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Tax Administration Reform Commission (TARC) submitted its First report to the Finance Minister on 30th May 2014(Dated 30th May, 2014)
June, 19th 2014
                                    Govt. of India
                                 Ministry of Finance
                        Tax Administration Reform Commission
                   NBCC Plaza, 3rd Floor, Pushp Vihar, Saket, New Delhi-110017


       F. No.                                                                          Date
       SO/TARC/Report/36/2014-15                                                 30/05/2014

To

          Shri Arun Jaitley
          Hon'ble Minister of Finance
          Governemnt of India

Sir,

    We submit herewith the First Report of the Tax Administration Reform
Commission (TARC).




                                  Dr. Parthasarathi Shome
                                          Chairman




        Y. G. Parande                                                   Sunita Kalia
           Member                                                         Member




        M. K. Zutshi                                                S.S.N. Moorthy
          Member                                                         Member




        S. Mahalingam                                                 M. R. Diwakar
           Member                                                         Member
                                          Preface
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.






Executive Summary                                                                                i
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,



ii                                                                           Executive Summary
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.

Executive Summary                                                                               iii
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.




                                                          Dr. Parthasarathi Shome
                                                                  Chairman
                                                    Tax Administration Reform Commission

New Delhi
30th May 2014




iv                                                                        Executive Summary
                     Table of Contents
S. No.                                Subject                                   Page Nos.

  1.     Preface                                                                i - iv

  2.     Executive Summary                                                      1 - 41

         1.          Coverage                                                   1

         2.          Critical Findings                                          3

         3.          Conclusions                                                22

         4.          Recommendations                                            25

              4.a    Customer Focus                                             26

              4.b    Structure and Governance                                   27

              4.c    People Functions                                           29

              4.d    Dispute Management                                         32

              4.e    Key Internal Processes                                     33

              4.f    Information and Communication Technology                   38

         Diagrams

         1.          Desired governance structure for large business services   7

                     Structure of Tax Council and Tax Policy and Analysis
         2.                                                                     8
                     Unit

         3.          Towards a unified structure of the two Boards in 5 years   9

         4.          Large Business Service                                     16

                     Road-map for implementation of the TARC's main
         5.                                                                     41
                     recommendations
Executive Summary
                                                         Executive Summary1
           ...to liberate the potential...you must first expand your imagination...things are
           always created twice: first in the workshop of the mind and only then, in reality. When
           you...take control...and imagine...in a state of total expectancy, dormant forces will
           awaken...to unlock the true potential...to create a kind of magic...forget about the
           past. Dare to dream that you are more than the sum of your current circumstances.
           Expect the best. You will be astonished at the results.
                                                         ­ Robin Sharma, in The Monk Who Sold His Ferrari

Public institutions, including government departments across the globe, need fundamental
reform at least every decade, if not more frequently. This reflects the likely, and widely
experienced, slide in the improvements made in the structure and practice that usually
accompany fundamental reform. Tax administration is one such institution. To counter the
anticipated slide, some reforming tax administrations have installed departments of change
whose exclusive responsibility is to track the slack and sharpen, on a continuing basis, their
productivity, accountability, cost effectiveness and, increasingly in a modernizing context,
their service delivery. Some countries have developed the practice of subjecting their tax
administration structure to occasional external examination to facilitate and introduce
corrective measures.

India had not taken such measures in the past and the tax administration has experienced
modest improvement that do not necessarily reflect global movement. Several committees
suggested measures combining tax policy and tax administration, albeit selectively. Some
committees took up overall public administration of which tax administration forms a
component. Apparently for the first time, the Tax Administration Reform Commission (TARC)
was set up by the government to examine and suggest reforms focused primarily on tax
administration. This is a welcome first step.

Chapter I of the TARC's report presents the Executive Summary. It is divided into four
sections: first, the coverage of the report that presents the focus of each chapter, second, a
detailed section on the TARC's findings, third, a shorter section on the overall thrust of its
conclusions and fourth, an elaborate section that lists its main recommendations.

1. Coverage
         Coverage

The TARC arrived at the view that taxpayer services must comprise the first focus of a tax
administration and that it, therefore, must give prominence to "customer focus" in taxpayer
services whose activities must be designed to improve the experience of taxpayers with the tax
departments. The activities of the two departments - the Central Board of Direct Taxes (CBDT)
and the Central Board of Excise and Customs (CBEC) - should be aimed at lowering the cost
of compliance so that existing as well as potential taxpayers find it easier to follow the rules.

1   Executive Summary is Chapter I of the TARC report.

Executive Summary                                                                                       1
To achieve this, a framework has to be designed that should aim to reduce uncertainty in tax
laws by providing clarity on tax obligations. Opening two-way communication channels
between the tax departments and customers would be another aspect of the strategy. Chapter
II of the report covers these aspects. It also brings out practices in other advanced tax
administrations. Some of the innovative approaches adopted by other countries have been
highlighted, including recognising the `rights' of the taxpayers.

No tax administration reform can be complete without looking deeply at the structure and
management of the tax administration. While recognising that there is no unique model of the
structure and management of a tax administration, there are some emerging cross-country
patterns. The clear movement is towards a common organisation for direct taxes and indirect
taxes. The TARC recognised that and decided to propose appropriate changes in the present
structure in a calibrated manner where, to begin with, selected functions may be delivered
through a common structure. One clear point to initiate this is the administration of large
taxpayer units (LTUs). This would accommodate the prevailing LTUs, whose offices ­
currently in the five metros ­ perform both CBDT and CBEC functions, although in disjointed
silos. Thus, the LTU experiment of structuring operations around a taxpayer segment has till
now not gone far, the reasons being many. Another area of gaining such immediate synergy is
in making tax laws. A further area of the TARC's consideration was the need to reorganise the
tax administration on a functional basis instead of its present organisation based primarily on
territorial jurisdictions. The TARC has taken an approach to reform in a step-wise manner over
time in recognition that the two tax administrations must be given time, albeit on a chalked out
roadmap, to move to a fully integrated tax administration. But prior to full integration, a unified
management structure through a common Board could be achieved in the next five years based
on groundwork to be completed on data integration, common delivery structure for the benefit
of taxpayers, and training of officers and staff based on comparable and benchmarked
parameters. Chapter III of the report deals with these aspects.

Tax administrations that do not allow specialisation among its officers and staff suffer in
interfacing with high quality tax intermediaries and taxpayers. They also find it difficult to
understand complex business transactions that require deep understanding and skill to decipher.
These skills do not come with only theoretical exposure but while working on the subject for a
minimum of 4-5 years, international experience revealing even periods as long as a decade
during which an officer is encouraged to specialize. It is thus imperative to allow tax officers
to develop specialisation in their work. Specialisation is not only required in audit functions,
as is commonly held, but also in dispute resolution, taxpayer services, and in other functions
of tax administrations such as HR, finance, tax analysis and ICT management. Chapter IV of
the report deals with the people function of the tax administrations, with training and
specialisation forming important components. It also focuses on the wider HR needs of staff
by identifying the need to introduce practices that have become common in modern tax
administrations including mentoring, effective performance evaluation methods, for example,
through assessment centres, and e-training.

Chapter V deals with dispute resolution and management. The TARC found in its analysis
that the present dispute management structure should be converted into a separate vertical

2                                                                              Executive Summary
function so that the tax collection functions do not influence the resolution of disputes, which
tends to occur at present. The current adversarial approach to disputes also needs to be
transformed into one that is more collaborative and solution-oriented. Besides, the dispute
structure needs to be modernised by bringing in alternative dispute resolution mechanisms
through arbitration and conciliation. This may require legislative change. The role of regular
interpretative statements has been emphasized to avoid disputes which otherwise arise due to
ambiguity and imprecision in laws, rules and regulations. Equally important is taking due care
for greater clarity at the law drafting stage itself.

Processes, by themselves, comprise an integral part of the reform along with structure, people
and the use of technology in a tax administration. Chapter VI deals with internal processes
and the need to design their management structure to bring better delivery to taxpayers as well
as to the tax departments. The TARC identified some key processes such as registration, return
filing, and tax payment to be further expanded and sharpened. This would be in keeping with
the recommendations made in Chapters II and III.

Both the CBDT and CBEC have been among the leading departments in the government in
adopting ICT. Both have successfully implemented large projects that have made many
processes convenient and transparent for the taxpayers and improved the efficiency of
operations. However, there are still many gaps and a large room for improvement. Chapter
VII is on the need for a deeper penetration of information and communication technology
(ICT) in the two tax departments. ICT has to form the backbone of improved service delivery
and that could be better achieved through a special purpose vehicle (SPV) as expounded in that
chapter.

2.
2.        Critical
   Critical        Findings
            Findings

At a macro level, the TARC found, first, that the Indian tax administration is in a vulnerable
position due its static structure. For example, the recent "restructuring" of the two departments
involved only an expansion in the number of posts without a corresponding reduction or re-
allocation of resources away from less productive areas that is a quintessential element of
modern restructuring and change. Second, the TARC found that the tax administration remains
essentially unable to address rapidly emerging challenges on the domestic or international
fronts, reflected in recent decisions that are far removed from international practice. Third, the
TARC found that it should make recommendations that may appear to be far reaching and path
breaking but are very much desirable and doable in the Indian context since they are
benchmarked with prevailing global best practices.

Thus, it is fair to emphasize right at the beginning of this report that the TARC has not
suggested any change that it believes cannot be carried out in the Indian context. Indeed, it is
imperative that they be carried out given the prevailing tax administration characteristics in
India. Some changes should be made with haste and others progressively so. The TARC has
made specific suggestions of where the tax administration should make changes immediately,
where it should position itself through continuing, self-generated reform in five years and, once
appropriately empowered, where it should reach as a world class tax administration in ten


