In an attempt to radically reform the tax administration in India, the central government appointed the Tax Administration Reform Commission (TARC), with Dr Parthasarathi Shome at its helm. Since its inception in August 2013, the TARC has carried out in-depth studies of the tax administration system and submitted five detailed reports that suggest various reforms to improve the system.
Some of the key recommendations made by the TARC, which when implemented will have a significant impact on the business environment in the country, are discussed below:
- Focus on taxpayers as customers: Taxpayer services should be the first focus of tax administration. Taxpayers should be treated as customers and their experience with tax departments should be improved.
- Reduce complexity in tax laws and uncertainty in business climate: India’s taxation regime is often considered one of the most complex in the world, and the TARC recommends eradicating poorly drafted and ill-considered laws, and also quickly removing uncertainty in the business climate and unwarranted risk in economic activity.
- Introduction of industry-based assessment: The present system of territorial jurisdiction must be scrapped and replaced with industry-based assessment, where officers specializing in a particular industry will handle the assessments, of such industry so tax authorities can better understand the position, practices and requirements of each industry. A tax council headed by a chief economic adviser should be created for greater economic analysis and precision in the legislative drafting of tax laws with a view to improve quality and coherency of such tax legislation.
- Reducing/expeditious disposal of disputes: Pre-dispute consultation should be introduced, which allows for an open interaction between tax authorities and taxpayers to eliminate disputes at the pre-notice stage.
- Closer coordination between the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT): This is proposed as a precursor to the slow merger of both the boards. The TARC has also recommended the setting up of large business services (LBS) which will be integrated and operated jointly by the two boards. LBS when introduced will replace existing large taxpayer units, and, will also adopt the international practice of industry-based assessment. The said recommendation has been made in line with the current international thinking which favours closer coordination between direct and indirect taxes. Agencies like the OECD and World Customs Organization are researching, cooperating and contributing towards this end at a global level.
- Other recommendations to improve tax administration: These include training officials, establishing a system for online tracking of grievances, applications for refunds, etc., sufficient allocation of funds for customer research, and setting up independent evaluation offices.
The TARC has made a total of 226 recommendations, out of which 41 have been accepted and implemented, 126 have been accepted but are yet to be implemented, and 59 are under examination. The CBEC has issued an office memorandum dated 8 March 2016 enumerating the recommendations that have been implemented. The following critical recommendations of the TARC have been implemented: i) creation of the Directorate General of Taxpayer Services; ii) constitution of a high-level committee for regular stakeholder consultation; iii) consultative meetings with trade the community before policy decisions; iv) retrospective amendments only to iron out deficiencies in law, not to create liability; v) pre-dispute consultation in cases involving ₹5 million tax; and vi) restructuring of procedures on related-party transactions (for the purposes of customs valuation) to bring certainty, as also with the creation of linkages between customs valuation and transfer pricing (indirect and direct taxes).
The well thought-out recommendations of the TARC are in tune with global best practices. The Indian government has chosen the right path to better the prevailing tax administration by seeking to implement some of the recommendations. The authors fervently hope that this process will continue, and, that the Indian tax administration will change and be counted as one of the best tax administration(s) globally in the foreseeable future.
Karthik Sundaram is an associate partner and Karthik Nair is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.