The draft Direct Taxes Code (DTC) Bill has had its taxation provisions scrutinised. But its major weakness has largely escaped scrutiny the tax administration (TA) provisions. If the DTC Bill becomes law, it will keep alive the grossly inefficient, pre-automated and corruption-prone TA structure largely inherited from the British.
To illustrate the weaknesses in the DTCs organisation provisions (Sections 126 to 133) and tax assessment procedure (Sections 143 to 177), three key 21st-century TA features have been examined.
The first is a single TA for all Central taxes. This will allow for economies of scale and scope and help reduce tax evasion via a comprehensive, automated, taxpayer information base. A single TA will also greatly reduce taxpayer compliance costs. The World Banks 2010 Doing Business report on India finds that Indian businesses currently have to file tax returns with different Indian TAs, around 30 times a year! Splitting the Central Board of Revenue into direct and indirect tax boards was justified 50 years ago. Technology has since rendered this dysfunctional. The DTC perpetuates the direct/indirect TA bifurcation via the statutory status given to the Central Board of Direct Taxes (CBDT), even enhancing its powers compared to the existing Income Tax Act, 1961 (I-T Act). The second is minimal contact between taxpayers and TA officials. This requires automated intelligence gathering and information exchange between TAs in, for example, Centre and states, and online taxpayer-friendly procedures. Further, detailed scrutiny assessments of selected taxpayers by Assessing Officers (AOs), currently almost fishing expeditions, should largely be replaced by specific queries based on third-party information. The DTC perpetuates the single AO scrutiny procedure, spelling it out in even greater detail than the I-T Act.
Third, taxpayer-TA contact, when needed, should be between the taxpayer (or the taxpayers representative) and a TA office rather than a particular TA official. As in most banks, no single officer should be solely responsible for each client. To limit taxpayer contact and also the power of officials making contact to extract bribes, assessment, levy of penalty, tax recovery, and other procedures should be divided into stages, with each stage being handled by separate divisions. Contact, where needed, can then be largely automated. This permits specialisation and efficiency gains while making individual TA officials relatively powerless, and so unable to command large bribes or collude with taxpayers. Necessary TA reorganisation and re-engineering are blocked by DTC provisions.
If detailed scrutiny assessment is, nevertheless, undertaken, under the DTC, as now, taxpayers/representatives must appear with financial evidence and accounts for a quasi-judicial hearing before AOs. Such inconvenient, broadly-focused desk scrutinies should become exceptions. Instead, as in most advanced TAs, there should be field scrutiny by an assessing team at the taxpayers premises, reducing taxpayer compliance costs while increasing scrutiny effectiveness.
Ideally, all Central taxes (income tax, wealth tax, excise duty and so on) should be assessed holistically. Field scrutiny is absent in the DTC. Combined scrutiny of all taxes is also blocked by separate direct and indirect tax laws. Field scrutiny should not be confused with the draconian, much feared but extensively used search and seizure (DTC, Section 135), nor the arbitrary and corruption-prone survey (Section 141).
The way forward is for the DTC to cover taxation alone and not TA. As in many forward-looking countries, TA provisions should be removed from the DTC and replaced by a new tax administration law. This TA law should flexibly accommodate planned long-term TA modernisation. As in Australia, Canada, Singapore, the UK, the US and even Indonesia, tax laws need not identify tax authorities. In fact, the US Internal Revenue Code (USIRC) does not even mention its Internal Revenue Service (IRS).
In the Canadian Income Tax Act, the Minister is the TA authority. Under this Act, the Minister can delegate powers duties to the Commissioner of Revenue. The Minister may also appoint a class of officers and delegate powers to them. There is no further mention of TA and TA procedures in the Canadian Act.
The USIRC vests TA powers in the (Treasury) Secretary. The Commissioner of Internal Revenue is appointed by the US president within the Treasury Department (Section 7803). Section 7804 authorises the Commissioner to appoint and manage TA staff. Again, there is no further mention of TA in the USIRC.
The organisation, automation and staffing of revenue are separated from taxation law in Canada, the US IRS and several other forward-looking countries. TAs can, thus, flexibly reengineer and modernise when faced with new technologies or challenges like globalisation. In contrast, the DTC identifies Income Tax Authorities (Section 126) from the Chairman, CBDT, down to Inspectors of Income Tax. TA hierarchy in the DTC and statutory powers of each Income Tax Authority imparts rigidity to income tax administrative organisation. Also, the specific statutory powers of AOs, Transfer Pricing Officers, Valuation Officers and Tax Recovery Officers perpetuate archaic TA procedures. For example, assessment of taxpayers by specific AOs rather than the central government leaves the door open for AO-taxpayer collusion. Re-engineering for greater efficiency and reduced corruption are thwarted.
Only two major administration weaknesses in the DTC are discussed here, though around 40 per cent of the DTC deals with TA. Most DTC provisions reproduce or expand obsolete provisions in the I-T Act.