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
is notof the
the administrative
is time
first
this thatfirst
not the set up that
a government
time of direct taxes was
a committee
government has also
found examined
committee that
hasthisby the
admixture
found is
that this
th
Estimates Committee
anomalous,
admixture and
is that the
anomalous, of Parliament.
post
and ofthat theIn
Revenue its 10
Secretary
post report (1991-92),
is superfluous.
of Revenue Secretary Itthe
was
is Committee
considered It
superfluous. the
bywas
Tax
madeReforms
the following
considered Committee,
by the Tax 1992,
recommendation chaired
Reforms Committee, by Prof.
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
Notes
Notes
Notes
Notes
Notes
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