Transparent Taxation: A major tax administration reform

By Rajendra Nayak

Prime minister Narendra Modi launched the Transparent Taxation platform on August 13, encompassing faceless assessments, faceless appeals and the taxpayer’s charter. The announcement marks a significant development in the area of tax administration reform. Tax revenue yield is influenced by both the tax policy and the 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. Most of the government’s recent tax reforms—such as the reduction in the corporate tax rate, modifying the dividend taxation system, simplified personal tax regime, etc—are focused on tax policy. The government’s current focus in reforming tax administration is welcome and timely.

Introduction of a taxpayer charter is a recognition of the ‘rights’ of the taxpayer. In some countries, these rights have been codified into tax laws, while in others—for example, Australia, Ireland, New Zealand, Singapore, and South Africa—they have been elaborated upon in tax administration documents. The taxpayer charter would now provide a clear statement of the tax administration’s commitment to a taxpayer as well as the tax administrations expectations from a taxpayer. Many tax administrations have special institutional arrangements to deal with taxpayers’ complaints. Dedicated bodies like the Ombudsman in Australia, Canada, the UK, Brazil, South Africa, and tax mediators in Belgium and France look into tax-related complaints. These bodies are independent of the tax administration. In many countries, they have been set up under a specific law. The primary purpose of this arrangement is to ensure that taxpayers have an opportunity to raise matters when they feel they have been treated unfairly. The government should consider the need to set up the office of the Ombudsman in India for improving taxpayer service.

The PM also touched upon the measures taken up by the government over the last few years for creating a non-adversarial tax administration. The credibility of the tax administration of a country depends to a very great extent upon the credibility of its dispute resolution mechanism in terms of how quick, consistent, transparent and fair the dispute resolution mechanism is in the eyes of the taxpayer. The quality of the tax administration is also influenced by its ability to ensure that avoidable disputes do not occur or are not prolonged. This requires clarity in laws and the adoption of a transparent and collaborative approach towards taxpayers. While the government needs to be applauded for several measures taken in recent times, concerns still remain.

In the wake of the ever-growing size and complexity of cross-border transactions, this need is strongly felt in the area of international taxation. The present alternative dispute resolution mechanisms, such as the Authority for Advance Rulings, Advance Pricing Agreements and Mutual Agreement Procedure still need additional capacity building to cope with the increasing demand from taxpayers. Further, given the nature of the issues which often come up, there is a need to develop functional specialisation. As the business landscape is changing rapidly and complex business models are taking shape due to changes in technology and global integration, the need for tax administrators to develop specialised skills and knowledge in specific areas to make informed decisions is increasing. The lack of such specialisation adversely affects the quality of decisions. There is also a need for the government to consider introducing arbitration and mediation as alternative dispute resolution mechanisms.

It cannot be overemphasised that effective communication is fundamental to tax administration. Several disputes arise due to ambiguity and imprecision in laws. Adequate care, therefore, needs to be taken at the drafting stage to ensure that the language of the tax provisions is unambiguous and consistent with the legislative intent. Appropriate procedures should be provided for in the legal machinery to necessitate consultation with stakeholders on the draft law, especially in the case of a substantive provision. While one must acknowledge the number of areas where there has been public consultation over the last few years, the manner in which the recent expansion of equalisation levy was introduced has been a cause of consternation for many stakeholders.

Tax administrations have traditionally been both the regulator and enforcer of tax laws with limited attention to taxpayer service. The Transparent Taxation platform is an attempt to achieve this interaction between the taxpayer and tax administration to make the tax administration taxpayer focused. This will go a long way in improving the way in which the tax administration works with taxpayers, resulting in not only better customer service but also has the potential to increase tax revenue.

The author is Partner, International Tax Services, EY India. Views are personal