Executive Summary                                                                               3
          yet accorded appropriate rank and status to the Chairman and members of the
years. In Board....
             this perspective, a roadmap has been provided for complete and fundamental tax
administration reform. Also, the recommendations made in different chapters of this report
need to The      Committee
         be viewed               wonder
                          as a whole     and whynotthe    Chairman
                                                      in isolated         of the Board
                                                                     fragments,                cannot efforts
                                                                                     if the reform        be given arethe
                                                                                                                        to bear the
         rank     and   status    of  Secretary       of  Government         of  India.
intended fruit. The TARC believes this is the right moment in the light of a new reform     The    contention      of  the
         Ministry
environment       that that    there ought
                        is expected      to emerge to be     a Secretary,
                                                         precisely               Department
                                                                       at this point     of time. of Revenue, to
         coordinate the affairs of the two Boards, viz., CBDT and CBEC, is
The majorunacceptable
               fault lines in     the tax
                              to the   Committee         as in their
                                            administration                opinion
                                                                  are listed          the two areas of Central
                                                                                as follows.
         revenues dealt with by the two Boards are fairly distinct from each other and
 Positiondo not   of Revenue
                   require     more Secretary
                                      coordination         than that isof
                                                   and autonomy               the two Boards:
                                                                           necessary       between the   The  TARC found that
                                                                                                             Ministries
    theseof matters
              Commerce  are closely     related and
                               and Finance,          whichcomprise      the crucial
                                                                are headed               shortcoming Secretaries
                                                                                                            at the apex level. It
                                                                                  by independent
          found that
    alsoreporting      toearlier    taxation
                            different            committees
                                        Ministers.                 had addressed
                                                        The Committee         feel that the atissue   time and again
                                                                                               the Secretariat      level­ as will
         whatever below
    be described                 ­ though
                         coordination         isgovernment
                                                  necessary actioncan best  has be      followed.through
                                                                                  notachieved           The TARC   inter-found that
    its view      closely or
         ministerial          parallels    those of the earlier
                                   inter-departmental                     committees,
                                                                 Committees          and modified
                                                                                               consultations.however  The to reflect
    international
         Committee     experience
                           are amused  that at has  since
                                                  the        emerged. stand taken by the Ministry in
                                                        contradictory
         deeming the two departments viz. Income Tax and Customs and Central Excise
    Thereto be    a postimportant
              is more        of Revenue   than  Secretary
                                                 the Railway   who    occupies
                                                                    Board           the apex position
                                                                              and simultaneously                in the Revenue
                                                                                                            expressing
    Department
         themselves   and    is selected
                          against            from the
                                      conferring       uponIndian    Administration
                                                               the head                      Service (IAS).
                                                                             of these organizations            theHerankis likely to
    have andlittle  experience
                 status              or background
                           of a Secretary                   in tax administration
                                                   to Government                            at the national
                                                                           of India particularly              whenleveltheand little
    familiarity
         Chairman,   with Railway
                            tax, including
                                         Board       holds the tax,
                                                 international        rank     of athat
                                                                           issues            are increasingly
                                                                                        Principal        Secretary  taking
                                                                                                                         to centre
    stage    in emerging
            in   emerging
         Government         ofglobal
                                India.challenges
                               global    challenges
                                         The    Committee intaxation.
                                                         in     find noYet
                                                              taxation.    yets/he
                                                                           reasonhe is isthe
                                                                                      why  the   final signatory
                                                                                                final
                                                                                              similar   signatory    on decisions
                                                                                                         status cannot
    on tax     policy
         as well         and administration
                     be given    to the Chairman      matters
                                                          of the  prior
                                                                   Centralto their
                                                                               Board arrival      for the
                                                                                          of Direct     TaxesFinance
                                                                                                                and the  Minister's
    consideration.
         Central Board    The ofTARC
                                   Excise  found     that this has translated to the Indian tax administration's
                                              and Customs."
    attention and concerns ­ in the form of the Revenue Secretary's control over the CBDT and
    CBEC
    With        - to to
            regard    mainly      represent the
                          the Committee's               Revenue Secretary's
                                                    observation      that the two area  Boards  of are
                                                                                                     familiarity,     i.e., general
                                                                                                          "fairly distinct    from
    administration,
    each   other and do    in  which
                           in not
                               which    s/he
                                         he may
                                    require     may
                                                more   be
                                                      be   highly competent
                                                          highly
                                                        coordination competent
                                                                           than thatbutis   which
                                                                                             necessaryis likely
                                                                                                      is  likely to
                                                                                                            ", theto possess
                                                                                                                       posses
                                                                                                                    TARC        only
                                                                                                                              notes
    thin since
    that   links1991-
                    to the 92 most     challenging
                               international               matters
                                                   experience      has of   tax policy
                                                                         clearly   movedmaking  counter or     modernizing
                                                                                                           to the  Committee's   tax
    administration
    observations       andin as    light of
                              thenoted         current global
                                           in Chapter       III, thepractices.
                                                                      dominant         a sense,
                                                                                  Inglobal          thisis
                                                                                                 trend     peculiar   practice has
                                                                                                            in the direction     of
    assigned theof
    unification       ultimate
                          direct responsibility
                                    and indirect tax     for administration
                                                               administrations     and andfinancial
                                                                                               treating  control   lyingtax
                                                                                                            corporate      with  the
                                                                                                                               and
                    together ­
    Revenue Secretary
    VAT/GST                      asDepartment
                                     business taxes.  of Revenue ­ rather than to the CBDT or CBEC.

    Theindicated,
    This
    As    issue
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                   the      administrative
                             is time
                         first
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    anomalous,
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                                    post
                                       and ofthat  theIn
                                               Revenue     its 10
                                                           Secretary
                                                         post         report     (1991-92),
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                                                                                                   superfluous.      the
                                                                                                                 bywas
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    considered       Committee,
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                                                      in Para 3.77
                                                                1992, Raja
                                                                       of     J.
                                                                           their report:
                                                                          chaired Chelliah.   The  Committee's    views
                                                                                     by Prof. Raja J. Chelliah. The
    were   as follows:
    Committee's views were as follows:
         "The Committee note that the existence of Central Board of Direct Taxes as an
         independent
         "We recommend     statutory
                                  that body
                                        (a) the   twoback
                                               dates         to 1964
                                                        Boards    should whenbe Central     Board of
                                                                                  given financial       Revenue
                                                                                                      autonomy
         with 1963
         Act,         was financial
                separate     enacted. The       Board
                                          advisers       is responsible
                                                     working     under the        administration
                                                                             forsupervision     and of   various
                                                                                                      control of
         direct   tax  laws    and   rules   framed    thereunder,      and   for
         the respective Chairman; (b) the Chairman of the two Boards should be givenassisting  Government     in
              status of of
         formulation
         the                 fiscal policies
                           Secretary     to the and   legislative
                                                 government      of proposals
                                                                     India and relating       to Direct
                                                                                    the members     of theTaxes.
                                                                                                            rank
         They    further      find   that   apart    from
         of Special Secretary; and (c) the post of Revenue Secretary should Tax
                                                              the   field    offices    of  the   Income      be
         Department,        a   number     of  attached     offices
         abolished." (Para 9.27 of the Final Report Part ­ I)         also    function     directly  under   the
         Board and assist it in discharging its responsibilities. At present the Board
          TARC's finding
    The comprises       of (sic) regarding
                                    7 members    theoneroleof of  the Revenue
                                                               whom      is nominated Secretary
                                                                                            as its is  congruent. It is
                                                                                                     Chairman.
    surprising
         However,       government
                 that the    Committee    has  sosurprised
                                             are   far not visited
                                                               to note this   matter
                                                                           that        and, as will have
                                                                                  the Government       be developed
                                                                                                             not      in



4                                                                                                        Executive Summary
intended fruit. 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 major fault lines in the tax administration are listed as follows.

   detail in this
   Position       report, it
             of Revenue      is time toand
                           Secretary    giveautonomy
                                             renewed attention   to Boards:
                                                        of the two  it due to The  TARC impact
                                                                              its adverse        on
                                                                                          found that
   the efficacy
   these  mattersof the
                  are   tax administration
                      closely               in India. the crucial shortcoming at the apex level. It
                                related and comprise
   also found that earlier taxation committees had addressed the issue time and again ­ as will
   Interestingly, the Chelliah Committee not only recommended abolishing the post of
   be described below ­ though government action has not followed. The TARC found that
   Revenue Secretary, but also emphasized financial autonomy for the two Boards. To quote,
   its view closely parallels those of the earlier committees, modified however to reflect
   international  experience
        ".... the Boards     that
                         should   has since
                                 have financemerged.
                                             ial autonomy and that the Chairmen should
         have a sufficiently high status. We recommend that the two Chairmen should
   There is a post of Revenue Secretary who occupies the apex position in the Revenue
         be directly accountable to the Finance Minister insofar as matters relating to
   Department and is selected from the Indian Administration Service (IAS). He is likely to
         tax administration are concerned." (Para 9.28 of the Final Report Part ­ I)
   have little experience or background in tax administration at the national level and little
   familiarity
   Selected       with tax,
                matters       including
                          relating   to theinternational   tax, issues that
                                             administration/financing         are increasingly
                                                                                       had been taking
                                                                           structure                      centre
                                                                                                   examined   in
   stage   in emerging     global   challenges    in taxation.  Yet s/he is the  final
   the case of the CBDT by the even earlier Wanchoo Committee, 1971. It recommended    signatory   on  decisions
   on tax policy
   making                  an autonomousmatters
                      and administration
              the Board                                  prior to their
                                                body, independent     ofarrival   for theof
                                                                         the Ministry      Finance
                                                                                             Finance,Minister's
                                                                                                        with the
   consideration.      The  TARC      found   that  this has translated  to the  Indian   tax
   Chairman enjoying a status equivalent to that of a Secretary to the Government of India as administration's
   attention
   in  the case andofconcerns
                       the Post  ­ in
                                   & the  form of the
                                       Telegraph         Revenue
                                                     Board.   The Secretary's     Choksiover
                                                                   subsequent control           the CBDT
                                                                                            Committee,       and
                                                                                                           1978,
   CBEC - to
   reiterated       mainly represent the Revenue Secretary's area of familiarity, i.e., general
                 that,
   administration, in which s/he may be highly competent but which is likely to possess only
          links
   thin "...   theto  the mostofchallenging
                   Chairman                         mattersofof
                                    the Central Board            tax policy
                                                              Direct           making
                                                                      Taxes should       or the
                                                                                       have  modernizing
                                                                                                  status     tax
   administration
         of a Secretaryin the  light
                           to the     of current global
                                    Government             practices.
                                                    of India and the In  a sense,
                                                                      Board         this
                                                                               should    peculiar
                                                                                       have         practice has
                                                                                              adequate
         staff the
   assigned         ultimate and
                 assistance     responsibility
                                      should be  for  administration
                                                    provided           and financial
                                                                with personnel          control
                                                                                   having        lying with the
                                                                                             necessary
   Revenue      Secretary
         technical          ­ Department
                      background               of Revenue
                                      and experience".       ­ rather
                                                           (II.       than
                                                                2.16 of     to the
                                                                        Choksi      CBDT or Report)
                                                                                  Committee    CBEC.

         issue
   The issue
         TARC   of
               of    the
                   the
                    has   administrative
                       administrative
                         worked      alongset set  updirect
                                               up of
                                             similar     of  direct
                                                         lines. taxes   taxes
                                                                   First,was       wasexamined
                                                                              it also
                                                                                  agrees also  examined
                                                                                            that  thelater  byby
                                                                                                         post  of the
                                                                                                               the Estimates
                                                                                                                   Revenue
                                                                   th
   Committee    Committee
   Estimates does
   Secretary      of Parliament.
                       not merit      In its 10th
                                of presence
                                     Parliament. in report
                                                     a     its (1991-92),
                                                      Inmodern  10 tax report     the  Committee
                                                                                   (1991-92),
                                                                            administration.       the  made
                                                                                                        Committee
                                                                                                   Instead,   the
                                                                                                              a    following
                                                                                                                 Governing
   recommendation
   made
   Council     following
           theshould   beinintroduced
                             Para  3.77 of
                             recommendation
                                          withtheir
                                                 the report:
                                                    in   Para 3.77
                                                       chairs     of theofBoards
                                                                             their report:
                                                                                        alternating as its chairperson.
   In this manner, the TARC adds to the tenor of the Chelliah Committee in that India should
                  itself withnote
        "The Committee
   benchmark                          that the existence
                                modernizing                    of Central Board
                                                  tax administrations             by notof   Direct
                                                                                           only         Taxes the
                                                                                                                as an
                                                                                                 removing           position
        independent
   of Revenue      Secretary    but body
                         statutory           dates back
                                       by replacing          to 1964
                                                         it with          when Central
                                                                    a Governing               Board
                                                                                         Council         of Revenue
                                                                                                      that  should include
               fromwas
        Act, 1963
   members             the enacted.     The Board
                            non-government              is responsible
                                                   sector     as well. The     forGoverning
                                                                                     administrationCouncilof various
                                                                                                               will oversee
        direct   tax  laws   and   rules  framed     thereunder,         and     for
   the functioning of the two Boards and approve broad strategies to be adopted by    assisting   Government       inthe tax
        formulation
   administration     toof  fiscal
                         fulfil the policies
                                      objectiveand  legislative
                                                   of                proposals relating
                                                       a more co-ordinated             approach  totoDirect   Taxes.
                                                                                                        the administration
        They
   of the   two further     find that
                 taxes ­ direct           apart from
                                    and indirect    ­ and the create field     offices which
                                                                         a structure       of theisIncome        Tax Such
                                                                                                       independent.
        Department,
   a co-ordinated         a number
                       approach      also    attached the
                                         ofimproves         offices
                                                                 focus alsoof thefunction    directly under
                                                                                      tax administration          the
                                                                                                                towards   its
        Board     and   assist  it  in  discharging       its  responsibilities.
   customers, or taxpayers. A depiction of the desired governance structure is given in  At  present      the Board
        comprises
   Diagram     1. This of
                        has(sic)
                              been7 discussed
                                      members in   one    of whom
                                                       detail   in Chapteris nominated
                                                                                   III of the as    its Chairman.
                                                                                              report.     This is depiction
        However,      the  Committee      are   surprised       to  note    that    the
   is for large business service, but the same can be also be framed for other taxpayers.Government         have not
        yet accorded appropriate rank and status to the Chairman and members of the
        Board....

