In preparing his Budget 2012, the finance minister faces a difficult challenge of fiscal consolidation without stifling investment and economic growth.

Given the limited elbow room to raise revenues through higher tax rates, the government should focus on the third-generation (3G) tax reforms that can yield a fiscal bonanza similar to that from 3G spectrum auctions. These would be reforms that modernise tax administration.

The first-generation reforms consisted of rationalisation of the direct and indirect taxes levied by the Centre, broadening of their bases, and lowering of the statutory rates. The second-generation reforms were the replacement of state sales taxes by the value-added tax (VAT).

While these reforms resulted in improvement in tax compliance and provided a significant boost to tax revenues, they were limited to legislative changes and the rich dividends that could be reaped by having a modern, IT-savvy and taxpayer-friendly tax administration remain unrealised.

A facilitative tax administration is dependent on simplicity of the tax laws, infrastructure for tax administration, harmonisation and integration of laws and procedures across the country.

The reforms for achieving simplicity in tax laws and their harmonisation are an ongoing process and the goods and services tax (GST) is aimed at addressing this objective. The GST, if based on the flawless design recommended by the 13th Finance Commission, could well be the 4G reform. Pending its implementation, governments should focus on archaic, inefficient and ineffective tax administration.

Critical ingredients of a modern tax administration are automation and standardisation, quality taxpayers' services, avoidance of tax disputes and their quick resolution. The most pivotal reform among these is a more effective use of information technology. While India has made considerable progress in terms of computerisation, it is still very basic.

The significant role that IT can play in comprehensive automation and integration of processes, minimising discretion by officials, data capturing and analysis for guiding policy decisions and for enhancing taxpayer services, has not been tapped in full measure.

The current business processes, systems and facilities lack in transparency, which encourages rent-seeking behaviour and reduces the willingness of taxpayers to voluntarily pay taxes. At the state-level, particularly, the use of IT in VAT administration and for monitoring inter-state trade leaves a vast scope for improvement. As one senior official put it recently, "revenues their governments collect is not because of the effort by officials, but in spite of it".

The latest World Bank study on Doing Business ranks India at a dismal low of 147 out of 183 countries in terms of 'ease of paying taxes'. Investors lament aggressive interpretation of tax laws by assessing officers, which can lead to protracted litigation for decades.

The resulting costs and uncertainty hinder business. So, the finance minister's recent statement that the government aims to provide citizen-centric governance to improve taxpayer services and redressal of public grievances could not have been more timely.

The decisions and actions of tax administrations are guided by the assumption that the taxpayer is naturally inclined to avoid paying taxes.

This attitude must be replaced by a more cooperative and communicative approach. Modern tax jurisdictions like in the US and UK adopt a customer-oriented and outcome-based approach for taxpayers. While setting organisational objectives, establishing targets and evaluating performance, the emphasis is on parameters of 'customer' satisfaction along with business results.

An open, communicative approach towards taxpayers can be instrumental in bringing greater certainty in tax liability and quicker resolution of tax issues, which helps reduce litigation.

India is sitting on a blocked amount of more than 3 lakh crore on account of tax litigation, of which 2.2 lakh crore is stuck at the Commissioner (Appeal) level. These sums could be much lower if there was a more open and communicative environment.

Studies in Australia show that reduced disputes lead to better compliance and more revenues. In UK, the Advance Agreement Unit comprising of a team of specialists work with businesses to provide some certainty for future tax payments. Also, customer relations managers provide a single-point contact and take a lead role in engaging companies on open cases and draw up an action plan for case resolution.

The HMRC has established customer contact centres that focus on alleviating doubts of taxpayers and create an environment of customer friendliness.

At a time when governments worldwide are grappling with the burgeoning debts and fiscal constraints due to the global financial crisis, 'working smarter' has become a necessity for tax administrators. India too must lend absolute commitment to reengineering its administrative framework and implement it in the right earnest.

The multiplier effect of this 3G reform could have the potential to surpass the rich haul reaped from the 3G spectrum auctions - a win-win situation for taxpayers, the revenue department and the economy. A stable and efficient tax administrative environment would also spur foreign investments, crucial for India's economic growth