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:
 Registration
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.

TARCs recommendation for People Function of Tax Department

Another area that does not compare internationally is that of HRD or the People function. Staff are not empowered to take independent or correct decisions for fear of retribution and vigilance,the exclusive objective being to “protect the revenue”. They are made to collect revenue irrespective of the condition of the macro-economy that should indicate how much tax may be correctly collected. They therefore tend to make decisions well knowing that a tax demand or dispute will not pass the test of judicial processes. At the same time they are subjected to
promotion, training, transfer, and leave policy that are fundamentally non-reflective of global practice. At the same time, senior management is subservient to the top Revenue official who,over the years, is imported from another Union Service that has no direct link to revenue or taxation. The overall outcome is a subdued tax administration that is far from dynamic. Indeed, over recent years it has acquired the notoriety of corruption. Empowering the staff, or People Function, comprises Chapter IV and TARC makes several significant recommendations towards empowerment.

The TARC recommends that:
 Both the departments should shift all their key operations to the digital platform so that performance can be reliably measured.

 A system of limited departmental competitive examinations should be introduced by earmarking 33 per cent of the vacancies in the promotions quota in Group B as well as Group A, so that relatively more meritorious and younger officers in the feeder grades can get a fast track in promotions.

 Recruitment needs to be made on the basis of carefully drawn recruitment plans that balance the short and long term needs and career aspirations of officers.

 Provision should be made for lateral entry of experts in key roles and specialized areas. While they may be on contract for 5 years, subject to their suitability and willingness they should be able to integrate with the organisation at the end of the contract period.

 The CBEC needs to develop a human resource management system, as has been done by the CBDT; collaboration and knowledge exchange between the two DGs (HRD) will
enable CBEC to get such a system going in shorter time.

 A comprehensive performance management system needs to be set up for both tax
administrations by revisiting and reconstructing the RFD.

 Key performance indicators, detailing the performance areas, objectives, key initiatives, performance indicators and performance targets, should be arrived at using the Balanced Scorecard methodology.

 The performance appraisal process needs to be made more wholesome and reliable by making it more open and by introducing a mid-year review.

 The tax administrations should extend the performance appraisal system to elements of 360° appraisal to include feedback from subordinates.

 The outcome of discussions during the performance appraisal process should result in the superior taking responsibility for juniors by putting in place an improvement plan to overcome their weaknesses.

 Performance needs to be recognized through non-pecuniary measures such as giving important assignments in chosen areas of work or specialization.

 To facilitate renewal of talent and professional growth, officers should be allowed to move outside the departments for defined periods of time.

 The career of IRS officers should be divided into three phases:
o The first 9-10 years should be spent rotating through different functional areas to gain familiarity
o The next 8-9 years should be in two or more specialist areas
o Persons showing the ability for top leadership will go into the third phase and constitute the pool from which selection will be made for top positions

 A common assessment centre for the two Boards needs to be set up by the people function to make a thorough, all round assessment of officers at the first transition point.

 In view of a different promotion system being recommended, the UPSC should be
consulted for exempting these promotions in the IRS from their purview like some other services, e.g., the Indian Foreign Service, Indian Railway Services and Indian Audit and Accounts Services are exempted. However, if the UPSC is willing to be associated with the altered promotion scheme, that option should be considered.

 A formal mentorship programme may be set up, with carefully selected mentors.

 The transfer and posting policy should be recast to promote specialization and
accommodation of individuals’ choices in professional growth and should bring about predictability, stability and certainty to placements. Personal difficulties of officers should receive due consideration.

 DGs (HRD) should assist the Boards in transfers and postings and they should be member secretaries of the placement committees. The administration section should have no role to play.
 Learning and development should occupy a central place in people advancement and all officers must undergo a minimum 10 days of training every year.

 NADT and NACEN infrastructure should be substantially upgraded and the academies need to keep themselves updated in terms of the contemporariness of course content, pedagogy and use of ICT in training and they should be treated on par with LBSNAA.
Their budgets should match the stipulation of the National Training Policy, i.e., 2.5 per cent of the salary budget of the departments should be earmarked for training and should be treated as plan expenditure.