       The Committee wonder why the Chairman of the Board cannot be given the
       rank and status of Secretary of Government of India. The contention of the
       Ministry that there ought to be a Secretary, Department of Revenue, to
       coordinate the affairs of the two Boards, viz., CBDT and CBEC, is
       unacceptable to the Committee as in their opinion the two areas of Central
       revenues dealt with by the two Boards are fairly distinct from each other and
       do not require more coordination than that is necessary between the Ministries
       of Summary
Executive  Commerce and Finance, which are headed by independent Secretaries                                               5
       reporting to different Ministers. The Committee feel that at the Secretariat level
       whatever coordination is necessary can best be achieved through inter-
        The Committee wonder why the Chairman of the Board cannot be given the
        rank and status of Secretary of Government of India. The contention of the
        Ministry that there ought to be a Secretary, Department of Revenue, to
        coordinate the affairs of the two Boards, viz., CBDT and CBEC, is
        unacceptable to the Committee as in their opinion the two areas of Central
        revenues dealt with by the two Boards are fairly distinct from each other and
        doin
    detail  notthis report,
                 require            time to give than
                             it iscoordination
                          more                       renewed      attention
                                                            that is necessary   it due to the
                                                                             to between    its Ministries
                                                                                               adverse impact on
    the efficacy
        of Commerce       andadministration
                   of the tax     Finance, which    in India.
                                                         are headed by independent Secretaries
        reporting to different Ministers. The Committee feel that at the Secretariat level
    Interestingly, the Chelliah Committee not only recommended abolishing the post of
        whatever coordination is necessary can best be achieved through inter-
    Revenue             or but
               Secretary,
        ministerial               also emphasized financial
                              inter-departmental           Committeesautonomy
                                                                            and for   the two Boards.
                                                                                   consultations.      TheTo quote,
        Committee are amused at the contradictory stand taken by the Ministry in
         ".... the Boards should have financial autonomy and that the Chairmen should
        deeming the two departments viz. Income Tax and Customs and Central Excise
         have a sufficiently high status. We recommend that the two Chairmen should
         bebe
        to      more important
             directly  accountable   than   the Railway
                                         to the  Finance BoardMinisterand  simultaneously
                                                                        insofar   as mattersexpressing
                                                                                               relating to
        themselves against conferring upon the head of these organizations the rank
         tax administration are concerned." (Para 9.28 of the Final Report Part ­ I)
        and status of a Secretary to Government of India particularly when the
        Chairman,
    Selected   matters   relating Board
                       Railway                 holds the rank of a Principal
                                     to the administration/financing          structure hadSecretary     to
                                                                                               been examined     in
    the Government      of India.
         case of the CBDT         byThetheCommittee
                                            even earlier  find  no reason
                                                              Wanchoo       why similar
                                                                          Committee,       status
                                                                                         1971.    Itcannot
                                                                                                     recommended
              the be
        as well
    making           given
                   Board  antoautonomous
                                 the Chairman       of the
                                                body,        Central Board
                                                          independent    of theof Ministry
                                                                                  Direct Taxes     and the with the
                                                                                             of Finance,
        Central
    Chairman       Board of
                 enjoying   a Excise     and Customs."
                               status equivalent      to that of a Secretary to the Government of India as
    in the case of the Post & Telegraph Board. The subsequent Choksi Committee, 1978,
    With regard to the Committee's observation that the two Boards are "fairly distinct from
    reiterated that,
    each other and do not require more coordination than that is necessary", the TARC notes
    that since  1991-
         "... the      92 international
                   Chairman                   experience
                                 of the Central     Boardhas              moved
                                                                  clearlyTa
                                                              of Direct            counter
                                                                             xes should      to the
                                                                                                 theCommittee's
                                                                                          have        status
    observations    and as
         of a Secretary   tonoted     in Chapter of
                              the Government         III,  the dominant
                                                        India              global
                                                                and the Board       trend have
                                                                                           is in adequate
                                                                                  should          the direction of
    unification    of direct and
         staff assistance       and should
                                       indirectbe tax   administrations
                                                     provided                and treating
                                                                   with personnel      having corporate
                                                                                                necessary  tax and
    VAT/GST
         technicaltogether  as business
                     background              taxes.
                                      and experience".        (II. 2.16 of Choksi Committee Report)

    As indicated,
    The   TARC has this is not the
                      worked   alongfirst time that
                                       similar       a government
                                                 lines.               committee
                                                        First, it agrees  that thehas
                                                                                    postfound  that this
                                                                                           of Revenue
               is anomalous,
    admixturedoes
    Secretary                   and that in
                    not merit presence     thea post
                                                modernof Revenue    Secretary is
                                                          tax administration.     superfluous.
                                                                               Instead,          It was
                                                                                          a Governing
    considered
    Council     by the
             should  be Tax  Reforms
                        introduced      Committee,
                                     with  the chairs 1992,
                                                       of the chaired
                                                              Boards by   Prof. Raja
                                                                      alternating     J. Chelliah.
                                                                                   as its           The
                                                                                          chairperson.
    Committee's
    In            views
       this manner,      were as
                    the TARC      follows:
                                adds  to the tenor of the Chelliah Committee in that India should
    benchmark itself with modernizing tax administrations by not only removing the position
                   Secretary that
         "We recommend
    of Revenue                     (a) replacing
                              but by   the two Boards
                                                   it withshould    be given
                                                            a Governing         financial
                                                                             Council    that autonomy
                                                                                              should include
         with separate financial advisers working under the supervision and control of
    members from the non-government sector as well. The Governing Council will oversee
         the respective Chairman; (b) the Chairman of the two Boards should be given
    the functioning of the two Boards and approve broad strategies to be adopted by the tax
         the status of Secretary to the government of India and the members of the rank
    administration to fulfil the objective of a more co-ordinated approach to the administration
             Special
         of two
    of the             ­ direct andand
                 taxes Secretary;          (c) ­
                                     indirect   the
                                                  and post        structure Secretary
                                                             of aRevenue
                                                        create                              should be Such
                                                                              which is independent.
         abolished." (Para 9.27 of the Final Report Part ­ I)
    a co-ordinated approach also improves the focus of the tax administration towards its
    customers, or ortaxpayers.
                     taxpayers.AA depiction   of the
                                      depiction   of desired
                                                       the      governance
                                                            desired            structure
                                                                      governance           for large
                                                                                                  is business
                                                                                      structure        givenItin
    The TARC's       finding  regarding    the role    of the   Revenue      Secretary    is congruent.        is
    service
    Diagram  is given
               1. This  in
                       has Diagram
                           been       1. This
                                  discussed   inhas   been
                                                 detail  in  discussed
                                                            Chapter    IIIin
                                                                           of detail
                                                                              the    in  Chapter
                                                                                   report.  This  is III of the
                                                                                                      depiction
    surprising that government has so far not visited this matter and, as will be developed in
    report.
    is for large business service, but the same can be also be framed for other taxpayers.




6                                                                                           Executive Summary
                     Diagram 1: Desired governance structure for large business services

                                     Independent
                                                                 Governing Council           Tax Council
                                     Evaluation Office




Executive Summary
                                         CBDT                                                                         CBEC
                                                                                     TPA


                                                                                     DGLBS


                                 DG (Audit)                                                                            DG (Audit)
                                                                  LBS 1              LBS 2         LBS 3


                     CC (Audit)                  CC (Audit)                                                CC (Audit)          CC (Audit)



                    Commissioner 1              Commissioner 1                                             Commissioner 1     Commissioner 1


                    Commissioner 2              Commissioner 2                                             Commissioner 2     Commissioner 2


                    Commissioner 3              Commissioner 3                                             Commissioner 3     Commissioner 3




7
    Second, synergy in tax policies and legislation between the two tax areas is to be achieved
    through a Tax Council, headed by the Chief Economic Adviser (CEA) at the Ministry of
    Finance. The Tax Council will bring the rigour of economic analysis and high precision in
    legislative drafting to tax laws so that tax laws are not only of assured quality, but are also
    coherent across tax types. Structure of the Tax Council and the Tax Policy and Analysis
    (TPA) unit, described in greater detail in Chapter III, is given in Diagram 2 below.

    Diagram 2: Structure of Tax Council and Tax Policy and Analysis Unit


                              Board
                             Member
                                                                                                          Tax Council


                                 Chief Economist                                                             Chief Economic Adviser
                           (Direct Taxes/Indirect Taxes)                                                             (Chair)




                             Tax Policy & Analysis
                                       Statisticians &
            Tax                          Operations
                                                                     Tax Law    Chairman    CBDT Chief Economist Addl Secretary Chief Economist CBEC Member Chairman
                                          research
        Administrators Economists                          Lawyers   Drafters    CBDT    Member (TPA) (Direct Taxes) (Budget) (Indirect Taxes) (TPA)
            (40)          (60)
                                         specialists
                                            (60)             (20)      (20)                                                                                  CBEC
        Numbers are in bracket


    The TARC found that the CEA is more equipped to deal with the links between tax and
    economic policies than the Finance Secretary (who was given a role by the Chelliah
    Committee). This new pattern reflects prevalent global practice in which tax and the
    economy are recognized to be intrinsically linked. That link needs to be established in India
    rather than linking it with external administrative control, apparently to accommodate an
    administration oriented service.

    The proposed structure would result in more autonomy in the functioning of the tax
    administration, which is unlikely to be achieved in the present structural framework as it
    fails to empower tax departments to carry out their assigned responsibilities efficiently. The
    Kelkar Committee, 2003 also recommended that both the CBDT and CBEC should be
    given requisite autonomy. The present functions of the DoR could easily be handled by the
    two Boards. The TARC could not identify the rationale for entrusting such functions to a
    separate body. Functions such as prevention and combating abuse of narcotic drugs and
    psychotropic substances and illicit traffic therein, Smugglers and Foreign Exchange
    Manipulators (Forfeiture of Property) Act, 1976, and the administration of central sales tax
    can be looked after by the CBEC while the enforcement of the Foreign Exchange
    Management Act, 1999, and Prevention of Money Laundering Act, 2002, can be looked
    after by the CBDT. The administrative functions relating to the Authority for Advance


8                                                                                                                                  Executive Summary
   Ruling, Settlement Commission and Ombudsman can be delivered through the respective
   Boards.

   The Governing Council and Tax Council will operate as single entities over both Boards to
   achieve better tax governance. The Councils anticipate the eventual convergence of the two
   Boards. Over the next five years, the two tax departments would move to a unified
   management structure, i.e. a common Board and operate the services for both taxes, as
   shown in Diagram 3 below. This would pave the way over another five years to a fully
   integrated tax administration with corporate tax, excise duty and service tax, together
   comprising taxes on business. When major functions of the tax administration are organized
   along functional lines, and not on merely tax lines, it will enhance taxpayer as well as staff
   convenience. This reflects current global practice. This would, of course, not be at the cost
   of specialisation in different tax types. The description above is a snap-shot of the structure
   described in greater detail in Chapter III and the same is depicted below.

