Wednesday, 25 June 2014

TARCs recommendation for Key Internal Processes for Registrations, Refund, tax payments etc

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:
o The present permanent account number (PAN) should be developed as a common
business identification number (CBIN), to be used by other government departments
also such as customs, central excise, service tax, DGFT and EPFO. A better regulatory system should be put in place to enhance its robustness and reliability.

o Both central excise and service tax should be covered under a single registration as both the taxes are administered by the same department and cross utilisation of credit is permitted between central excise and service tax under the CENVAT credit rules.

o It is necessary to provide for de-registration, cancellation or surrender of registration numbers and PAN.

 Tax payments
o Banks should be left to authorize their branches to collect taxes, and the present process of selection of banks needs to be purely standards-based and transparent.

o Payment gateways should be increased for better customer convenience.

 Filing of tax returns
o I-T returns should also include wealth tax return so that the taxpayer need not separately file wealth tax returns. These returns should also be processed together in the CPC at Bengaluru.

o The disclosures in the return should include a brief mention of the issues on which there has been an on-going litigation between the tax administration and the taxpayer, and should indicate the factual and legal position adopted while computing taxable income for a year. This is to protect taxpayers from allegation of non-disclosure, suppression, escapement of income, etc., which often results in the initiation of penal provisions.

o Taxpayers should give information on their compliance experience at the time of filing returns; this information should be used to improve taxpayer service bringing in customer focus.

o Territorial jurisdiction should be dispensed with and industry-based assessment should be introduced in line with recommendations in Chapter III of this report.

o The CBEC should set up centralized processing units in line with the CPC, Bengaluru, and CPC-TDS at Ghaziabad for processing central excise and service tax returns.

o There should be a common return for excise and service tax.

o The CBEC should set up an e-portal and all invoices should be issued from that portal.This portal should be linked and made compatible with SAP ERP systems, which a majority of the companies use for their own invoicing. E-invoice would simplify credit/refund procedures, which would become automatic.

 Scrutiny in direct taxes and audit in indirect taxes
o Hearing in all tax cases by personal presence should be avoided, and data can be sought through an e-system. The taxpayer can upload the data on the e-system. Personal hearing should be sought only in complex cases.

o There should be specialization in scrutiny/audit work as recommended in Chapters III and IV of the report. Capability should be developed through training and re-training. The two Boards should also develop a standard audit protocol, with clear emphasis that the AOs must follow the principles of natural justice and respect the taxpayer rights to privacy and dignity.

o Audit Commissionerates in the CBEC should undertake integrated audit covering
central excise and service tax together and the onsite customs post clearance audit (OSPCA) in case of accredited clients (ACP), as the records and books to be verified are common to all the taxes administered by the CBEC. In major cities where exclusive Central Excise or Service Tax Commissionerates are functional, the audit function should be assigned to a specific Audit Commissionerate for carrying out integrated audit of customs, central excise and service tax.

o Joint audits should be undertaken by field formations of the CBDT and the CBEC to shorten the examination processes and reduce costs, both the for tax administration and for taxpayers. This may require a change in procedures for the CBDT as at present, the I-T Act does not have a provision for open audit as is done in indirect taxes.

o Broad-based selection filters for the risk assessment matrix should be put in place. There is also a need to set up a standard operating procedure which recognizes the iterative method, testing them ex-post, to develop effective and efficacious parameters for the risk assessment matrix.

 Tax deducted at source
o The insistence on manual filing of TDS certificates before AO for verification of refunds claim should be done away with.

o The tax deductor’s duties and obligations in terms of making information compliance and also depositing the deducted amount is onerous and they are not compensated for that. Therefore, some compensation for them should be considered. This can be in terms of a small commission to be deducted as business expenses by them to fulfil their obligations.

o The CPC-TDS should allow correction in the name of the deductees to avoid multiple submissions of TDS forms. Even a single error requires the deductor to submit the entire return afresh. The process of uploading the entire file for one or two corrections is cumbersome and disproportionate to the gravity of the error. This adversely impacts taxpayer services. Subject to the required checks and validations, there is a need to widen the scope of online error rectification service.

o A passbook scheme for TDS may be adopted with some safeguards. Once TDS is
deducted from a payment, TDS should get credited to the taxpayer’s account. This
should be like an account with running balance, to be utilized by the taxpayer at his option to set off his tax liabilities.

o To assist small and marginal tax deductors in preparing and filing their TDS returns, either existing tax return preparers or a separate system of TDS return preparers should be initiated with more training and a better remuneration structure than at present.

