India’s Tax Administration Reform Commission (TARC) Releases First Report

June 23, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – India’s Tax Administration Reform Commission (TARC) has submitted its first report to Finance Minister Jaitley suggesting a variety of changes to India’s tax administration framework.

Constituted in August 2013 under the leadership of economist Dr. Parthasarathi Shome, the TARC is charged with identifying key areas for improvement in India’s tax system. In its first report released last month, the commission suggested merging the Central Board of Direct Taxes (CBDT) with the Central Board of Excise and Customs (CBEC), broadening India’s use of the Permanent Account Number (PAN) system, improving services to taxpayers and ending retrospective taxation, among other measures.

“The TARC recommends that the two boards [CBDT and CBEC] must embark on selective convergence immediately to achieve better tax governance and, in the next five years, move towards a unified management structure with a common board for both direct and indirect taxes, called the Central Board of Direct and Indirect Taxes. The tax administration needs to have greater functional and financial autonomy and independence from governmental structures, given their special needs. The post of revenue secretary should be abolished [and] the present functions of the Department of Revenue should be allocated to the two boards [the CBDT and CBEC],” the report reads.

In addition to suggesting structural changes, the report recommends the tax administration adopt a more “customer focused” modus operandi – partly in response to increased complaints in recent years regarding the perceived rude and arbitrary behavior of tax officials.

“The prevailing treatment of the taxpayer by the tax administration requires much to be improved in reflection of global practice. Customer focus reform therefore is the first need. Officers and staff at all levels of tax administration should be trained for customer orientation. Further, for people posted in this vertical, the training in customer focus need to be more specialized and intensive. This training should be appropriate to the areas in which such officers are deployed such as customer relationship, measurement of customer satisfaction [and] taxpayer education. In redressing taxpayer grievances, the decision of the Ombudsman should be binding on tax officers,” the report recommends.

Along the same lines of recommending the administration enhance its treatment of taxpayers, the report explicitly identifies retrospective taxation as an issue requiring immediate attention and amelioration.

“The lack of accountability in the system is represented by infructuous demands raised by the tax administration with impunity as well as massive escalation, non-resolution and non-recovery of such demands by global standards. Getting a handle on dispute management is crucial for retrieving stakeholder confidence and for saving much needed staff and financial resources of the tax administration,” the report recommends.

“For clarity in law and procedures, a process based on best practices should be followed. Retrospective amendment should be avoided as a principle [and the] fundamental approach should be collaborative and solution oriented,” it continues.

The TARC’s explicit rebuke of India’s retrospective tax policies follows strong rhetoric from Ravi Shankar Prasad, Minister for Telecommunications, Law and Information Technology, on the issue earlier this month.

With several multi-million dollar tax disputes over retroactive taxation currently in limbo between the Indian government and Vodafone, Nokia, Royal Dutch Shell, AT&T and General Electric (among others), modifying India’s existing tax law – which currently lacks a provision for resolving tax disputes through negotiation – has been cited as a priority for Modi’s administration.

“Both the boards must immediately launch a special drive for review and liquidation of cases currently clogging the system by setting up dedicated task forces for that purpose. The review and liquidation should be completed within one year and the objective should be to decide all cases pending in departmental channels for longer than a year as on the start date of the action plan,” the TARC recommends.

While Minister Jaitley’s official response to the TARC recommendations has yet to be made public, foreign investors are hopeful a number of the report’s key points – especially those related to discontinuing retrospective taxation and enhancing customer service – will ultimately find their way into official government policy.

The complete TARC report titled “First Report of the Tax Administration Reform Commission” can be found online here.

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