Taxpayer’s Magna Carta: Supplement Charter with taxpayer engagement that incentivise diligent taxpayers

tax, income tax

By S Ramesh

A bold, innovative measure introduced by the Finance Minister in the FY21 Budget speech is the proposal to embed the rights of taxpayers in the Income Tax Act. This step articulates the government’s intent and vision to ensure a taxpayer-friendly, trust-based system. The objective is to enhance efficiency of the tax department's delivery system. Respecting 'wealth creators' would no longer be only symbolic, but would have a statutory mandate.

Over the decades, India's tax administration has evolved from enforcement to facilitation, from a tax compliance thrust to one of continual improvement in its taxpayer service delivery. Both the Central Board of Direct Taxes, and the Central Board of Indirect Taxes and Customs have published their vision, mission and citizens' charter. CBDT and CBIC have laid down elaborate service delivery standards in accordance with the Bureau of Indian Standards's SEVOTTAM guidelines. While the guidelines reflect both tax agencies' stated intention to ensure a fair, transparent, and tax-payer centric administration, they have not yet been coded into the respective tax legislations. An aggrieved taxpayer without professional expertise, facing a high-pitched assessment or a rejection of a tax refund, is still likely to be at a loss regarding their rights are next course of action. Articulation of taxpayers' rights in the tax laws will ensure clarity, better awareness, and lay down a roadmap for remedial action.

A recent OECD survey of 58 advanced and emerging economies found that 88% had either administrative or legal procedures governing taxpayers' rights and obligations in place. India is now poised to codify taxpayers' rights to be binding on the tax administration and enforceable under law. In 2003, the OECD brought out an illustrative Taxpayer Charter, with a core set of taxpayers' rights and obligations. The IMF's 2007 Manual on Fiscal Transparency also emphasises the expediency of such a statutorily-mandated charter.

In the US, the Taxpayer Bill of Rights was first legislated in 1988; it was embedded in the Internal Revenue Code, implemented by the Internal Revenue Service (IRS), in 2014. USA's federal statutory tax law enshrined ten important rights, including that to challenge the IRS's position and to be heard, the right to be informed, and the right to pay no more than the correct tax amount.

A recent development in this regard is USA's enactment of the Taxpayer First Act (TFA) on July 1, 2019. TFA strengthens certain taxpayer rights, and requires modifications to the organisational structure, customer service priorities, enforcement procedures, information technology of IRS. Importantly, the act renames the IRS Office of Appeals as IRS Independent Office of Appeals.

Australia first published a Taxpayer's Charter in 1997, and has periodically reviewed it to make it more accessible. The last update, done in 2018, gave clear information about what the taxpayer can expect during the Australian Tax Office's Audit and Review process.

Canada announced its Declaration of Taxpayer Rights in 1984, and modified it in 2007 with a set of 15 statutory and administrative rights-the Taxpayer Bill of Rights. The former follow the redress procedures furnished in tax laws, and the latter cover the service rights the Canadian Revenue Agency accords taxpayers.

In order to tend to taxpayers' complaints and to enforce their rights, many tax administrations have instituted a specialised body, like the Ombudsman. USA boasts of a Taxpayer Advocate Service (TAS), an independent organisation within the IRS. The TAS deploys "case advocates" to assist eligible taxpayers to resolve their issues with the IRS. In Australia, the independent Inspector General of Taxation acts as a Taxation Ombudsman and reviews operation of the tax administration. India, too, needs to revive the post of Ombudsman in the tax departments.

Where the rights are administratively documented, the approach is taxpayer service-centric and more flexible than in jurisdictions where rights have been enacted by law. The challenge lies in ensuring that taxpayers' grievances are mitigated swiftly and inexpensively even when the statutory approach is adopted. India's proposed Charter needs to unambiguously and simply spell out rights. It should be futuristic and flexible, especially in light of e-assessments and e-appeals. Its launch should be preceeded by both awareness campaigns and training and capacity-building ones. Encoding rights in law must be fortified with a revitalised taxpayer engagement model, nudging behaviour using data analysis, and incentivising the diligent taxpayer.

The proposal to enshrine taxpayers' rights in the Income Tax Act will provide greater impetus to efforts to enhance India's Ease of Doing Business ranking, by providing greater accountability, transparency, and certainty in tax administration. Of late, there is growing anxiety among compliant taxpayers due to issues like blocking of input tax credits, notices on reconciliation of GST returns, and provisions for arrest under the proposed GST law amendments. Hence, it would be worth considering a similar exercise to codify taxayers' rights under all other taxation laws, including GST and Customs. Nina Olsen, who headed USA's TAS, stated in 2013: "At their core, taxpayer rights are human rights. They are about our inherent humanity." With a strong legislative shield to protect the honest and the compliant, the FM may well win the hearts of Indian taxpayers, thanks to her Magna Carta.

The author is Former Chairman – CBIC & Managing Director- Indirect Tax, PwC India. Views are personal