unit of CBDT and the Tax Research Unit of CBEC (and in the recommended Tax Policy and Analysis Unit) as well as at the field level (in the directorates) so that vertical and horizontal integration of the overall capacity and accountability of the two organisations – the CBDT and the CBEC – increase and impact assessment before taking any initiative becomes part of the basic working process at all levels. The entire process has to be seen as a management tool for any tax action, legislative or administrative. (Section X.4)
ii) How to do impact assessment Stakeholder engagement
h) Stakeholder consultation enhances the transparency of any decision making process, provides quality control on any tax action and improves the information on which decisions are based. Stakeholder consultation should not only form part of the decision making process, but should be considered an independent tool for decision making in its own right. (Section X.4.b)
i) The method employed to calculate impact assessment is key to the design and performance of impact assessment. Since there is no single model that fits all situations, a view has to be taken on identifying the appropriate method for the question/issue at hand, the key objective of using evidence-based decision-making, and integration of such evidence into policy making. (Section X.4.c)
j) The usual methods for calculating compliance costs include surveys, benefit/cost analysis, compliance cost analysis and business impact tests, which should all be considered. The choice of method should be scaled to the specific capacity of the tax administration and to data availability. For these reasons, the CBDT and CBEC should have a flexible yet analytical approach to the choice of method. (Section X.4.c)
k) Aggregation of impact may be difficult as sometimes impact is measured by different indicators and scales. Keeping this in mind, costs and benefits – quantitative and qualitative – nevertheless need to be assessed. (Section X.4.c)
l) Benefit calculation is part of any impact assessment. Non-economic benefits of legislation may be difficult to assess and so cost saving cannot be easily calculated, because of methodological limitations. Nevertheless, tax benefits can be calculated. (Section X.4.c)
m) A discretionary change model should be developed to understand the impact on tax revenues due to a change. (Section X.4.c)
n) An impact assessment will contain an element of risk. If these risks involve possible irreversible damage on an uncertain scale, a formal risk assessment should be carried out. (Section X.4.c)
o) Identification of risk, a priori, will also reduce or eliminate the risk since it enables the development of a strategy to deal with it at inception, either through policy design or by taking care of the factors affecting the outcome. (Section X.4.c)
p) Another role of risk analysis is to prioritise and classify risks – identification of thresholds and tolerance levels for cost, schedules, staffing, resources and quality through an iterative process, and then determining which risks require development of mitigation strategies and/or a contingency plan. (Section X.4.c)
q) Steps need to be taken to carry out risk analysis in impact assessment: identification of relevant risks, a clear description of the origin of every risk and the nature of the consequences it may have, the chance of its occurrence, the extent of harm it could cause, and identification of alternative ways to reduce it. (Section X.4.c)
r) While ex-ante analysis is a necessary step in impact assessment, ex-post reviews of impact have a positive impact on the overall quality of ex-ante analysis. Ex-post reviews of impact assessments impart dynamism to ex-ante analysis as they reveal systemic errors in impact assessment methodologies, and help in correcting these. Hence, results of the ex-post review and conclusions drawn need to be assessed and, if found useful, fed back into impact assessment guidelines.(Section X.4.c)
iii) Timing of the process
s) The time to initiate the impact assessment process is as important as clearly stating the purpose and intent of the tax action under question. (Section X.4.d)
t) Looking at the importance of timing, the CBDT and CBEC must issue formal guidelines outlining the timelines for impact assessment and public consultation. (Section X.4.d)
u) The impact assessment process will need to be planned dynamically. Guidelines should not be looked upon as an immutable document as there may be a need to adopt new information that becomes available during the impact assessment process, which may require suitable change in the timelines. But this should not mean that timelines are modified in a manner that precludes a decision within the stipulated period. (Section X.4.d)
iv) Data collection
v) A comprehensive impact assessment analysis requires good quality of data to correctly evaluate the impact. Thus, identification of data requirement and understanding of data availability should be arrived at, at an early stage of the process. (Section X.4.e)
