The Indian government has embarked on a journey of adoption of technology and digitization in governance processes and citizen services over the last few years. Implementation of the nationwide goods and services tax (GST was a major milestone in this journey. On the direct tax front, the government transitioned the revenue audit (tax assessment) process from face-to-face assessment to electronic assessment and now to a complete faceless assessment. The faceless assessment scheme was launched in 2020 with the objective of promoting an efficient and effective tax administration, minimizing physical interface, increasing accountability and introduction of team-based assessments. Faceless assessment is, no doubt, a major tax reform initiative and India is one of the few countries to adopt such a system. As per the information available from public domain as of April 2021, the tax authorities had issued assessment orders in 106,734 cases and no extra taxable income was added in over 90% of faceless assessment cases.
Faceless assessment is administered through separate units within the tax department each of which has specific and important role in the process, viz assessment units, verification units, technical units and review units. All these units work closely with the National e-assessment Centre (NeAC) and Regional e-assessment Centre (ReAC).
Single point contact for taxpayers
The NeAC is the key interface primarily responsible for all communications with taxpayers and facilitates conduct of the proceedings in a centralized manner and act as ‘single point of contact’ between the taxpayers and the different units in the tax department. The segregation of responsibilities across teams seeks to achieve the objective of team-based assessment, and collective decision making as against one officer applying discretion to decide on a matter in the earlier regime.
In terms of the process of faceless assessment, broadly speaking, the tax department’s IT system selects cases for scrutiny assessment using risk-based criteria identified through data analytics. NeAC issues notices initiating assessment proceedings and seeking information from the taxpayers.
Internal mechanics in tax dept
The response furnished by the taxpayer is passed on to a specific Assessment Unit in any one ReAC, allotted to a particular case through an automated allocation system. The Assessment Unit requests NeAC to obtain information / documents from the taxpayer, or to conduct further enquiry / verification by the Verification Unit, or to seek technical assistance from the Technical Unit.
Considering the details furnished by the taxpayer, the Assessment Unit shares a draft assessment order with NeAC. In certain cases, the NeAC may also assign the draft assessment order to a Review Unit in any one ReAC for reviewing the same.
In case no variation in the income of the taxpayer is proposed by the Review Unit, the NeAC will finalize the order and issue to the taxpayer on the online Income Tax portal. In case the Review Unit proposes any adjustment to the taxable income, the NeAC will provide a final opportunity to the taxpayer to present its case by issuing a show cause notice, which may contain a draft of the assessment order.
The draft order (together with the show cause notice) provides clarity on the view of the tax authorities in a particular a case/ issue.
Video conference facility
While responding to the show cause notice, the taxpayer may also request for a personal hearing through video conferencing. From experience and to maintain the faceless nature of the proceedings, the tax officer is generally not visible on video conference, while they can see the taxpayer and their authorized representatives.
In our experience, requests for personal hearing through vide conference are generally accepted by NeAC. There is also an option to upload documents on the portal on which reliance is placed during the course of video conference to facilitate an interactive discussion.
However, in some cases, the submissions filed by taxpayers were not considered while finalizing the order, and the request for a videoconference was also not approved. Representations have been made to the tax authorities to consider some cases on video conference mode only. In certain cases, being aggrieved by the orders of the NeAC, some taxpayers have also approached courts on the principles of natural justice
The initiation of assessment proceedings is through the issue of notice to the taxpayer. It has been observed that the questionnaire issued by NeAC to the taxpayers to initiate the faceless assessment is quite specific to a particular business and that the tax department has taken into account the financial statements, the income-tax returns, tax audit report, etc. furnished by the taxpayers.
Usually, the time allowed in the initial notice issued under faceless assessment scheme is reasonable and provides adequate opportunity to the taxpayers to submit their response. The timelines, however, appeared to be relatively more stringent specially towards the end of the proceedings. Nevertheless, this being initial stage of implementing the faceless assessment proceedings, process is likely to get more streamlined for both the taxpayer and the tax department.
Currently, the Income Tax portal has limitations in terms of size of files that could be uploaded, thereby requiring multiple uploads in case of voluminous submissions by the taxpayer.
The ability of taxpayers to explain complex transactions and voluminous details only through written submissions sometimes poses a challenge under the faceless assessment scheme. This also requires the taxpayer to draft precise and reader-friendly submissions, so that it can be easily understood by tax authorities.
It is expected that the upload limit shall be enhanced gradually to enable the taxpayers to make appropriate submissions and facilitate smooth closure of assessment proceedings.
There are adequate provisions for seeking an adjournment under the faceless assessment scheme. However, at times, it becomes a bit challenging task in certain situations specially where very strict timelines are set to respond to questions. Taxpayers should plan in advance where they want to seek an adjournment. Better planning may help to address such concerns and avoiding unintended complications in assessment order leading to further litigation.
Digitization of tax proceedings requires businesses to gear up to meet the dynamic needs of this mandatory change. Not only documents/ information should be electronically stored for timely retrieval, back up for tax adjustments made in any particular financial year should also be maintained to ensure timely submission. It is important for taxpayers to keep their credentials updated on the income tax portal so that the notices and other correspondences reaches the designated recipient.
The first year of faceless assessment scheme has been quite fruitful in line with its overall objective to bring in more transparency and consistency in the revenue audit process. Further, the introduction of the scheme has also supported tax authorities and taxpayers during covid times when face to face interactions were not possible.
Being in the transition phase, taxpayers would have felt the need for face-to-face interaction with tax department to better explain the facts and legal submissions especially in complex matters. The stakeholders are hopeful that the experience gained during the recent revenue audits would further help streamline the process.
The scheme has brought about greater flexibility for taxpayers and professionals representing before tax authorities. It has resulted in substantial time savings on account of travel to tax office, waiting time over there, etc.
Also, online submission of responses outside of regular office hours has helped the taxpayers and their representatives in better time management.
In a nutshell, the faceless assessment scheme is a significant tax reform and a step in the right direction to achieve ease of doing business and bringing in more transparency and certainty in tax matters. Success of this scheme is the joint responsibility of both sides and with increased collaboration between tax authorities and taxpayers, the scheme can result in better quality assessments in future.
Consistency in tax positions on industry-wide issues would help provide certainty for taxpayers and avoid unnecessary disputes and litigation.
Sujay Paul and Archana Kumar contributed to this article.
The article was published on Livemint.