A recent IMF/PwC study has ranked Indias income-tax legislation amongst the most lengthy and surprisingly, the United States, supposedly having a complex tax system, ranks low at No 7.
Our tax system could be beyond comprehension not just for first-time tax-payers but also seasoned hard-nosed MNCs who are used to operating in multiple tax jurisdictions. At times, the thought of visiting the department could send a chill down the spine of citizens and in my view, it is the single-largest factor driving people away from the tax net a root cause behind the flourishing parallel economy. On the other side, for corporate taxpayers, the administration of tax regulations at the field level is becoming a nightmare.
Our regulation gives wide powers to the tax authorities, particularly at the assessment stage. The entire process is driven by doubt and suspicion rather than trust and faith. The benefit of doubt is invariably with the revenue department and interpretation of law is entirely the prerogative of an officer, since the structure of the law makes any intervention by a superior officer or an administrative body like the commissioner impossible. High-pitched assessments have become a norm in the recent past. What adds pressure is an expectation to fork out significant part of additional taxes demanded without going through a fair appellate process. If the assessment procedure sounds like an uphill task, the redressal mechanism is equally onerous, resulting in a disillusioned taxpayer.
Though in the past decade, the system has undergone significant reforms, a lot more ground is required to be covered to get even remotely close to global best practices. The concept of taxpayer services, which aims at encouraging and facilitating voluntary compliance is still to evolve. Promotion of voluntary compliance and introduction of scheme of self-assessment makes it necessary for the tax administration to facilitate compliance through provision of quality taxpayer services.
A crying need to improve taxpayer services was an important theme of the Kelkar task force, wherein far reaching and bold statements such as rent seekers were made to demonstrate the problem. The task force focused primarily on the role of tax administration and made far-reaching recommendations for widening the scope of the taxpayer services programme. Noteworthy among them include increasing access of taxpayers through the Internet, email etc, establishment of the institution of ombudsman for resolution of taxpayers problems, enhancing accountability of tax officials, etc. A wide range of reforms such as extension of interactive voice response system, software for preparation of returns, tax return preparation services etc have found mention in successive budgets since 2002.
With an objective of protecting the taxpayers rights and reducing his burden, the government has announced the setting up of a Tax Ombudsman and notified the 2006 Scheme. Similar schemes are present for redressal of customers grievances under banking, insurance, securities and electricity laws. The success story of ombudsmen in banking and insurance services has been the driving factor for this.
The scheme allows an opportunity to make application for redressal of grievance to a person appointed by the government as an ombudsman. True to its spirit, the ombudsmans office shall be independent of the jurisdiction of the income-tax department. To start with, the offices of ombudsman shall be located in 12 major cities including the four metros and Bangalore. It is anticipated that the scheme would later get extended to other locations. The ombudsman will have the power to receive complaints, review them and issue appropriate orders. The complaints would typically relate to administrative aspects such as delay in issuance of tax refunds, non-acknowledgement of letters or documents sent to the department, non-updation of demand and other registers leading to harassment of taxpayers, lack of transparency in identifying cases for scrutiny assessment, delays in giving effect to appellate orders and allotment of permanent account numbers (PANs) etc. Whats more - complaints against unwarranted rude behaviour of tax officials, non-adherence to working hours, violation of administrative instructions and circulars issued by the Central Board of Direct Taxes (CBDT) can also be made. However, no complaint shall be entertained for any matter before an appellate authority/tribunal/courts.
Though the approach to ombudsman appears to be easy and simple, nonetheless, it could be subject to inherent limitations from a practical standpoint. Most important being the requirement to file complaint with the senior of the tax official against whom the complaint is to be filed with the ombudsman. It has been provided in the scheme that on receipt of the complaint, the ombudsman shall endeavour to settle the case by mutual agreement within a specified time (say one month) failing which an award of up to Rs 1,000 shall be granted for loss suffered by the taxpayer.
His decision will have binding effect on the income-tax department and the taxpayer. The ombudsman is also required to furnish reports to CBDT, Ministry of Finance, on his work and make recommendations for improving the tax administration.
The institution of ombudsman has relatively stronger presence in developed countries. For instance, in the US, the role of ombudsman is performed by the national taxpayer advocate, who has powers to identify and resolve taxpayers problems with the inland revenue service and propose changes in administrative practices/legislation. In the UK, the ombudsman looks into complaints relating to several issues such as faulty procedures, unfair treatment, bias or prejudice, misleading or inadequate advice by the revenue authorities, refusal by authorities to answer reasonable questions, mistakes in handling claims of taxpayers etc. Similarly, in Australia, the taxation ombudsman investigates and takes action on complaints relating to a range of tax administration issues.
In most countries, the concept of ombudsman has the requisite legislative tooth. In the US, the national taxpayer advocate functions under the legal framework provided by the Taxpayer Bill of Rights. Similarly, in the UK, the ombudsmans powers and responsibilities are set out in an Act of Parliament, which suggests that complaints must be sent to the ombudsman through MPs. In Australia, the Ombudsman Act, 1976, governs the activities of the Ombudsmans office. In contrast, Indian ombudsman lacks legislative backing since the document governing it is a CBDT circular and could pose problems in enforcement and administration.
The decision of the ombudsman is binding on the income-tax department but the odds of litigation cannot be ruled out. This is manifested from an ongoing practice of tax authorities disregarding CBDT circulars in many instances. CBDT circulars by judicial precedents have been held to be binding on the tax authorities, though they lack legislative enactment. A legislative backing to the scheme would have been more appropriate. The banking and insurance ombudsman function under the Banking Regulation Act, 1949 and Insurance Act, 1938, respectively. Widening the scope of the ombudsmans authority to ensure that the revenue department adheres to jurisdictional tribunal and court orders would have been welcome.
In the final analysis, the establishment of ombudsman is a bold, sweeping and welcome change. Whilst acting as a watchdog, it could prove as a bridge between the taxpayer and the tax gatherer and contribute in enhancing the efficiency of our tax administration.
Mukesh Butani The author is a partner with BMR & Associates and views are personal