w) Since data requirement is linked to the method used, an assessment of techniques provides an assessment of the data requirement. This exercise also provides an insight into the strengths and weaknesses of various techniques and data aspects associated with those techniques. (Section X.4.e)
x) There is need to develop and put in place a systematic and functional approach to data collection so that essential, good quality data are not lacking. Often ad hoc strategies that cut cost in various ways, including compressing the allowable time, fail. (Section X.4.e)
y) Before data collection is embarked upon, context analysis should be carried out so as to understand and analyse the universe of analytical techniques available, which ones are to be employed, the expected quality of data to be collected, the estimated cost of collection, the predicted non-response rates, the expected level of errors, and the length of time for data collection. (Section X.4.e)
z) The quality of the impact assessment process is dependent on a range of other areas such as treatment of risk element in the results, use of sensitivity analysis, and understanding of the statistical life of the data. Other factors impacting quality include gaps or omission in data, inadequate evaluation techniques, complexity and fragmentation of approach, failure to adhere to important rules, and poor integration with the consultation process. (Section X.4.f)
aa) Some quality issues can be corrected by resorting to threshold tests. Threshold tests are conducted to identify the difficulty level of impact assessments. The process for quality check and improvement can be based on four steps: identify potential gaps, assess potential impact on quality and costs, approve plans, and assess actual impact on quality. (Section X.4.f)
bb) Since, in practice, there is no fixed quality standard that could be prescribed – given that it depends on the expectations of policy makers and taxpayers – the CBDT and CBEC should embark on a systematic exploration of quantitative data and qualitative information and build an orderly triangulation of the complete information picture to help assess the correctness of impact assessments. (Section X.4.f)
cc) Both Boards must adopt a careful and strategic approach to data collection, and issue strict guidelines for that purpose. The practice followed should be uniform, keeping in mind the need for high quality data, and with a clear understanding that this is one of the most difficult steps of the impact assessment process, and is often time and resource consuming. Inaccurate data would lead to inaccurate results and fundamentally alter the impact assessment. Consultation with external stakeholders should also not be ruled out to check the robustness of the data. (Section X.4.e)
dd) ICT systems already generate a considerable amount of data. These data or information need to be evaluated for their immediate suitability or suitability after some changes. Storage and protection of existing data, and enabling data creation through data mining are crucial at this stage in both the CBDT and CBEC. External data may also be gathered through general surveys, secondary data sources or archival data and interviews or stakeholder consultations during seminars and conferences. (Section X.4.e)
v) Communicating results
ee) It is important to communicate results of the impact assessment process to all stakeholders. Better communication and feedback contribute to improving the quality of information about the regulation under review and provide a good basis for subsequent improvement in design to obtain better results. (Section X.4.g)
vi) Preparing implementation
ff) A sound analysis of the costs, risks and benefits of regulatory action at an early stage can help formulate and eventually reach pre-defined policy objectives. Thus, the impact assessment process should commence even if the impact assessment is provisional and only covers a limited range of possible outcomes. If the process starts late, the results of the exercise could fail to be included as inputs in the policy making process. (Section X.4.d)
gg) A steering group for impact assessment should be set up for consulting interested parties, using expertise and collecting data, carrying out the impact assessment analysis, presenting the findings in a draft impact assessment report, scrutinising the report and framing possible recommendations based on the draft report, carrying out detailed stakeholder consultation, revising the draft report after taking suggestions into account, preparing the final impact assessment report, and submitting it to the concerned authority. (Section X.5)
hh) It should be mandated that the CBDT or CBEC estimate the impact of proposed legislation on the costs to be borne by the taxpayers. This should be with a view to reducing the compliance burden which, of late, has increased due to regulatory creep. It is important that the impact assessment captures the expected impact in qualitative and quantitative terms. (Section X.5)