Diagram 3: Towards a unified structure of the two Boards in 5 years




   Artificial separation of two tax Boards: The tax administration is divided into two Boards
   ­ CBEC and CBDT ­ whose Chairs and Members are selected from career tax officials,
   and who report to the Revenue Secretary. There are several crucial difficulties with the
   nature and practice of the two Boards. First, there is no rationale for a functional separation
   that fails to reflect the common global practice of the day. This is because many of the
   Members' functions on the two sides repeat the same function that could be carried out
   ideally and optimally by the same official. This separation appears to accommodate the
   comfortable existence of Board Members rather than serve the interests of government in
   a sharp tax administration. Combining at least certain functions immediately would yield
   more Member positions in currently neglected areas. The Chelliah Committee had also


Executive Summary                                                                               9
      recommended that the two Boards should operate in close co-ordination with each other.
      To quote:

             "With the abolition of the post of Revenue Secretary some arrangement would
             have to be made to ensure supervision and coordination of the activities of
             the two Boards. While alternative institutional arrangements could be
             considered, it is necessary to ensure that two basic conditions will be
             satisfied; the first is that the two Boards or the Tax Departments should not
             act independent of each other; as we have stressed earlier, it is extremely
             important that the tax system is structured and managed as a harmonious
             whole and that other inputs besides knowledge of tax administration are
             brought into the formulation of tax policy." (Para 9.28 of the Final Report
             Part ­ I)




      Routine placement of officials in the two Boards (with little relation to length of tenure):
      Second, the selection of Chairs does not take into account the length of their remaining
      tenures prior to retirement. The selection is based almost entirely on seniority. As an
      indicator, in 2014 alone, there are likely to be four Chairs of CBDT and three Chairs of
      CBEC. For Members, there is a requirement of one year of residual service. Otherwise, the
      selection process is the same. With such rapid turnover and short tenures, there is little
      leadership in the Boards and, consequently, scant attention and time being devoted to
      directing national tax policies or providing administrative guidance ­ their quantity as well
      as quality have been reduced to random outcomes of ephemeral Chairs and Members.

      Board assignment has little relation to experience or link to specialized areas: Third,
      the assignment of functions among Members does not necessarily reflect their work
      experience. Additionally, some areas that comprise crucial matters in modernizing tax
      administrations are given inadequate attention ­ for example, information and
      communication technology (ICT). Indeed, in such a specialized area, it is possible that
      people elevated to the post of Member ICT may have spent hardly any time during their
      earlier career on this matter. It, therefore, is unlikely that such a Member will be able to
      manage the area or take dynamic essential steps to keep the tax administration abreast of
      the latest developments in ICT applications that would be beneficial to the system.

      Members making policy have little policy experience: Fourth, most Members emerge
      primarily or exclusively from field functions while, at the Boards, they are expected to
      design policy. Introduced policies, therefore, are often unrepresentative of the best
      available and experimented policy options from across tax administrations internationally.
      This happens even as top taxpayers express willingness to adhere to a rational tax
      administration framework while increasingly protesting against prevailing practices that do
      not compare with their experiences in dealing with tax administrations elsewhere.

      Members' risk aversion leads to low productivity or low motivation to provide
      guidance or clarity: Fifth, positioned beneath a Revenue Secretary picked from another
      Service, the Boards have tended not to assume a leadership posture, their views and


10                                                                             Executive Summary
   decisions increasingly revealing extreme risk aversion. The outcome is that the Boards'
   decisions or pronouncements in the form of legislative changes, binding circulars,
   clarificatory guidance notes or press releases are few and far between, and that too under
   external force, in contrast with other tax administrations elsewhere.

   Risk aversion permeates down, and leads to, infructuous tax demands: The stance of
   inaction has permeated down to Chief Commissioners and even Commissioners who are
   averse to taking strong or even correct decisions that would counter infructuous demands
   made by lower level officers who have been given the role of a quasi-judicial authority. On
   the other hand, when an officer is convinced about a demand s/he has made but the
   Controller and Accountant General's (CAG) auditor has disagreed with it, the Boards have
   issued standing instructions that a "protective demand" must be issued by the officer to the
   taxpayer. Thereafter, the departments persist in such futile litigation imposing completely
   avoidable costs on the taxpayer. The CAG has nowhere stated that such protective demands
   should be issued and it is entirely up to the Boards not to do so. Non-issuance could lead
   to their being called to explain by the Public Accounts Committee (PAC) of Parliament;
   this was not uncommon in earlier years. Where a considered view has been formed on
   CAG's observations, the Boards ought to display the courage to defend their decisions
   before the PAC should such a need arise, instead of transferring the risk to the taxpayer.
   The Board's standing instructions, therefore, reveals excessive risk aversion that could only
   have an adverse effect on the taxpayer who is left in a completely uncertain and trying
   position in terms of current cash flows and business decisions for the future. The deleterious
   ramifications for the economy can only be surmised but not exaggerated.

   Taxpayers express helplessness against rude or arbitrary behaviour of officers with
   little assigned accountability in practice: The continuing impact on the taxpayer who has
   been relegated to a position of helplessness is unprecedented internationally. The
   confusing, if not arrogant, environment that they have to face on a daily basis was reported
   by high finance officials of major Indian corporations who are some of the largest Indian
   taxpayers. This occurred during the TARC's stakeholder consultations at five Indian metros
   ­ Bengaluru, Chennai, Delhi, Kolkata and Mumbai. They did not complain about the
   disagreements of the quantum decisions as much as about the rudeness in communication,
   non-maintenance of appointment time, passing on accountability to another location, and
   going so far in some instances as informing the taxpayer that a demand is being made to
   obviate "vigilance" ­ internal audit against the officer ­ and the taxpayer should take
   recourse to the appeals process available to him. This matter is detailed further as it has
   cropped up time and again during consultations with taxpayers in different contexts.

   Complete absence of economic, statistical, behavioural, or operations research-based
   analysis of policy or of taxpayers prior to making major or minor legislative or
   subordinate legislation-based (rule-based) decisions: Administrative decisions and tax
   policy making are both based on nil analysis by international standards. No "impact
   assessment" is carried out before introducing major legislative changes. Even changes in
   rules that Boards announce have no reference to what background analysis has preceded


Executive Summary                                                                             11
      the decision. Pre-budget discussions are usually back-of-the-envelope calculations of
      revenue impact. The impact on a taxpayer is considered in a cursory manner, if at all.
      Retrospective amendments clustered during 2009-12 may reflect this lackadaisical
      approach. In turn, this reflects complete lack of accountability at any level except on
      grounds of lagging behind in revenue collection.

      Lack of use of Information and Communication Technology (ICT) based data by the
      Tax Policy and Legislation (TPL) Unit and the Tax Research Unit (TRU): The two
      departments on both direct and indirect tax sides have made impressive advances in the
      installation of ICT and its use in the process function. What has not occurred is data mining.
      The masses of data generated, for example through the expansion of electronic filing,
      remain essentially unutilized. In modernizing tax administrations, modelling of taxpayer
      behaviour to obtain nuanced taxpayer behaviour patterns prior to the formulation of tax
      administration policy has become common practice. India has not yet begun even
      rudimentary attempts in this direction. Given its current size and officer backgrounds, in
      fact, no essential tax policy or tax administration policy analysis is carried out at either TPL
      or TRU. They function essentially to interpret and draft the law. There is no officer who is,
      or could be, entrusted to carry out ex ante or ex post policy analysis. This points to the
      urgent need to overhaul these units on the basis of a total reformulation in their objectives
      and scope.

      Adverse impact of revenue target on tax officer equilibrium: Revenue target is the sole
      criterion that is effectively used to assess performance. Targets are set in the Union Budget
      in a static context. No attempt has been made by the Boards to undertake any post mortem
      study that would analyse whether the projections were correct over a period of time when
      placed against the economic trajectory during the past year. Instead, the Boards pressure
      Chief Commissioners, who pressure Commissioners, who pressure lower level officers to
      meet fixed revenue targets, irrespective of the prevailing condition of the economy.
      Officers complained bitterly during the TARC's consultations in the five metros about the
      anxiety that they go through on account of the revenue collection pressure and some even
      went to the extent of pointing to the need for mentoring, coaching and psychological
      support.

      Blind revenue target causes unjust pressure on good taxpayers: Modern tax
      administrations do not use a fixed or static revenue target. A revenue projection is made at
      the time of the budget reflecting the condition of the economy at that point. The projection
      is changed during the year reflecting the changing economic outlook. This is compared
      against what revenue is actually being collected. The difference is called the "tax gap". This
      is continually minimized through better collection efforts by reducing or eliminating tax
      evasion rather than by putting pressure from the top on officers below who, in turn, pressure
      even good taxpayers to contribute more revenue or postpone making due refunds in
      particular during the last quarter of the financial year. Such policies would be illegal in
      other law abiding societies. Consequently, instead of formulating policies with respect to
      tax administration and tax policy, several Board Members take on the role of tax collector.
      The consequence, unsurprisingly, is twofold: first, a dearth of meaningful tax policy or tax

12                                                                                Executive Summary
   administration policy and, second, an inequitable pressure on the good taxpayer. Indeed,
   the TARC observed, other than helplessness, deep and openly expressed anger amidst even
   top taxpayers in several metros.

   Wrong use of tax avoidance instruments for revenue generation: In the direct tax area,
   ordinarily, transfer pricing examination between associated enterprises should be used as a
   tool to minimize tax avoidance. In India, transfer pricing measures are used for revenue
   generation, which comprises a completely wrong approach. This is revealed through the
   allocation of revenue targets to transfer pricing officers (TPOs) from transfer pricing
   adjustments. This is unheard of internationally. Accordingly, India has clocked by far the
   highest number of transfer pricing adjustments, demanding adjustments even for very small
   amounts. There is also a high incidence of variation among TPOs in their adjustments for
   similar transactions or deemed transactions. Taxpayers reported that they often succumb to
   such adjustments simply to carry on with business activity for, otherwise, they would have
   to allot or divert huge and unavailable financial and staff resources to such activities.
   Several other avoidance measures are also interpreted by the administration to be used for
   revenue generation, which comprises wrong policy.

   Defective formulation and implementation of tax law and rules to generate revenue:
   On the indirect tax side, since the introduction of the "negative list" of services ­ only
   listed services are not taxed while all others are - has wreaked havoc among taxpayers due
   to poor management of change by the CBEC, reflecting lack of knowledge, preparedness
   or Board guidance to field officers leading to multiple interpretations combined with the
   usual lack of accountability for timeliness in clearing up confusion through circulars or
   guidance notes. The practice of delaying refunds by asking for irrelevant information
   reveals an undesirable and non-transparent practice to avoid refunding what is legitimately
   due to the taxpayer. Such artificial devices to garner revenue reflect an unethical approach
   to revenue collections.

   Lack of quality in fiscal deficit reduction: Revenue target policy is usually set to achieve
   a better fiscal target figure. The TARC observes that the revenue target policy has been
   erroneous inasmuch as it is not just the numerical figure of fiscal deficit that counts but its
   quality. If a fiscal deficit is reduced through coercive government action in an era of global
   information, international rating agencies are going to take note of the overall business
   environment. Merely reducing the quantified fiscal deficit is not sufficient since the focus
   turns also to the quality of deficit reduction. Herein lies the fallacy of pursuing a blind
   deficit reduction policy. It has to be matched, instead, with appropriate approaches towards
   revenue collection both from tax administrator and taxpayer point of view. Indeed, some
   countries today are so concerned about the impact of tax policy and tax administration on
   the taxpayer that they have virtually removed the word "taxpayer" from the lexicon,
   replacing it with "stakeholder" and "customer", recognizing them as partners with the
   administration in generating revenue. India remains a long distance from such an approach.

   While revenue target is often achieved due to economic factors, identification of tax
   administration impact or tax-base impact is not separately attempted. Thus, the overall

Executive Summary                                                                              13
      impact assessment is confined to a year, and no gainful change is made in the tax
      administration or conscious efforts made to widen the tax-base.

      Escalation of disputes and poor recovery from demands: Lack of accountability in
      raising tax demands without accompanying responsibility for recovery has led to an
      unprecedented situation in India, which is experiencing by far the highest number of
      disputes between the tax administration and taxpayers with the lowest proportion of
      recovery of tax while arrears in dispute resolution are pending for the longest time periods.
      Thus, dispute management comprising dispute prevention and dispute resolution is at a
      nadir. It has also become a profession in its own right in a backdrop where, in modern tax
      administrations, disputes are entered into only as a last resort.

      Virtual absence of customer focus: Much of the modernizing tax administrations across
      the world have changed their stance towards taxpayers in a visible change in the approach
      to dealing with them, which is to treat them as partners. Segmenting taxpayers according
      to their tax behaviour enables the tax administration to develop strategies appropriate for
      such behaviour and improve the collection mechanism. In India, no customer focus strategy
      has been developed based on segmentation analysis.

