Digital Transformation — Direct tax department, India

The Revenue Service under the ministry of Finance is responsible for collection of direct taxes for the federal government in India. The total tax revenue collected by the IRS is approximately US$ 120 billion, i.e. about 56% of the federal government tax revenue. The department has ~50000 employees spread across 600 cities and towns in over 1000 office locations.

Background and necessity/reasons for transformation:

The system of tax collection is based on the principle of voluntary compliance. The underlying belief is that the taxpayer will honestly pay its taxes and only the few who do not, need to be straightened. One of the functions envisaged for the department was facilitating taxpayers in determination and payment of their taxes. However due to historically high tax rates aided with the prevalence of a largely cash economy and exemptions provided to certain disadvantaged sectors (politically sensitive too) and poor infrastructure for detection & monitoring, taxpayers started gaming the system. There was huge under reporting of income. The department had its hands full detecting these through investigations and legislation. In due course the department started considering itself as an enforcement and regulatory authority whose primary function was application of laws for collection of tax, devise strategies to unearth income/transactions which have not been reported for tax purposes, etc. The manual paper based operations were not conducive to such operations and the department ventured into IT for more effective monitoring, collection and use of data.

The distributed nature (geographical location) of the department and the discretionary powers which came to be vested in the officers coupled with the propensity of the taxpayer for tax avoidance brought to the fore issues of transparency, accountability and harassment to taxpayers during tax related proceedings.

Over time a view developed, in the political and top management that the taxpayer will comply voluntarily if he is facilitated and develops trust in the department. To this end, tax rates were gradually reduced, a non-intrusive widening of tax base resorted to and a risk assessment based audit system developed leading to decrease in audits. In addition several other applications were developed to make for a rich user experience. These systems were developed on standalone basis and did not talk to each other; were probably on different platforms too. The user has to visit different sites to interact with the department on different issues. The user experience was not very good and not complete despite huge investments in IT.

In addition, issues of compliance cost to taxpayer, transparency, accountability, harassment, etc. cannot be addressed in a manual environment. Any physical interactions between the taxpayer and the department could become a potential source. It is also impossible to monitor these interactions. The points of interactions remain huge and each proceeding could generate several interactions. Consider this.

Assessment (audit) is a core function for the department and one that generates the maximum points of contact and intersection with the public. The assesse files a return of his income which may/may not be selected for detailed audit. In both cases the excess tax paid by or to the credit of the assesse is refunded to it. The assesse is put on notice by issue of statutory notice about the detailed assessment (audit). The points on which the officer needs clarification are informed to taxpayer and these are to be provided by it. The officer if satisfied will close the audit or proceed with deeper investigations. Before finalization of the assessment and determining the income and tax payable the assesse is given opportunity to rebut the conclusions of the department. The officer on the basis of all the facts, evidence and submissions before him makes an assessment order. The order is served on the assesse. If not satisfied it can file an appeal within 30 days. This first appeal is made before a senior officer of the department. The appellate authority follows almost the same procedures as the assessing officer.

The assessment proceedings are just one of the interactions that an assesse may have with the department. There are several other functions — withholding tax, return of income of withholding tax, making applications, obtaining certificates and clearances, approvals, effect to orders passed on appeal in favor of the assesse that result in refund, rectification order, etc. The points of interactions are endless though not every taxpayer may interact on all issues.

The organization needs a digital transformation to provide a seamless experience to the taxpayer with minimum physical contact. This integrated system will lead to better monitoring, increase in transparency, accountability and huge reduction in harassment. It will increase effectiveness. It will be reasonable to expect increased revenue collections though the gains made on other fronts alone justify the transformation.

Challenges:

The challenges to the transformation would be many. A successful transformation from the present will have to address legacy issues (integration of functions on a common platform; transfer of existing data to the new platform, system design, justifications, vendor issues), new infrastructure including hugely increased bandwidth, financial support and not the least, opposition from the employees that could be for several reasons including vested interests and necessity to familiarize with yet another new system. My apprehension is that the change will be resisted also for the reason that it tries to re-orient the department from an enforcement agency to a facilitator. To make the system really work the way I intend it to, i.e. largely non-intrusive, a unique identification number for every individual and entity would not only be necessary but required to be populated to all assets and transactions.

Successful Transformation:

In my view, the successful transformation should give the taxpayer a seamless experience available at one single point of interaction with minimum/no requirement of physical interaction with the officer. It should be able to populate tax data and link it with the unique Id, be non-intrusive and be an effective monitoring tool without sacrificing any of the effectiveness of the department.

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