vii) Role of KAIC in implementation
ii) The formation of the KAIC, to carry out deep analytics, involving all – direct and indirect – taxes by combining and significantly expanding the TPL and TRU should be achieved/completed on an immediate basis. This is essential and forms a central pillar of the TARC’s menu of reforms. (Section X.4.h)
jj) The KAIC should function as a hub and vertical analytical units as spokes, with strong coordination by the KAIC, without which the work of the vertical analytical units would be isolated from one another. (Section X.4.h)
kk) The role of the KAIC in the work relating to impact assessment will be to strengthen the quality of policy debate, to provide enhanced technical capacity to verify the impact analysis, and to ensure that policy outcomes are integrated and policies are coherent. (Section X.4.h)
ll) The role of the KAIC will also be to facilitate capacity building processes for impact assessment. (Section X.4.h)
mm) The KAIC will have to act as a repository of such impact analyses so that any unit requiring support from it can find relevant material as well as technical support. Such support can be for elaboration of the method as well as in the scope of issues being dealt with, refinements such as inclusion of risk assessment, evaluation of the impact and improvements to data collection methodologies, keeping in view that the learning process in impact assessment is iterative and cumulative. (Section X.4.h)
nn) The KAIC’s capacity should be of such a level that its views are well respected. This, however, cannot happen unless the KAIC brings a higher level of expertise on the subject, is able to carry out detailed and deeper analytics, and be a repository of knowledge. (Section X.4.h)
oo) To make sure that the desired level of co-ordination, integration and learning are not lost, horizontal committees can be constituted by the KAIC to ensure transfer of knowledge and learning, and to provide a forum for discussion to enhance thinking and improve participation. (Section X.4.h)
pp) The KAIC should be tasked with drafting clear, concise and accessible guidelines where theory and practical methodology are adequately incorporated. These guidelines should be as comprehensive as possible. (Section X.4.h)
qq) The guidelines could be in the form of a living document, which can be continuously improved as experience and knowledge on impact assessment methods and processes accumulate and new techniques or methodological changes are embraced. Some elements of these guidelines can be advisory and some mandatory. The advisory part is to provide verticals the flexibility to introduce improvement, and the compulsory part is to strictly ensure adherence to basic and key processes. (Section X.4.h)
rr) Regular training programmes will need to be instituted to support the preparation of impact assessment programmes to familiarise officials with the scope of, and the work involved in, impact assessment, and their obligations during the impact assessment process. (Section X.4.i)
ss) The KAIC will have to develop a body of guidelines and references that are essential instruments for impact assessment training and familiarisation. In this respect, it will have to embark on the long term goal of drawing up autonomous guidelines specific to its own requirement. (Section X.4.i)
tt) The training programmes should be run on two tracks – one for KAIC staff and another for those working in the analytical units of each vertical. For the KAIC, training will require to be on the detailed methodologies of impact assessment and related procedures, development of consultation mechanisms so that they are professionally ready to contribute to the impact assessment process. (Section X.4.i)
uu) For staff working in different verticals, the training should not be theoretical; it should be tailored to take account of specific circumstances. At a later stage, perhaps after six months of working in an analytical unit, they can be given training designed to impart skills needed to do high quality impact assessment as well as to receive information on where to receive assistance with more complex cases. (Section X.4.i)
vv) KAIC staff will be required to act as resource persons to provide training to those in the vertical analytical units. For example, it can use webinars, making available training frameworks that give practical examples of impact assessment to such staff. (Section X.4.i)
ww) The CBDT and CBEC may need to access exogenous information sources and to help them do so, the KAIC may need to develop close links and relationships with reputed national and international research institutes, universities and private sector bodies. Such associations or links will be helpful particularly because impact assessment may need ongoing improvement in methodology as well as in processes. This will also facilitate the accumulation of knowledge, continuing compilation of data, and sharing and dissemination of information. (Section X.4.i)