      Examples of customer focus are few and there is no training for it, reducing taxpayers
      to a subservient status: It is true that numerous Aayakar Seva Kendras (ASK) are being
      set up at locations all over India so that a taxpayer can register a question and follow how
      the matter is progressing through the system. However, selected visits indicated a wide
      variation in implementation. Second, through installed ICT software, a taxpayer can log in
      to see whether and how much his tax deduction at source (TDS) has been credited.
      However, many lacunae remain in terms of non-matching and the system has been slow in
      correcting anomalies. Third, other than TDS, there are significant cases of mismatch
      between the ICT-based Centralized Processing Centre (CPC) and the information
      percolating from there to a taxpayer's Assessing Officer (AO). Although the taxpayer
      suffers as a result of the mismatch, the lack of responsibility or accountability, leave alone
      timeliness in resolution, between the ICT and the AO for redressal of the mismatch is
      striking, despite ardent pleas from affected taxpayers, the latter sometimes even being
      subjected to scrutiny. Fourth, a common complaint made during the TARC consultations
      by high and low taxpayers alike was that the Indian tax administration was virtually the
      opposite of what is understood globally as customer focus orientation in terms of congenial
      attitude and polite approach to the taxpayer, or in terms of timeliness in decision making.

      Instances of egregious tax officer behaviour: Taxpayers are subjected routinely to rude
      and arrogant behaviour, are made to wait hours ­ being called to appear in the morning
      though met many hours later, sometimes even in the afternoon ­ are asked to make
      photocopies of information already sent to the administration again during the visit without
      availability of copying machines, CEOs of companies being asked to appear when the CFO
      or an accounts official from the company would suffice. These characteristics signify
      practice that has descended to unprofessional levels, to put it mildly. There is no
      departmental training to behave differently; there are no guidelines or framework of rules

14                                                                              Executive Summary
   for accountable behaviour. Yet the vision and mission statements of the departments
   pronounce their intention to care for the taxpayer by incorporating taxpayer perspectives to
   improve service delivery. The prevailing situation is so far from common global practice
   that, in the judgment of the TARC, there is likelihood of a tax revolt in the not so distant
   future unless emergency and compulsory training is conducted for officers, with strong
   cues from the leadership. Contextually, while Ethics, as a subject, forms a part of
   probationers' training, Customer Focus is not addressed as a topic at any point in the
   officer's career. This decidedly reveals how the tax administration has functioned, and
   continues to function, in isolation and in a feudal manner, protected by systemic job
   assurance and assessed highly as long as revenue targets are met. The distance of this
   framework and manner of functioning from authentic customer focus could not be greater.
   The need for remedy could not be more urgent.

   Large Taxpayer Units (LTUs): The concept of LTUs was introduced in 2006 following
   comparable practice in more than 50 countries. There should be a double dividend from the
   functioning of LTUs. On the one hand, large taxpayers defined according to their size of
   advance income tax or previous year's excise tax or service tax payment, can pay all taxes
   ­direct and indirect ­ at one window. On the other, the tax administration can be fully
   informed of all taxes filed by a single taxpayer ­ corporate or any other business ­
   enhancing the sharpness of scrutiny and audit functions and their consistency across taxes.
   It is happenstance that in India, as explained above, direct and indirect taxes are divided
   into parallel departments with effectively little information passing from one to the other.
   The institution of LTUs was expected to bridge this gap at least for large taxpayers. This
   has simply not happened. While large taxpayers get the single window facility, the two tax
   departments have continued to operate as silos, desisting from sharing information even
   with respect to LTU participants. To protect their respective turfs, they have bypassed the
   advantages to be reaped from sharing information even when the revenue ramifications
   from such exchange could only be positive. Thus, so far, the advantage that should accrue
   to the tax administration by operating LTUs has not accrued at all. No viable explanation
   was received by the TARC as to why, despite the introduction of an institution at the highest
   policy making level, the administrative system could basically ignore the policy intention
   without the slightest retribution except, once again, to point to the complete absence of
   accountability in the system. The TARC has found that, were the functioning of LTUs to
   be revived to a pre-eminent status, they could form the fountainhead of tax administration
   reform in India. Chapter III of this report describes how the joint working between the two
   Boards in large taxpayer operations can transform the present working of the LTUs into a
   large business service. Diagram 4 below demonstrates that.




Executive Summary                                                                            15
Diagram 4: Large Business Service

                                                       Large Business Service
             Member                                                                                Member
             Compliance                                                                            Compliance




                                  CBDT




                                                                                            CBEC
             Member (CIT)                                                                          Member (Excise
                                                                                                   & Service Tax)

             Member (HR)
                                                                                                   Member (HR)
                                                           PR. DG (LBS)




   Financial Sector           Resource            Media and                Manufacturing               ITeS
                             Industries            Telecom



                ICT                                                                                     HR/Finance
                                                                                                          /Admn


                HR                                         CC (LBS)                                     Planning &
                                                           Region A                                       Coord


             Dispute Mgt                                                                                  Debt
                                                                                                        Collection




    Financial Sector                Resource               Media and                                          ITES
                                   Industries               Telecom
                                                                                Manufacturing



                            Relationship                    Relationship                     Relationship
                             Manager 1                       Manager 2                        Manager 3


                                           Audit Gr.                            Audit Gr.
                                                                                                             Auto Sector
                                              A                                    B
 Banking         Mining                                                                                      Chemicals &
 Insurance       Oil & Gas                                                                                   petrochemical
 etc             etc                                                                                         etc



      Irrational approach to vigilance over officers: Perhaps the most fundamentally
      diagnostic finding of the TARC is the almost absurd approach, by global standards, to
      vigilance over tax officers and the continuance of the system without the slightest revealed
      interest to change it from within i.e. by the Boards. A primary responsibility of the Boards
      is the welfare of and justice to their officers. Yet these officers are subjected to anonymous
      charges against them that could be ruinous to their careers. Vigilance action against them


16                                                                                                  Executive Summary
   emanating from such anonymous complaints can drag on for years or be kept in abeyance
   only to be revived for unrelated future adverse steps that may be taken against them if the
   system so desires. It is not surprising that correct, fearless decisions cannot be expected
   from officers in an environment of such uncertainty. Instead, the safe course of action is to
   relentlessly follow the "revenue protection" goal that is inculcated in them as the primary
   motto of operation.

   Fear of vigilance in management: The TARC found that a similar fear of vigilance lurks
   even in the higher echelons of management, rendering the administration devoid of bold or
   corrective action where needed or even where obvious. Unresponsive to taxpayers'
   legitimate concerns, slow to undertake corrective action, on the contrary, instructing that
   protective demands be issued to taxpayers automatically on the basis of the CAG's
   observations and ignoring its own officers' assessment, the Boards ­ comprising top
   management of the tax departments ­ have succumbed to the fear of vigilance. The
   management is functioning to protect itself even while the taxpayer becomes its sacrificial
   lamb, revealing a lack of accountability towards the taxpayer. In this context, customer
   focus as enunciated in the vision and mission statements remains relegated to paper.
   Management becomes doubly irresponsible ­ towards both its officers as well as to
   taxpayers.

   Fear of vigilance as a consequence of external pressure and external head: Possibly
   the subservient status of the two Boards reporting to an officer from a different service and,
   more so, without essential background or knowledge of tax matters, is leading to the Boards
   shirking from taking bold steps or corrective action, or being unwilling to face the
   legislative or judicial branches as needed, or being unwilling to take initiatives in the
   building of infrastructure or, last but not least, failing to empower the institution and,
   instead, remaining inert towards its own officers and taxpayers. All of this characterizes
   the Indian tax administration of the day. It is clear that unless it is given its own autonomy,
   the Indian tax administration can never rise to its full potential.

   HRD ­ or People ­ function: First, while the need is to create a high-performing
   organisation, the HR policies of the two departments seem to work against the creation of
   a meritocracy. The promotion, transfer and placement policies do not adequately address
   the need for recognising merit, developing specialisation and creating a motivated and
   highly competent and professional work force, which is capable of effectively addressing
   the emerging challenges and also serving the taxpayers satisfactorily.

   Second, several officers mentioned that there is a culture of supervisors doubting and
   questioning correct decisions merely because they are perceived as customer-friendly. This
   demotivates even diligent and honest officers and induces them towards risk-averse
   decisions, thereby passing on an unfair burden on the taxpayer as that would be an easy
   way out from being subjected to further questioning by management. In short, the common
   management stance being one of distrust of the junior officer, rather than his empowerment,
   sows the seed of a chasm between an officer and the management. The former eventually
   succumbs to the laid out approach expected of him by the system.

Executive Summary                                                                              17
      Third, the transfer policy of tax officers is routine if not archaic. The transfer policy needs
      to balance the needs of the organisation with the needs of an individual to maintain high
      morale. The argument that the Indian Revenue Service is an all-India service should not
      lead to the installation and functioning of a structure that ignores the need for specialisation.
      Transfers are given first priority over acquiring specialization in any subject that may be
      quintessential in carrying out acutely specialized tasks in a global context. An officer may
      be placed in TPL, TRU, systems, or international taxation, directly from the field without
      prior training merely to adhere to the transfer policy. Nevertheless, there are enough caveats
      in the policy to accommodate special `silver spoon' cases. Indeed cases appeared to the
      TARC where circular transfer requests (pertaining to a group of officers) that are entirely
      `Pareto optimal' ­ where there are gains without anyone being worse off ­ are ignored even
      where the transfer policy is apparently not compromised. Presumably this may reflect an
                                              conceded to, may be repeated by others, not realizing
      underlying fear that such requests, if connected
      that meeting such continuing requests would only enhance people welfare. The need for a
      transfer policy that is meaningful in its fairness and encouragement towards professional
      specialization cannot be over-emphasized.

      Fourth, another oft ignored aspect of the people function is the implementation of leave
      policy. This appears to be randomly applied at least in selected observed cases. The policy
      has broad scope for leave accumulation, but granting of leave appears inexplicable and
      unrelated to the accumulation of leave. Rather, it appears to be linked to the professional
      relationship between an officer and his superior. The right of the officer to take accumulated
      leave has sometimes been ignored, revealing a lack of information or of training of
      managers in modern management principles in which rights such as the days of acquired
      leave, or stipulated number of days of training, comprise the right of a worker and has
      nothing to do with a work relationship. There is no redressal for the worker in such
      circumstances. What is worse, there is no accountability assigned to the errant superior.
      The TARC gathered the impression that the management tends to wield a tough stick on an
                   s/he falls
      officer who falls       foul inter-personally
                        foul inter-personally          the system.
                                                    ofsystem.
                                               of the

      Fifth, an issue that cannot be ignored and appears to work in the reverse direction is that of
      moral hazard. Taxpayers openly complained during the TARC's consultations about their
      helplessness against demands for bribes to make refunds, to hold back infructuous
      demands, or speed up processes from dormancy. While no officers' names were mentioned
      for fear of retribution, the TARC views that the open claims made by stakeholders is a
      cause for deep concern. Even senior officers admitted their ineffectiveness in controlling
      this growing phenomenon. On the one hand, a toothless institution may suffer from various
      such maladies as almost a quid pro quo for the powerlessness that it endures. On the other
      hand, if the institution is responsible for delivering a public good and is intended to be the
      primary institution for generating funds for public expenditure, then bribery represents a
      leakage from public funds. Whatever tax is not paid and is shared instead between an errant
      taxpayer and a corrupt officer is an amount that does not enter the exchequer. This
      institutional disease, to the extent that it exists, cannot be ignored and a solution must be
      found.


