After giving a mighty push to the less-cash economy, digital governance seems to be the next big thing on the current government's agenda, going by what Nirmala Sitharaman said in her Budget speech. The finance minister told Parliament "the existing system of (income tax) scrutiny involves a high level of personal interaction between the taxpayer and the tax department, which leads to certain undesirable practices on the part of tax officials. To eliminate such instances, a scheme of faceless assessment in electronic mode involving no human interface will be rolled out this year in a phased manner." Sitharaman never uttered the word 'corruption', but this might be her honest admission of how the IT Department had gone about its business to meet revenue targets and the subsequent fallout.
Electronic assessment, or e-assessment, is considered a big leap towards curbing taxpayer harassment by unscrupulous taxmen. The government started it as a pilot project in FY2015/16 and later extended the programme to more than 100 cities to test its efficiency and transparency. But in her haste to launch it on a bigger scale, the finance minister might have overlooked some of the 'shortcomings' of the faceless assessment procedure.
Not Yet Anonymous
According to Sitharaman, the cases selected for scrutiny will be randomly allocated to assessment units, and a central cell will send notices via e-mail, without disclosing the name, designation or location of the assessing officer (AO). In fact, the central cell will be the single point of contact between the taxpayer and the IT Department. Although this is the ultimate model the government is pursuing, the current system, even three years after the pilot, is nowhere close to it.
Arun Kumar Jagatramka, former Chairman and Managing Director of the now-defunct Gujarat NRE Coke, concurs. "The government calls it faceless assessment, but the fact is, both assessee and the tax officer (assigned to the case) know each other. The latter can even call the assessee to demand money," he said in one of the post-Budget interactions with finance ministry and tax officials.
Jagatramka is not the only one to voice his concern. Several chartered accountants and tax experts dealing with their clients' IT assessments say that the existing system is far from faceless and anonymous. "Right now, both assessee and AO know each other. Unlike what is made out to be, it is not an anonymous procedure yet. It is called e-assessment just for the sake of it; the assessee knows who the AO is, he goes there and get 'things' done," says Rajat Mohan, Partner at the Delhi-based CA firm AMRG & Associates.
Partho Dasgupta, Partner, Tax and Regulatory Practices, at BDO India, elaborates it further. "Today, we have jurisdiction-based division of tax officials. Based on where you are filing returns, you would know who the AO is. Even if it is an e-assessment, notices come from a specific e-mail id with the name of the officer mentioned."
However, this loophole could be plugged soon. As Sitharaman explained in her Budget speech, the government is trying to build a system where the mail will be sent from a common ID. When assessees respond, those mail messages will be sorted at the backend before reaching the officers concerned.
Meetings a Necessity
Tax assessment is a complex procedure and assessees need to do a lot of explaining in most of the cases. And doing it over e-mail alone may not be feasible for all. Explaining a particular entry, say an expense, a deduction or an asset valuation, often requires face-to-face interactions with the tax officer.
According to tax experts, assessments involving simple returns - those without any scope of (tax) addition or deletion - could be ideal for e-procedure, but complex cases almost always require face-to-face discussions with taxmen. Besides, tax laws are open to interpretation, and certain business activities/transactions may lead to an unnecessary tax burden if proper clarifications are not provided.
Dasgupta of BDO India says written submissions will always lead to a gap in understanding and verbal explanations in the presence of tax officials may help resolve the issues. "If I meet someone and explain in a much more lucid manner what I had intended to write, it becomes easier for everyone. But if I write the same thing in a much more technical language, it becomes very difficult to understand." He pushes his point with the court analogy, where it is not the written submission, but the way arguments are made that decides a case.
There is a technical snag as well. At times, tax officers ask for a lot of documents, but the attachment size of a single mail cannot exceed 50 MB. So, it is difficult to send all the details at one go.
Mohan of AMRG & Associates says that for bigger companies, tax papers could run into thousands of documents - just one ledger could contain 200 pages. "No system can scan thousands of copies in 10-15 minutes. Also, what will happen if the person scanning those pages forgets to send the last two pages of the ledger? What will happen if the AO does not check the last page but looks at some previous pages where the expense is shown as, say, Rs 78 crore instead of Rs 100 crore as mentioned in the P&L (profit and loss) account? The AO would then (mistakenly) make an addition of Rs 22 crore."
Some tax experts also think e-assessments will lead to more disputes. Amit Maheshwary, Managing Partner at Gurgaon-based Ashok Maheshwary & Associates, says, "Unless you meet taxmen face to face, it is difficult to explain things. You think you can do it all on mail, but I think a lot of additions are happening because of this and a lot many disputes will also come up."
Then there are certain types of assessments - say, those related to transfer pricing - which are difficult to complete online. Transfer pricing is not strictly based on a set of rules and largely depends on economic interpretations. Explaining all these in writing will be slightly challenging.
Wait and Watch
Dasgupta, however, says tax officials are fully aware of these difficulties. Incidentally, he has not come across complex cases which have been picked for e-assessments. On the other hand, there have been instances when cases were initially picked for e-assessment, but later on, the tax department asked for a detailed face-to-face scrutiny.
Nidhi Goyal, Managing Partner at Delhi-based Avinav Consulting, also gives the department the benefit of the doubt. According to her, the department allows one to clarify if there are adjustments or erroneous statements. The authorities will not send any notice if they are satisfied with the return filing. Otherwise, they will issue a notice for a proper assessment. "If assessees file their returns properly, in sequential order, with every paper tagged with their applications, the matter is usually resolved. If you try to goof up, if you try to mix things up and avoid certain entries, and then ask for meetings (with tax officers) and fix it with the 'help' of the officers, the problems start," she says.