 More emphasis in training needs to be given on customer focus and value education.

 A code of ethics needs to be developed, congruent with the values in the vision and mission statement.

 There should be more proactive approach to preventive vigilance.

 The provisions of Rule 56(j) of the Fundamental Rules should be effectively utilized for weeding out officers who are inefficient or of doubtful integrity.
The criterion for review should be changed to completion of 20 years of service.

 CVC should have a Member who has been an officer of either of the IRSs and there should at least one Joint Secretary/Additional Secretary level officer posted in the secretariat of CVC.

 No cognizance should be taken of anonymous complaint as laid down in the existing DoPT instruction.

TARCs recommendation for Customer Focus

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:
 There should be a dedicated organisation for delivery of taxpayer services with customer focus for each of the Boards. There should be an exclusive Member in each Board for the taxpayer services. The taxpayer services vertical under each Board would be headed by an officer of the rank of Principal Chief Commissioner, who would be responsible for delivery of taxpayer services. This implies dedicated resources and personnel for this vertical.

 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 Principal DG (LBS).
For other taxpayers, i.e., medium and small, the operations of the CBDT and CBEC will continue in separate chains.

 Officers and staff at all levels of tax administration should be trained for customer orientation. Further for people posted in this vertical, the training in customer focus need to be more specialized and intensive. This training should be appropriate to the areas in which such officers are deployed such as customer relationship, measurement of customer satisfaction, taxpayer education, etc.

 In line with the international practice of spending 10-15 per cent of the administration’s budget, a minimum of 10 per cent of the tax administration’s budget must be spent on taxpayer services. At least 10 per cent of the budget for tax administration should be allocated and spent for ICT-based taxpayer services.

 Sufficient funds must be allocated to conduct customer research including, in particular, on customer surveys.

 In redressing taxpayer grievances, the decision of the Ombudsman should be binding on tax officers. To bring independence and effectiveness to the office of the Ombudsman, nongovernment professionals should also be inducted in the post.

 Pre-filled tax returns should be provided to all individuals. 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.

 There is an urgent need to revisit the present citizen’s charter to make it more meaningful and customer focused. The citizen’s charter should be renamed the taxpayer’s charter to focus on all categories of taxpayers.

 There should be a regular stakeholder consultations on the issues of tax disagreements and tax law changes. The Commission recommends a permanent body for stakeholder engagement. The recent experience of the Forum through which many issues were resolved between stakeholders and the tax departments should become a continuing activity.

 There should be a system for online tracking of dak/grievances/applications for refund etc. It should be made mandatory to receive all dak through a central system generating a unique id. The ASK software implemented by CBDT provides such a mechanism in a limited manner. This needs to be extended to all offices. The functionality to enable the taxpayer to track the status of his application/grievance online should be added to the ASK system.
Similar system for online receipt of application should be enabled on the indirect tax side.

 Continuous benchmarking of the tax administration, particularly in relation to delivery of taxpayer services, with that of other tax administrations should be done to highlight the area of focus.

Preface by Dr Parthasarathi Shome on first draft of Tax Administration Reform Comission (TARC) Report

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:

 To review the existing organizational structure and recommend appropriate
enhancements with special reference to deployment of workforce commensurate with functional requirements, capacity building, vigilance administration, responsibility and accountability of human resources, key performance indicators, staff assessment, grading and promotion systems, and structures to promote quality decision-making at high policy levels.

 To review the existing business processes of tax administration including the use of information and communication technology and recommend measures best suited to the Indian context.

 To review the existing mechanism of dispute resolution, time involved for resolution, and compliance cost and recommend measures for strengthening the process. This includes domestic and international taxation.

 To review existing mechanism and recommend measures for improved taxpayer services and taxpayers education programme. This includes mechanism for grievance redressal, simplified and timely disbursal of duty drawback, export incentives, rectification procedures and refunds etc.
 
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.