18                                                                                Executive Summary
   Key internal processes: Glaring gaps prevail in internal processes. Some among those
   found by TARC are listed here: (1) a basic lack of harmony between direct and indirect tax
   departments; (2) relatedly, the issuance of PAN, its non-use thus far as a Common Business
   Identification Number (CBIN) and the lack of provision for de-registration, cancellation or
   surrender, and slowness in real time verification of PAN; (3) absence of possible
   consolidation of direct taxes on returns, for example, income tax and wealth tax; (4)
   continuation of jurisdiction specific returns for direct and indirect taxes; (5) lack of
   harmony even within indirect taxes, i.e., between customs, central excise and service tax,
   (for example, not combining audit of customs, excise and service tax paid by the same
   taxpayer, or not treating a business as a whole and instead treating it as individual audit
   units); (6) absence of e-invoicing and commensurate monitoring of CENVAT credit flow;
   (7) absence of audit protocols that separate different scrutiny procedures and protocols for
   different types of audits; and (8) the virtual absence of risk-based scrutiny selection for
   income tax despite the use of Computer Assisted Scrutiny Selection (CASS) due to lack of
   pre-selection data cleansing or systems-based checks and analysis.

   A particular gap remains in an interface function with the taxpayer; this is in processing
   and making refunds. (1) In the case of income tax, there is no time limit within which an
   AO needs to process the refund in case it could not be issued by the CPC. The insistence
   on manual filing of TDS certificates before the AO for verification of a refund claim stalls
   the process. (2) Where eligible refunds emanate from Commissioner (Appeals), Income
   Tax Appeals Tribunal, a high court or the Supreme Court, again, the AO faces no prescribed
   time limit for issuing the refund. (3) In the case of service tax, a consistent complaint was
   that of refusal to pay due interest to domestic suppliers and to service exporters under
   different pretexts ­ including repeated demands for additional documentation or the use of
   a provision entitled "unjust enrichment" ­ by the department. The latest available data
   reveal that, in 2010-11, interest on refunds was 0.01 per cent and 0.02 per cent of refunds
   for customs and excise respectively, which may serve as an indicator of the realism of the
   complaints. (4) It was reported by officers to the TARC that it was routine to receive
   instructions from above to slow down or stop making legitimate tax refunds in the last
   quarter of the financial year.

   Tax fraud, intelligence and criminal investigation comprise another deficient area. The
   TARC found that: (1) "Search and Seizure" and its legal backing need to be made clearer.
   Drafting of prosecutable issues and highlighting the offence and the evidence to be adduced
   either do not exist or are carried out not in a fully professional manner. A dedicated vertical
   assisted by lawyers is currently lacking and needs to be embedded in the administration.
   (2) The directorate in charge of investigation of criminal activity on the direct tax side is
   inadequately linked to other agencies and, remarkably, not even to the indirect tax side.
   This once again reveals the deep and inexplicable chasm that continues to exist between
   the two tax departments and is simply tolerated despite obvious synergies that would ensue
   if common functions were jointly performed.

   Role of ICT: ICT today is the most critical underpinning for tax administration reform. All
   modern tax administrations see it as a key component of their strategy to improve the

Executive Summary                                                                              19
      efficiency and effectiveness of their operations, be it customer services, internal business
      processes or effective interventions in the area of audit and enforcement. They are also
      focusing on enhanced use of analytics to support their actions in diverse areas such policy
      making, customer segmentation and risk management.

      While the two Boards' achievements are creditworthy, and provide a robust basis for future
      progress, in the TARC's opinion, there is a long road ahead of both the Boards before they
      could be said to have achieved comparable global benchmarks, of a modern 21st century
      tax administration, for full and effective utilization of the potential that ICT offers. And in
      order to reach that destination, they will have to chart a new path as TARC has outlined in
      Chapter 7 of this report.

      ICT does not appear to be fully internalized in the thinking and working of the departments
      and there is not enough appreciation of its strategic importance as opposed to viewing it
      merely as a means of automation of transaction processing. The absence of integration of
      the ICT and business domains at the highest levels has led to sub-optimal realization of the
      benefits of ICT projects and systems. Greater attention is needed on the part of the senior
      leadership to the opportunities that ICT offers for re-engineering business processes to do
      things differently and more productively. Further, there is insufficient focus on the use of
      data analysis for developing policies and for making informed and evidence based
      decisions. It is true that the CBEC has already implemented, and CBDT is implementing,
      a data warehouse that will provide much better access to data as well as powerful analytical
      and reporting tools. However, in the absence of data sharing between the two Boards, the
      data warehouses will only provide data from their respective systems, and thus only a
      partial version of the truth, thereby limiting its utility. Further, merely providing technology
      is not sufficient. If the required human capacity to use the technology tools to perform
      advanced analyses is not developed, the potential of ICT will remain unrealized. There
      appear to be no efforts planned to create such capacity and develop an institutional
      framework for undertaking research and analysis in either of the Boards.

      The implementation so far has been in the project mode, meaning that individual projects
      were conceived, designed and implemented at different points of time for meeting different
      needs. There has been no clearly articulated ICT strategy, derived from an overall
      organizational strategy and vision, forming the basis of the project development. This
      weakness has been compounded by the absence of a robust ICT governance framework that
      would have encompassed sound programme and project management, closely linking
      business goals with ICT implementation. It has also led to heterogeneous approaches to
      ICT implementation, with systems being developed along different implementation models
      and not adequately catering to the need of interoperability.

      There are also gaps in the ICT implementation. These are either because some processes
      have not been covered in the scope of automation or because the sub-systems or modules
      that provide for digitization have are not been implemented. This is true of the core
      applications of both the direct and indirect tax administrations. The result is that data are



20                                                                                Executive Summary
   incomplete and the Boards are still dependent on reports from the field, which, besides
   often being inconsistent and inaccurate, impacts on the efficiency of field operations.

   Missing pieces in digitization of operations also means that the Boards are unable to make
   meaningful performance measurements at the organizational as well as at team or
   individual officers' levels. Consequently, they are unable to effectively manage
   performance at all levels.

   There also appears to be a communication gap between the DG (Systems) and the officers
   in the field, leading to difficulties in implementation as users do not seem to adequately
   perceive value in ICT implementation.

   Many administrations adopt suitable ICT maturity frameworks, to assess their progress in
   ICT implementation, as also the comprehensiveness, depth and effectiveness of such
   implementation. No such use of framework has been adopted by the two Boards.

   The most critical shortcoming of the current implementation arises from the two Boards
   operating in separate silos and a total absence of data sharing between the two. A big
   opportunity for radically improving both taxpayer services and enforcement actions is
   being missed on this account. An opportunity to reduce duplication of efforts and resources
   too is being missed.

   The TARC also finds that a key risk to the ICT implementation lies in the HR policies of
   the two departments, which are overly oriented towards a generalist approach. Effective
   ICT implementation requires specialized skills and capacities and all modern tax
   administrations recognize this. In India, on the other hand, the transfer policy results in
   situations in which crucial resources get moved out the ICT function, at critical points of
   time simply because of the prescribed tenures, and new (and often unprepared and
   unwilling) persons get inducted. Combined with the absence of a reliable process of
   knowledge transfer, this continues to pose a serious risk to ICT implementation. Compared
   to the size of the projects, the two DG (Systems) are also understaffed.

   Considering the complexity and scale of the tax administrations' operations, and the
   challenges confronting them in a rapidly changing environment, the task of complete
   digitization of their operations is an onerous one. This, coupled with the need to take the
   implementation out of the silo-based approach that has constrained the realization of the
   full potential of ICT hitherto, would indicate that the DG (Systems) as they are currently
   configured and structured are ill-equipped to meet the future needs effectively. Only a
   purpose built organization that will take on the full responsibility for ICT implementation,
   with full operational freedom and flexibility to be run in an independent and professional
   manner, and yet be under the strategic control of and accountable to the two Boards, can
   successfully meet the challenge.




Executive Summary                                                                           21
3.
3. Conclusions
         Conclusions

The critical findings delineated above, when combined, lead to the TARC's overarching
conclusion that, if an institution could have spirit, then the current Indian tax administration
lacks that spirit. Functioning in a vacuum, it has lost its purpose as revealed in its behaviour,
for its stated vision and mission are scarcely observed in its operational style. Its singular
objective of protecting revenue without accountability for the quality of tax demands made is
commonly believed to have severely affected the investment climate in India and in investment
itself. This view reflects strongly the pleas, complaints and anger expressed by high and low
taxpayers alike during the TARC's stakeholder consultations. Thus, overall, the Indian tax
administration is at its nadir. A fundamental and deep reform is urgently called for. There is no
time to lose if investment is to be revived and its full potential reached, and an eventual tax
revolt through capital flight or other direct protests is to be averted.

Deconstructing, the conclusions may be summarized as follows:

      A crucial deficiency is a fundamental lack of customer focus in the Indian tax
      administration, which is in stark contrast to modernizing and reforming tax administrations.
      The randomness and uncertainty in tax demands, the rudeness and abrasiveness in tax
      officer behaviour towards taxpayers, totally obviating the latter's stakeholder role, the
      inconsistency in demands made on similar tax matters without accountability, and the often
      poor quality of show cause notices have combined to project the tax administration in its
      poorest light in the eyes not only of the taxpayer but of society at large. Yet there is no
      place for customer focus thus far in the training syllabi of either branch of the tax
      administration. Indeed, recently, the phrase "tax terrorism" has appeared in the gathering
      commentary on the Indian tax administration.

      The present structure of the tax administration ­ (i) headed by a non-tax official
      imported from another public service stream that has no link to taxation, (ii) artificially
      separating the tax administration into direct and indirect taxes headed by two parallel
      Boards for common functions, ignoring, for instance, even the functional commonalities in
      LTUs that were established for the very purpose of reaping benefits from exchange of
      information between the two tax areas, (iii) living with a selection system into the Boards
      that has no or little link to the length of tenure, work experience, or specialization, and (iv)
      risk aversion arising from an externally imposed vigilance over the entire officer structure
      ­ has led to a management functioning at a suboptimal quality and below its potential
      capacity.

      The risk averse behaviour of the tax administration has routinely led to infructuous tax
      demands on the taxpayer, often with the full knowledge that eventually such demands
      would not be able to withstand or pass the judicial process. In addition, a contrary view
      from the CAG on an AO's assessment is directed by the Boards to be assimilated through
      a `protective demand' on the taxpayer, despite knowing that it is likely to lead to a dispute.
      The resultant number of disputes and the time taken to resolve these have surpassed
      heights that are globally incomparable. The rules of appeal by the tax departments that

22                                                                                Executive Summary
   elongate the process prior to final resolution and a high proportion of cases that end in
   eventual defeat have led to a miniscule proportion of recovery compared to demand. Yet
   there is no accountability regarding recovery for the concerned officer. While raising a
   demand is praised, there is no punishment for infructuous demands. The loser is the
   taxpayer in terms of time lost, advance payment required of the disputed amount resulting
   in deleterious effects on the cash flow of business, and the length of staff time and expenses
   associated with a long drawn-out dispute resolution process.

   The HRD or people function, or the approach to handling staff, is grossly inadequate.
   First, the pressure to meet exogenously imposed revenue targets, irrespective of the
   condition or     prospects
                orprospects    of the
                            of the macromacro    economy,
                                           economy,         has
                                                      has not    not
                                                              only    only
                                                                   made      made for
                                                                         it tough   it making
                                                                                        tough for
   taxpayers to make business decisions, it has also led to significant worsening in the officers'
   work environment. Second, the tax administration subjects its staff to an irrational
   practice of vigilance in which anonymous complaints against them are given equal status
   to direct evidence. Vigilance emanates also from external agencies, which is not common
   practice in many other tax administrations. The outcome of the vigilance process can linger
   for years, truncating the possibilities of success in many careers. This fear starts from entry
   to termination of a career. The result is extreme risk aversion. Thus, an AO is likely to issue
   an order despite knowing that it would not withstand the judicial process, and higher tax
   authorities are unlikely to modify it for the same fear of vigilance. The loser is again the
   taxpayer. Third, the transfer policy and leave policy are irrational. They discriminate
   and tend to work against the good intentions of officers who have acquired rights to leave
   or have a genuine desire to specialize in a subject. Several officers expressed anguish over
   their dire need for counselling or psychological support. Such conditions are unheard of in
   modern tax administrations.