 Refunds
o Refunds should be issued within a strict time frame. There should be a separate
budgetary head for refund of direct tax and indirect taxes in the annual budget out of which refunds should be issued so that there is transparency. Adequate allocation should be made by the government under this head.

o Refunds sanctioned should be paid along with the applicable interest automatically as is done in the case of income tax and not on demand by the taxpayers. As in the case of direct taxes and customs duty drawback, the refund and interest payment should be directly credited to the bank account of the taxpayer.

o The rate of interest on refunds should be the same as the interest charged by the tax department. This would ensure equity between the two interests and would not disadvantage the taxpayer unduly.

o Refunds arising after a favourable appeal should be paid in time or the tax payer should be allowed to set-off the advance tax liability or self-assessment tax liability of subsequent years against the refunds due.

o The test to determine whether there is unjust enrichment in indirect taxes should be limited to cases of refunds where there is direct passing on of amounts claimed as refunds. In any other situation, this concept should not be applied.

o Refund claim subjected to pre-audit verification should be issued within a specified time. The post-audit verification of refund claim should be risk-based.

o An easier and simplified scheme should be introduced for service exporters. The entire refund filing and processing mechanism should be online.

 Foreign tax credit
o The CBDT should come out with clear FTC guidelines, which should also cover the
timing differences between different tax jurisdictions.

 Tax collections
o There should be a separate vertical for tax collection as recommended in Chapter III of this report. To improve the efficiency of debt collection activities, both the Boards should work on setting up risk assessment models to compute risk scores for each new tax debt case that reflects the likelihood of the taxpayer paying their debt based on objective criteria.

o Stay of demand information should be uploaded electronically on the central server of the departments so that tax collectors can have system generated prior intimations regarding the expiry of stay orders.

o The power to write off dues should be raised at different levels of the organization and made uniform for both direct and indirect taxes. Full powers should be vested in the respective Principal DGs in charge of recovery in the respective Boards. Write off should be done in concurrence with the CFO at the headquarters level and his nominee at the regional/zonal level.

 Related party transactions
o Both Boards should frame detailed documentation requirements for transfer pricing as well as custom valuation, keeping in view that such documentation should be reasonable, to bring certainty and predictability for the taxpayers.

o There is a need to align the process in India with global best practices and to do away with the current process. With self-assessment in place, import transactions should only be subjected to post-clearance audit. Valuation risks would be an important component of the risk matrix for audit selection.

 Trade and business facilitation
o As a trade facilitation measure, on-site post clearance audit should be developed fully to enable Indian customs to move closer to international best practices. Intervention in the cargo clearance should be made on the basis of a risk matrix.

o Documentation requirements for non-resident taxpayers for a certificate under Section 197 of the I-T Act should be well-publicized. The taxpayer should be told a priori the time that will be taken for the issue of the certificate. That time period should be reasonable. A certificate issued in an earlier year from any other tax office in India to an assessee/payer should be attached with other documentation. There should also be a facility for electronic filing of these papers so that the need for the physical presence of the taxpayer is, to the extent possible, obviated.

o The system of E-invoicing similar to that prevalent in most Latin American countries should be introduced. Using this system a taxpayer should generate an electronic invoice through the Department’s system. Sufficient preparation and consultation with the industry and trade associations should be done before introducing this system.

 Enforcement Administration
o There should be a dedicated structure for prosecution matters for more focused attention to this important area so that the unexploited potential for creating deterrence against tax evasion is realized.

o The working of the Directorate of Intelligence and Criminal Investigation should be ICT based and should be given a good complement of personnel and other resources to make it realize the potential.

 Non-profit sector
o CBDT needs to put in the public domain a national database of the non-profit sector to bring transparency.

 Manual of tax departments
o Departmental manuals should be annually updated and put up on the website for easy downloading by both taxpayers and tax officers.

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