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Quality tax audit scheme
February, 01st 2010

The Central Board of Direct Taxes recently framed a scheme for ensuring quality tax assessments by its officers across India. In the preface to the scheme (issued in December 2009), the CBDT has expressed its concerns on the need for improving the general quality of tax assessments conducted by its officers. While in the past, the CBDT had issued instructions to the range heads (the country is divided into different revenue ranges) to monitor the quality of the tax assessments falling under their jurisdiction, there was no comprehensive plan in place for improving and monitoring the overall quality of tax assessments.

While there are separate audit wings, an internal audit mechanism and the Comptroller & Auditor General audits, this scheme is a first of its kind aimed at improving quality of tax assessments by the revenue officers. Although the need for a plan to improve the quality of tax assessments has existed for several years, the CBDT has finally implemented a scheme effective from January 2010.

As per the scheme, the range head has to monitor at least five assessment cases for each of the revenue officers (assessing officers) falling under his jurisdiction. The cases will be jointly selected by range heads and assessing officers. The range heads would give appropriate directions for the guidance of assessing officers regarding the course of investigation to be adopted for completing these assessments in a proper manner and would also monitor the assessment proceedings in these identified cases.

Once the assessments are completed, the assessing officers would send a copy of the assessment order to their range heads and to the concerned commissioner of income-tax.

Also, monitoring, the scheme deals with quality assessments. The scheme mentions that for quality assessment, the assessing officer has to clearly identify the issues arising for consideration, has to give sufficient opportunity to the taxpayer to give his response, has to evaluate and analyse the response in detail and accordingly give his finding and conclusion in accordance with provisions of the law, resulting in substantial additions to income declared by the tax payer.

The scheme mentions that the cases identified for monitoring by the range head are expected to comply with this criteria of quality assessments and also authorises the chief commissioners of income tax to set monetary thresholds for assessments to qualify as quality assessments, normally not being less than Rs 5lakh, excluding recurring adjustments.

Other than the identified cases, the scheme requires a specified percentage of the assessments to be quality assessments. The scheme also requires the concerned chief commissioners to lay down the parameters for determining whether an assessment is a quality assessment and at the end of each fiscal, review and tabulate the assessments that have met these parameters.

Chief commissioners are also authorised to devise methods for commending good performance of the assessing officers and for incorporating the same in annual appraisals of the revenue officers.

While the scheme is a welcome move to improve the quality of tax audits by revenue officers, there are larger issues that may still need to be addressed. On the quality assessment scheme, it appears that CBDT itself has diluted the concept of quality assessments. One would expect that the criteria laid out by it for an assessment to be called as a quality one, would be the bare minimum criteria for any tax assessment, let alone a quality one.

Identification of right issues, providing sufficient opportunity to taxpayers and giving detailed justifications for the conclusions arrived at should be the hallmark of any tax assessment. The other aspect is the inadequate staff in the revenue department. The information available on the website of the CBDT (updated as of September 2007) shows that there are vacancies yet to be filled. Of the sanctioned strength of 4,192 officers (assistant commissioners and above), only 3,101 posts have been filled upa 25% shortfall.

For a growing economy like India, while the sanctioned strength itself appears to be far less to handle the tax administration, gap in the strength vis--vis the actual strength only adds to the problems. The inadequate staffing has a cascading impact existing officers not able to handle the workload, inadequate time to complete tax assessments thereby impacting the quality leading to rise in litigation.

The other notable issue is the inadequate infrastructure. The officers are not adequately equipped to do qualitative assessments. Access to computers, databases and tax literature etc is restricted to top-level officers. While the CBDT initiative in introducing the quality assessment scheme is appreciated, the government should focus and address the larger issues as well.

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