   At the same time, accusations of moral hazard and demand for bribes cannot be ignored
   by the TARC. On the one hand, this could be partially explained through the administration
   operating as a subservient entity to another public service stream so that, despite an
   evidentiary slide in the morals of the institution, management does not feel directly
   responsible for it. On the other hand, given that the ultimate sufferer from corruption is the
   taxpayer ­ while recognizing that he has to necessarily be at least a passive participant ­
   there is no gainsaying the fact that there is need for the tax administration's management
   to take extraordinary steps to contain and obviate this institutional disease since it has a
   direct impact on society, its productivity and on the economy's measured GDP.

   The TARC, therefore, concluded that the people function of the Indian tax administration
   is in a very undesirable state. Even as the staff continue to exhibit competence, if not
   brilliance, at an individual level, the system tends to defeat them from performing at their
   full potential. Certainly, it tests them on erroneous premises and subjects them to archaic
   management practices. This situation demands immediate correction through compulsory
   training in modern management practices at the Commissioner and higher levels of
   seniority, who currently are subjected to little or no requirement for continuing
   management education. It also demands people policies that are designed to recognize and
   reward high performance, ethical conduct and identify leaders early and groom them for

Executive Summary                                                                              23
      leadership positions so that they can lead the organisation to high performance. The TARC
      is, therefore, making recommendations in relation to this function which have
      transformative potential and which are radically different from the current processes.

      The TARC recognizes that the question may be asked whether it is appropriate and feasible
      that a radically different HR dispensation should be operated in the tax administration de
      hors rest of the government. The TARC is making its recommendations after carefully
      deliberating over this question. The TARC believes that, with far-going reforms like the
      Direct Tax Code and the Goods and Services Tax on the anvil, the tax administrations are
      poised at an inflection point requiring strong leadership and bold action. The need for
      transforming the tax administrations is so stark that only radical measures can bring about
      the needed transformations. The measures that the TARC is recommending is based on the
      principles and practices which are already being operated in other tax administrations, both
      in developed and developing countries, for long. In India too, these practices exist, albeit,
      largely in the private sector high performing organisations. The TARC is recommending
      these measures for the two departments because that is what its remit is. However, the
      TARC fully believes that unless the HR policies in the government at large are also
      transformed along the lines of its recommendations, the administration in India will
      continue to remain a severe constraint against its growth and development. Somewhere a
      beginning must be made and it is the TARC's conviction that the transformed IRS can
      become a beacon for rest of the civil services.

      The TARC concluded that rapid rationalization of key internal processes is called for
      whether they be in the case of PAN ­ its generation and termination, or its wider
      rationalized use for more taxes ­ consolidated filing of returns for different taxes,
      harmonization of computerized processing at the CPC with that of the AO, making refunds
      of direct tax and indirect tax credit, risk-based selection scrutiny using ICT, or consistency
      checks across direct and indirect taxes in the case of search and seizure, and intelligence
      and criminal investigation.

      In the case of ICT, the TARC concluded that the Boards must commit themselves to full
      digitization and work towards building comprehensive systems, covering all key processes,
      in which everyone, from the top leaders to the frontline employees, works in a digital
      environment. In other words, ICT must get embedded in the DNA of the organization.

      There is a clear need to articulate an ICT vision and strategy, derived from business strategy
      that reflects the departments' vision and mission, which will provide an overarching setting
      for the design of the ICT architecture. This will provide consistency and coherence across
      different ICT projects, systems and sub-systems and bring about much greater
      interoperability, ensuring better customer satisfaction.

      There is an equally urgent need to embrace a sound ICT governance framework, along with
      rigorous adoption of programme and project management methodologies, so that there is
      deeper business-ICT implementation and effective ICT risk management.



24                                                                              Executive Summary
    HR policies need to be aligned with ICT requirements. This means they must promote
    specialization, allow the necessary length of tenures to allow development of the required
    skills and their application in the relevant areas, and allow personal growth for qualified
    officers according to their suitability and inclination and organizational needs. HR policies
    need to cater to the lateral entry of specialists where such skills are not available internally.
    Further, the policies need to specifically take into account the stages of the project lifecycle
    while considering transfers of staff who may be engaged with those projects.

    In order to enhance business-ICT interaction, the Boards need to adopt structures and
    process to establish a working relationship between business owners and DG (Systems)
    officers that will align ICT implementation with business needs and priorities.

    To promote better analytical support for policy development as well as operations, a
    specialist organization, the Knowledge Analysis and Intelligence Centre, needs to be set
    up for which the ICT function will provide the necessary platform and tools. KAIC will be
    the repository of highly specialized analytical and other related skills. Its remit will be to
    address highly complex problems with strategic implications. Good analysis will have to
    continue to happen within each functional vertical, which the ICT function needs to support
    through appropriate technological tools.

    In short, to be able to shape themselves into a modern 21st century tax administration, the
    two Boards need to adopt the agenda of a complete digital transformation. The TARC
    believes that for fulfilling such an ambitious agenda successfully and sustainably, it is
    essential that a single SPV with operational freedom and flexibility to take quick decisions
    should be established for servicing the ICT needs of the two Boards. It should be set up as
    a company with professional management and a sound business model that would make it
    financially self-reliant.

    The SPV can also be tasked to set up the ICT platform for the KAIC and also support it
    through ICT specialists, who can be seconded from the SPV to the KAIC.

Accordingly, the TARC's main report is organized sequentially, comprising Customer Focus,
Organizational Structure, Dispute Resolution, People Function, Other Internal Processes, and
Information and Communication Technology (ICT). The recommendations that follow in the
next section are also similarly ordered.

4.
4. Recommendations
        Recommendations

In what follows, the TARC lists its main recommendations in the full belief that they can be
instituted if the willpower exists at the top policy level. Such changes have occurred in other
countries including the one that bequeathed India her prevailing bureaucratic structure that has
seen its best days and has outlived itself. It is now time to confront what is bad and change it
for the better to reflect the expectations of India's new and future generations that have the
desire to work and be productive rather than facing and combating high costs of compliance.
Only recommendations that are desirable and doable along these lines are listed below. Also,
the recommendations should be considered as a package and not on a pick-and-choose mode.

Executive Summary                                                                                 25
That would not work; it would be better to set aside the recommendations in toto and reconsider
them at a future date when India may be ultimately ready to make serious changes that are
needed but is not up to facing them as of now.

Diagram 5 gives road-map for implementation of the TARC's main recommendations.

4.a
4.a Customer focus focus
          Customer

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.
      (Section II.6.c)

      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. (Section II.6.c)

      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. (Section II.6.a)

      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. (Section II.6.a)

      Sufficient funds must be allocated to conduct customer research including, in particular, on
      customer surveys. (Section II.6.b)

      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, non-
      government professionals should also be inducted in the post. (Section II.6.b)




26                                                                             Executive Summary
   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. (Section II.6.b)

   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. (Section II.6.c)

   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.
   (Section II.6.b)

   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.
   (Section II.6.c)

   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. (Section II.6.c)

4.b
4.b Structure and Governance
           Structure and Governance

As the customer faces and enters the tax administration, how well s/he is treated and how
smoothly his job is accomplished is dependent on the structure and governance of the tax
administration. This therefore comprises the second area of reform. For example, TARC found
the lack of synergy between the two tax departments even for LTUs despite their establishment
in 2006 to be a telling reflection of the administration's lackadaisical approach to installed
policy. Structural reform is therefore recommended using LTUs as the anchor for which
common functions need to be immediately consolidated for the two tax departments. Many
other structure and governance from deep within are also needed if operations are to be
rationalized. Structure and Governance comprises Chapter III and the next set of
recommendations.

The TARC recommends that:

   The two Boards must embark on selective convergences immediately to achieve better tax
   governance, and, in next five years, move towards a unified management structure with a
   common Board for both direct and indirect taxes, called the Central Board of Direct and
   Indirect Taxes. For a unified management structure, apart from the common Board, the
   functions that can easily support the framework would be in the areas of human resource

Executive Summary                                                                               27
      management and vigilance, finance, ICT, infrastructure and logistics, and compliance
      verification. (Section III.4.e)

      The convergence can begin for large business segment by setting up of a large business
      service (LBS) which will be integrated and operated jointly by both the Boards. This will
      be a taxpayer segmentation by the tax administration, and joining LBS will not at the option
      of the taxpayer. All the core tax functions will be managed jointly by officers of both the
      Boards. (Section III.4.b)

      The tax administration needs to have greater functional and financial autonomy and
      independence from governmental structures, given their special needs. (Section III.7)

      The post of revenue secretary should be abolished. The present functions of the Department
      of Revenue should be allocated to the two Boards. This would empower the tax departments
      to carry out their assigned responsibilities efficiently. (Section III.7)

      A Governing Council, headed by chairperson of the two Boards, by rotation, and with
      participation from outside the Government, should be set up at the apex level to oversee
      the functioning of the two Boards. (Section III.4.c)

      An Independent Evaluation Office (IEO) should be set up. Its main work would be to
      monitor the performance of the tax administration, promote accountability, evaluate the
      impact of tax policies and assess all factors that affect tax administration. IEO will report
      to the Governing Council so as to ensure its independence. (Section III.4.c)

      A Tax Council should be set up to develop a common tax policy, analysis and legislation
      for both direct and indirect taxes. The council will be headed by the Chief Economic
      Adviser of the Ministry of Finance. (Section III.4.d)

      Common Tax Policy and Analysis (TPA) unit comprising tax administrators, economists,
      and other specialists such as statisticians, tax law experts, operation research specialists and
      social researchers should be set up for both Boards. The existing TPL in CBDT and TRU
      in CBEC should be subsumed in the common TPA. TPA will report to the Tax Council
      through the concerned member of each Board. TPA will be responsible for all three major
      components of tax policy formulation ­ policy development, technical analysis, and
      statutory drafting. (Section III.4.d)

      Each rule, regulation and other tax policy measure such as exemptions should be reviewed
      periodically to see whether they remain relevant to the contemporary socio-economic
      conditions and meet the changing requirements. For this, a robust process should be
      institutionalized. As a first step, a thorough review of the existing rules, regulations and
      notifications should be undertaken. Going forward, it should be a standard practice to build
      sunset clause in each rule, regulation and notification. (Section III.4.d)

      The present Boards are not aligned to various needs nor are they geared to respond to
      emerging and future challenges in an effective and efficacious manner. Keeping that in

28                                                                                Executive Summary
   mind, the two Boards should be expanded to have ten Members, apart from the
   Chairperson. (Sections III.5)

   The two Boards would be responsible only for policy dimensions of tax administration,
   while the directorates under them would be responsible for operations in the field
   formations. These directorates would have a vertical and horizontal alignment with
   functions, and would interact with each other in a matrix-like structure of responsibilities
   and accountability. (Section III.5)

   The field formations are currently organized to handle all key functions in a particular
   geographic region. In order to bring about a functional orientation, field offices will need
   to be restructured along the core functions of taxpayer services, compliance, audit, dispute
   management, enforcement and recovery, etc. (Section III.5)

   A functional orientation would promote specialization in the respective area of tax
   administration. For these reasons, specialization should be encouraged by selecting suitable
   officers and providing them sufficient tenures to develop specialized knowledge in key
   sectors. (Section III.5.d)

   A common approach for developing robust and comprehensive enterprise risk management
   framework should be adopted by the two Boards. This should be approved by the
   Governing Council to bring coherence. (Section III.5.a.i)

   There should be one Knowledge, Analysis and Intelligence (KAI) centre for both the
   Boards and its role should be recognized and used for policy and operational effectiveness.
   (Section III.6)

4.c
4.c People People Function
           Function

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.




