Digitising Compliance, Administration and Enforcement Processes under the Income Tax Framework

Problem

The outbreak of COVID-19 and the consequent implementation of a nationwide lockdown, has had a debilitating effect on the economy’s consumption and income generation capabilities. India thus saw a sharp decrease in tax collection. The government is said to have missed its downward revised net direct tax collection target for 2019-20 by INR 1.42 lakh crore. Moreover, the pandemic has placed limitations on physical contact. Given that several processes under the income tax administration framework depend heavily on physical contact, there is a pressing need for a reevaluation.

At this stage, it is imperative to optimise tax collection to bolster revenue. However, this has to be done cautiously as aggressive tax collection is bound to create disaffection for the government at a time of economic crisis. These twin requirements—augmenting revenue while improving taxpayers’ experience interacting with the income tax system—in addition to the constraints on physical contact, present the perfect opportunity for policy intervention to redesign and digitise compliance, administration and enforcement processes under the Income Tax Act, 1961 (IT Act).

Solution

The revamp of existing processes under the IT Act must focus on two primary principles – automation, and promoting presence-less interactions between taxpayers and tax authorities.  

Automation of compliances that are typically viewed as tedious, would not only improve taxpayer morale, but it would also increase efficiency. For instance, most countries auto-populate a substantial portion of taxpayers’ income tax returns based on information that is already available with the tax authorities. The adoption of pre-filled returns in India would encourage voluntary compliance, and create transparency between taxpayers and the tax authorities. By disclosing upfront the information that would typically be used by authorities to identify incorrect declarations and prosecute taxpayers, this would pave the way for a trust-based relationship between taxpayers and tax authorities. 

The IT Act in its current form is riddled with provisions that allow administrative discretion. Coupled with physical interactions, this increases the prevalence of corruption and rent-seeking. Notably, some measures have been taken to address the issue. For instance, the implementation of the 2019 faceless assessment scheme was a step in the right direction. However, such reforms have been implemented on a small-scale. The introduction of an assessment framework that is presence-less and targets resources towards high risk cases at population scale is necessary to increase the efficiency of India’s income tax structure.

Implementation 

• Amend the IT Act to build trust between taxpayer and tax authorities.
• Automate processes such as filing of returns, allotment of registration, issuance of refunds etc. 
• Eliminate physical interaction between tax authorities and taxpayers.
• Give taxpayers the opportunity to rectify genuine errors and alter the compliance risk strategy to focus on high risk taxpayers.

About the Authors

Vidushi Gupta

Vidushi was a Senior Resident Fellow and led Vidhi’s work in the field of taxation. Prior to joining Vidhi, Vidushi worked at PwC and was engaged in providing indirect tax advisory, advocacy, compliance and litigation services to multinational clients. She graduated from the RML National Law University in 2014 with a B.A.,LL.B.(Hons.). She also obtained an LL.M. degree in Taxation from the London School of Economics as a Chevening scholar in 2021.