Will Faceless Assessments Reduce Taxpayer Harassment?

Though the faceless process holds promise, several concerns must be addressed for its success, writes Suranjali Tandon.

A tax adviser closes a folder containing tax forms. (Photographer: David Paul Morris/Bloomberg)
A tax adviser closes a folder containing tax forms. (Photographer: David Paul Morris/Bloomberg)

For many years, taxpayers have expressed concern about the discretionary power available to assessing officers of the income tax department—often leading to harassment and corruption. To allay such concern the government has introduced faceless assessment and appeals. The process of assessment is being given a facelift by removing human interface and undertaking assessments as well as appeals through a technology-driven process. While this has caused a stir within the tax administration, it may be useful to examine the change this reform promises to bring.

Selection Of Cases For Scrutiny

The current system of assessment begins after the taxpayer files their return (can also be filed electronically) and this is submitted to the centralised processing unit. Once submitted, returns are selected for scrutiny based on a centralised Computer Aided Scrutiny System, or CASS. The criteria for selection of a case for scrutiny are set each year based on a set of parameters of risk assessment as well as through 360 degree profiling of the taxpayer. These criteria are not made publicly available but it is inferred from case selection that unreported high value transactions, discrepancy with 26 AS or value of refund and deductions claimed may be few red flags. These cases represent a small fraction of total returns but a significant amount of tax is associated with these returns. In CAG’s 2019 report it was observed that one percent of the assessees selected for scrutiny represented 25-30% of the total direct tax collections.

As part of the current reform to make assessments fair, the selection process will be driven by data analytics and artificial intelligence, the Income Tax Department has said. While the current case selection for assessment is already based on an automated process it is possible that the cases can be selected so as to ensure that the claims are based on rigorous analysis. In recent years, after demonetisation, the Income Tax Department has collected vast information on taxpayers. Given the capacity constraint within the department, it is possible that the method of selection cases can be refined through efficient use of this data.

Scrutiny Assessment

Once the case is selected for scrutiny the regional assessing officer sends a notice to the taxpayer intimating selection of case for scrutiny. In all cases, other than those with a discrepancy with 26 AS Tax credit statement), the AO is required to issue a notice to the tax payer along with a date when the assessee is required to meet with the assessing officer. The taxpayer is provided an opportunity to present facts to support the information furnished in the return. The AO would also verify the information collected from other sources in respect of the assessee. Based on this the AO issues final order that would either accept the return, or demand additional tax.

A strong criticism of the process has been that the taxpayer is required to physically meet with the AO, who assesses as well as settles the case. This creates a conflict of interest where the AO raising such query is also in a position of taking a decision on it. Such personal interaction can also create a nexus between the taxpayer and official resulting in corruption for a favourable assessment. There have been efforts in the past to remove such inefficiency. For example there has been in place a grievance redressal system whereby a taxpayer can approach an ombudsman about unfair treatment during assessment, search and bribery. However, to further ease the process for the taxpayer e-assessment was introduced for select 8 cities in 2019. This month, faceless assessments and appeals are being rolled out nationwide, announced Prime Minister Narendra Modi.

The current reform proposes that all functions of interaction be mediated by the National e-assessment Centre – via AI-led selection of cases for assessment and their random allocation between different regional assessment units.

  • A return will be selected for scrutiny in a similar manner but would be randomly assigned to a regional e-assessment centre (ReAC) outside the jurisdiction of the assessee.
  • The assessee must provide all required information just as in the earlier process, however through the NeAC.
  • Further, verification and technical unit of a different ReAC will now carry out the other functions of the AO, i.e. to verify information from other sources as well as to examine the details of the case.
  • Based on all the information the regional assessment unit will issue a draft order and communicate this to the NeAC.
  • The latter will evaluate the draft order based on risk management strategy specified by the Board.
  • The NeAC will then have the option to issue a final order, a show cause notice giving the assessee a chance to explain their case or send the order for review to any review unit in another ReAC.

Therefore the new process of assessment distributes the workload of the AO among various ReACs. Not only is the assessment carried out by an impersonal entity i.e. a unit but the whole process is divided between multiple units not located in the jurisdiction of the taxpayer. There system design includes multiple checks and balances.

Convenience, Coordination, Targets

Even though the faceless process holds promise, there are several concerns that must be addressed for its success.

Digital Advantage

The introduction of such scheme can eliminate the possibility of corruption however the impersonal approach must not inconvenience taxpayers not conversant with technology.

Co-ordination For Consistency

It’s success will also depend on smooth co-ordination across units. In the past the decisions taken by various AOs in cases with similar facts were often inconsistent across jurisdictions. Further, CAG also found that in many cases the AO committed the same mistake in more than one assessment year for same assessee. This in part explains the poor success rate of the department in disputes, which is less than a third. With a more centralised unit and the possibility of review it is hoped that the new system will minimise such inconsistencies. This in turn can help lower the potential for litigation. Unless these concerns are managed, contentious issues are bound to continue, negating the benefits of the faceless process.

Revenue Targets

Assessments are also known to be driven by the need to meet revenue targets. If ambitious targets continue to be set, the underlying incentives may not change.

Further, it’s impact on re-opening of assessment orders, among a major cause of disputes, must also be borne in mind, since a more robust method of assessment should substantially limit the scope of re-opening. Therefore the taxpayer’s rights of lower compliance costs and fair treatment must be upheld by such reform. Unless the need for consistency, reasonable targets and robust selection of cases are met by the new system it may end up being merely a procedural change.

Suranjali Tandon is Assistant Professor at the National Institute of Public Finance and Policy.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.