Executive Summary                                                                             29
The TARC recommends that:

      Both the departments should shift all their key operations to the digital platform so that
      performance can be reliably measured. (Section IV.3.d)
      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. (Section IV.3.c)
      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. (Section IV.3.c)
      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. (Section
      IV.3.c)
      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. (Section IV.3.b)
      A comprehensive performance management system needs to be set up for both tax
      administrations by revisiting and reconstructing the RFD. (Section IV.3.d)
      Key performance indicators, detailing the performance areas, objectives, key initiatives,
      performance indicators and performance targets, should be arrived at using the Balanced
      Scorecard methodology. (Section IV.3.d)
      The performance appraisal process needs to be made more wholesome and reliable by
      making it more open and by introducing a mid-year review. (Section IV.3.d)
      The tax administrations should extend the performance appraisal system to elements of
      360° appraisal to include feedback from subordinates. (Section IV.3.d)
      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. (Section IV.3.d)
      Performance needs to be recognized through non-pecuniary measures such as giving
      important assignments in chosen areas of work or specialization. (Section IV.3.d)
      To facilitate renewal of talent and professional growth, officers should be allowed to move
      outside the departments for defined periods of time. (Section IV.3.d)
      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


30                                                                             Executive Summary
   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 (Section IV.3.d)

   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. (Section
   IV.3.d)
   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. (Section IV.3.d)
    A formal mentorship programme may be set up, with carefully selected mentors. (Section
   IV.3.d)
   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. (Section IV.3.e)
   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. (Section IV.3.e)
   Learning and development should occupy a central place in people advancement and all
   officers must undergo a minimum 10 days of training every year. (Section IV.3.f)
   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. (Section IV.3.f)
   More emphasis in training needs to be given on customer focus and value education.
   (Section IV.3.f)
    A code of ethics needs to be developed, congruent with the values in the vision and mission
   statement. (Section IV.4.a)
   There should be more proactive approach to preventive vigilance. (Section IV.4.b)
   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. (Section IV.3.d)
   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. (Section IV.4)


Executive Summary                                                                              31
      No cognizance should be taken of anonymous complaint as laid down in the existing DoPT
      instruction. (Section IV.4.d)

4.d
4.d Dispute Management
          Dispute Management

The lack of accountability in the system is represented by infructuous demands raised by the
tax administration with impunity as well as massive escalation, non-resolution and non-
recovery of such demands by global standards. Getting a handle on dispute management is
crucial for retrieving stakeholder confidence and for saving much needed staff and financial
resources of the tax administration. Dispute Management comprises Chapter V and includes
a set of recommendations.

The TARC recommends that:

      For clarity in law and procedures, a process based on best practices outlined in Section
      V.4.b should be followed. (Section V.4.b)
      Retrospective amendment should be avoided as a principle. (Section V.3.e)
      Fundamental approach should be collaborative and solution oriented. (Section V.3.d)
      Both the Boards must immediately launch a special drive for review and liquidation of
      cases currently clogging the system by setting up dedicated task forces for that purpose.
      The review and liquidation should be completed within one year and the objective should
      be to decide all cases pending in departmental channels for longer than a year as on the start
      date of the action plan. (Section V.6)
      Dispute management should be a functionally independent structure with adequate
      infrastructural support. (Section V.4.a)
      Officers posted in the dispute vertical must receive adequate induction training and on-the-
      job training on areas. (Section V.4.a)
      To minimize the potential for disputes, clear and lucid interpretative statements on
      contentious issues should be issued regularly. These would be binding on the tax
      department. (Section V.4.b)
      The current practice of raising demands irrespective of merits should be discontinued. Call
      book in CBEC should be abolished. (Section V.4.b)
      The process of pre-dispute consultation before issuing a tax demand notice should be put
      into practice.(Section V.4.b)
      Disputes must get resolved in time as the times lines as mentioned for decisions in the
      respective enactments. The law should also prescribe the consequences of not adhering to
      the time lines, which would be that the case in question would lapse in favour of the
      taxpayer. (Section V.5)
      Ordinarily appeal should not be filed against appeals of Commissioner (Appeals), except
      where the orders are ex-facie perverse. (Section V.5)


32                                                                              Executive Summary
   The present structure of Commissioner (Appeals) should be changed to two forums,
   namely, single Commissioner (Appeals) and 3-member Commissioner (Appeals) panel. If
   the case is not decided within the prescribed time frame, the taxpayer's appeal would be
   deemed to have been allowed. (Section V.5)
   The DRP in income tax should be made full-time panels. Their mandate should be
   expanded to include corporate cases of resident cases as well. Same mechanism should be
   introduced in indirect taxes also, where collegium of three Commissioners would be
   deciding complex cases involving extended period of limitation, related party transactions
   and taxability of services. (Section V.4.e)
Thereprocesses,
ADR
                  DRP for indirect
       should beArbitration          taxes also,
                             and Conciliation,    on the
                                                 should  same
                                                        be      lines as
                                                           statutorily             in Act
                                                                          in the I-T
                                                                       introduced     bothand  in
                                                                                           direct
and indirect taxes legislations. (Section V.4.f)
conjunction with the recommendation made above. (Section V.4.e)
   The jurisdiction of AAR should be made available for domestic cases also. More benches
   of AAR should be established at Mumbai, Bangalore, Chennai and Kolkata, with the
   principal bench at Delhi. (Section V.4.c)
   The Settlement Commission should act as part of taxpayer services, and be made available
   to the taxpayer to settle disputes at any stage. There should also be an increase in the number
   of benches of the Settlement Commission. It should be manned by serving officers to
   enhance its accountability. (Section V.5)
   Appeals to high courts and the Supreme Court should only be on a substantial question of
   law. (Section V.5)
   Authorized representatives from the departments should be carefully selected and given
   sufficient incentives and necessary infrastructural support to perform their duties
   effectively. They should also be given specialized training before they are asked to appear
   for the department. The administration of the DR function should also be in the dispute
   management vertical. (Section V.5)
   On disposal of a case by Supreme Court/High Court and if the judgment is accepted by the
   Department, an instruction should be issued to all authorities to withdraw appeal in any
   pending case involving the same issue. (Section V.6)

4.e
4.e       Key Internal
    Key Internal       Processes
                 Processes

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

Executive Summary                                                                              33
         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.




34                                                                             Executive Summary
   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



Executive Summary                                                                         35
         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.


36                                                                           Executive Summary
   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



Executive Summary                                                                             37
         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.

4.f
4.f       Information
    Information       and Communication
                and Communication       Technology
                                  Technology

ICT constitutes the backbone of a modern tax administration. India has made progress in this
area. Nevertheless there are caveats that have to be recognized and corrected so that the system
could meaningfully move forward to enable quicker processes, automatic correction of errors
and inconsistencies, upgrading of software and hardware, convergence of ICT functions of the
two tax departments. Information and Communication Technology and recommendations
thereof comprise Chapter VII.

The TARC recommends that:

      For full realization of the potential of ICT, it must get embedded in the DNA of the
      organization. Both the design of policies and implementation should make full use of ICT
      (Section VII.3.a)

      The leadership must ensure that where systems are available, employees should not have
      the option to work in a paper environment (Section VII.3.a)

      Both Boards must commit themselves to achieve a fully digitized environment and work
      towards comprehensive ICT system(s) in which everyone from the top leader to the last
      person on the frontline works in a digital environment (Section VII.3.a)

      The Boards must regularly use maturity frameworks to assess their ICT maturity and map
      out the path towards greater maturity (Section VII.3.a)

38                                                                           Executive Summary
   Automation should follow business process re-engineering to avoid the danger of getting
   trapped in an outdated mode of governance (Section VII.3.a)

   All decisions should be taken with ICT compatibility in mind. Similarly, all legislation
   should be ICT-compatible (Section VII.3.b)

   The Boards must create structures and processes to enhance working relationships between
   business owners and DG (Systems) to ensure that ICT initiatives are aligned with business
   needs, priorities and capabilities (Section VII.3.b and d)

   Boards should adopt a robust ICT governance framework and practices, and rigorous
   programme and project management frameworks (Section VII.3.b)

   Project planning and approvals must include the required number and quality of human
   resources (Section VII.1.b)

   Movement of personnel should have a linkage with project implementation and there
   should be a process of knowledge transfer (Section VII.1.b)

   A service oriented architecture and approach should be adopted to promote integrated
   systems, greater "value for money" and customer focus (Section VII.3.b)

   HR policies must be aligned with the need for specialization and officers should be allowed
   to grow in the areas in which they specialize. Routine transfers should be avoided (Section
   VII.3.d)

   Special training for officers in key areas of ICT should be arranged for officers of DG
   (Systems) (Section VII.3.e)

   DG (Systems) should ensure proper training for operational staff at the roll out of any new
   application (Section VII.3.e)

   DG (Systems) should have authority and funding to depute officers for specialized courses,
   seminars and events and engage with professional networks and academic institutions
   (Section VII.3.e)

   The discussions for data sharing between CBDT and CBEC should be speeded up and
   sharing must begin quickly (Section VII.4)

   A shared knowledge, analysis and intelligence centre, headed by an expert professional,
   should be set up for advanced data analytics and research. The SPV can support it by
   providing the platform, tools and technologies, and expertise (Section VII.4)

   A common special purpose vehicle (SPV) should be set up for servicing the ICT needs of
   the Boards (Section VII.5.a)



Executive Summary                                                                          39
      It should be incorporated as a company with limited liability under the Companies Act and
      should have a private ownership of 51 per cent and government ownership of at least 26
      per cent. It should have operational independence and institutional flexibility even as
      government retains strategic control (Section VII.5.c)

      The SPV should preferably have a net worth of around Rs.300 crore. This will ensure that
      the SPV is well-capitalized, can hire the best people at competitive salaries, and invest
      adequately in infrastructure to manage large-scale national projects.

      The relationship between the departments and the SPV should be a complementary one.
      The tax administration would develop an overall strategy with the ICT inputs provided by
      the DG (Systems). The SPV will develop the ICT strategy within the framework of the
      overall strategy, which will be approved by the Boards. The DG (Systems) of the two
      Boards will continue to exist, and will perform more strategic roles and be the Boards'
      interface with the SPV (Section VII.5.e)

      It should aim to be financially self-sustaining through an appropriate business model
      (Section VII.5.f)

      It should be operationally aligned and maintain relationships with the concerned entities in
      DG (Systems) to ensure effective ICT service delivery (Section VII.5.h)

      The Boards, DG (Systems) and the SPV together should work out the plan for the
      transformation to "digital by default" status. The plan should begin with a visioning
      exercise to define the end state and should be programme, as opposed to project, oriented.




40                                                                             Executive Summary
                    Diagram 5: Road-map for implementation of the TARC's main recommendations

                               Formation of : Gov erning Council
                                               : Tax Council
                               Restructuring of the two Boards.
                               Creation of single Tax Policy and Analy sis




Executive Summary
                              (TPA) unit for the two boards
                               Alignment of ex isting LTUs to
                              Large Business Serv ice (LBS)
                               Functional alignment of field formations and
                              directorates                                     Creation of Common
                               Separate Vertical for: Tax pay er Serv ice     Business Identification
                                                      : Dispute Management    Number (CBIN) and its
                               Merging commissionerates and formation of      regulation
                              serv ice tax and central ex cise                 Creation of single SPV for ICT
                               Legislations for ADR mechanism (Arbitration    deliv ery
                              and Conciliation)                                Formation of Strategic
                               Capacity Building (Training)                   Planning & Risk Management
                               Rationalisation of v igilance administration   (SPRM)
                                                                               Independent Ev aluation                                       Fully digitised




                    Actions
                               Restructuring of HR Directorate
                                                                              Office (IEO)                                                  operations of Tax es.
                               Creating Finance Function in the two Boards
                              at Member lev el                                 Performance management
                                                                                                                  Creation of assessment
                               Improv ing refund mechanism-creation of        sy stem.
                                                                                                                 centre for HR               Unified Management
                              separate budget head.                            Risk-based audit sy stem
                                                                                                                                            structure for the two       Fully Integrated
                                                                               Creatino of Knowledge                                        Boards - Central Board     Modern Tax
                                                                              Analy sis & Intelligence (KAI)                                of Direct and Indirect     Administration
                                                                              Centre                                                        Tax es, i.e. Central        Business tax ,
                                                                                                                                            Board                      comprising central
                                                                                                                                                                       ex cise, serv ice tax and
                                                                                                                                                                       corporate income tax




                                    Immediate (201 4-1 5)                       Two y ears (201 5-1 6)          Three y ears (201 6-1 7 )    Fiv e y ears (201 9-20)     Ten y ears (2024-25)


                                                                                                         Time




41
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