What are the challenges India is facing due to inefficient tax assessment? How it can be addressed?

Economic Survey 2017-18 highlights the issue of ever-increasing pile of tax litigation. The tax litigations amount to approximately Rs7.58 trillion which is equivalent to 4.7% of the gross domestic product in 280,000 cases. Another distinguishing factor highlighted in the economic survey is low success rate of the tax departments at all levels in the litigations. This is contributed to the fact of the low efficiency in the assessment of the taxes by the tax department.
Implications of these inefficient assessments:

  • Taxpayer: Uncertainty due to litigations. It results in increased costs due to litigations. Thus affecting the cost competitiveness.
  • Public finance: Low success rates is increasing the burden of interests on the public exchequer as it is required to pay 6% interests on the advance tax payments.

The Comptroller and Auditor General (CAG) has reported that the cost to the exchequer was about Rs58,000 crore over nine years due to such practices.
Causes of these inefficient tax assessment:

  • Inefficient tax administration: Most of the time the assessment is carried out keeping immediate tax collections in mind without understanding business complexities and ground realities.
  • Unrealistic targets: The pressure for augmenting higher revenue leads to unrealistic assessments. These are later struck down in court of law.

Measures taken to address the inefficiencies in tax assessment:

  • New scheme of assessment has been introduced in the Budget of 2018-19 where technology will be used to the extent feasible as interface between taxpayer and tax officers and team-based assessments.
  • Electronic interface for assessments has also been introduced.

Other measures which can aid in addressing the inefficiencies:

  • Balancing the wide discretionary powers given to tax officers with regulations that require them to strictly follow the procedures during assessment.
  • Structural changes in CBDT where the performance is measured by tax collection.
  • Separation of the responsibility of tax collection from that of the evaluation, framing of laws, research and policy reform.

The addressing the inefficiencies of assessment will provide benefits like protecting the honest tax payer from the officials and  taking the fight against the tax dodgers or those who take shelter in the grey areas of law to a logical end.

Question for UPSC Mains:
What are the challenges India is facing due to inefficient tax assessment? How it can be addressed?

Published: March 9, 2018 | Modified:June 27, 2019

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