A paradigm shift in Indian revenue audits

Modus operandi

Faceless assessment is administered through separate units within the tax department each of which has specific important role in the process, viz assessment units, verification units, technical units review units. All these units work closely with the National e-assessment Centre (NeAC) Regional e-assessment Centre (ReAC).

Single point contact for taxpayers

The NeAC is the key interface primarily responsible for all communications with taxpayers facilitates conduct of the proceedings in a centralized manner act as ‘single point of contact’ between the taxpayers the different units in the tax department. The segregation of responsibilities across teams seeks to achieve the objective of team-based assessment, collective decision making as against one officer applying discretion to decide on a matter in the earlier regime.

In terms of the process of faceless assessment, broadly speaking, the tax department’s IT system selects cases for scrutiny assessment using risk-based criteria identified through data analytics. NeAC issues notices initiating assessment proceedings seeking information from the taxpayers.

Internal mechanics in tax dept

The response furnished by the taxpayer is passed on to a specific Assessment Unit in any one ReAC, allotted to a particular case through an automated allocation system. The Assessment Unit requests NeAC to obtain information / documents from the taxpayer, or to conduct further enquiry / verification by the Verification Unit, or to seek technical assistance from the Technical Unit.

Considering the details furnished by the taxpayer, the Assessment Unit shares a draft assessment order with NeAC. In certain cases, the NeAC may also assign the draft assessment order to a Review Unit in any one ReAC for reviewing the same.

In case no variation in the income of the taxpayer is proposed by the Review Unit, the NeAC will finalize the order issue to the taxpayer on the online Income Tax portal. In case the Review Unit proposes any adjustment to the taxable income, the NeAC will provide a final opportunity to the taxpayer to present its case by issuing a show cause notice, which may contain a draft of the assessment order.

The draft order (together with the show cause notice) provides clarity on the view of the tax authorities in a particular a case/ issue.

Video conference facility

While responding to the show cause notice, the taxpayer may also request for a personal hearing through video conferencing. From experience to maintain the faceless nature of the proceedings, the tax officer is generally not visible on video conference, while they can see the taxpayer their authorized representatives.

In our experience, requests for personal hearing through vide conference are generally accepted by NeAC. There is also an option to upload documents on the portal on which reliance is placed during the course of video conference to facilitate an interactive discussion.

However, in some cases, the submissions filed by taxpayers were not considered while finalizing the order, the request for a videoconference was also not approved. Representations have been made to the tax authorities to consider some cases on video conference mode only. In certain cases, being aggrieved by the orders of the NeAC, some taxpayers have also approached courts on the principles of natural justice

Notice

The initiation of assessment proceedings is through the issue of notice to the taxpayer. It has been observed that the questionnaire issued by NeAC to the taxpayers to initiate the faceless assessment is quite specific to a particular business that the tax department has taken into account the financial statements, the income-tax returns, tax audit report, etc. furnished by the taxpayers.

Usually, the time allowed in the initial notice issued under faceless assessment scheme is reasonable provides adequate opportunity to the taxpayers to submit their response. The timelines, however, appeared to be relatively more stringent specially towards the end of the proceedings. Nevertheless, this being initial stage of implementing the faceless assessment proceedings, process is likely to get more streamlined for both the taxpayer the tax department.

Online submissions

Currently, the Income Tax portal has limitations in terms of size of files that could be uploaded, thereby requiring multiple uploads in case of voluminous submissions by the taxpayer.

The ability of taxpayers to explain complex transactions voluminous details only through written submissions sometimes poses a challenge under the faceless assessment scheme. This also requires the taxpayer to draft precise reader-friendly submissions, so that it can be easily understood by tax authorities.

It is expected that the upload limit shall be enhanced gradually to enable the taxpayers to make appropriate submissions facilitate smooth closure of assessment proceedings.

Adjournments

There are adequate provisions for seeking an adjournment under the faceless assessment scheme. However, at times, it becomes a bit challenging task in certain situations specially where very strict timelines are set to respond to questions. Taxpayers should plan in advance where they want to seek an adjournment. Better planning may help to address such concerns avoiding unintended complications in assessment order leading to further litigation.

Taxpayers’ responsibility

Digitization of tax proceedings requires businesses to gear up to meet the dynamic needs of this mandatory change. Not only documents/ information should be electronically stored for timely retrieval, back up for tax adjustments made in any particular financial year should also be maintained to ensure timely submission. It is important for taxpayers to keep their credentials updated on the income tax portal so that the notices other correspondences reaches the designated recipient.

Way forward

The first year of faceless assessment scheme has been quite fruitful in line with its overall objective to bring in more transparency consistency in the revenue audit process. Further, the introduction of the scheme has also supported tax authorities taxpayers during covid times when face to face interactions were not possible.

Being in the transition phase, taxpayers would have felt the need for face-to-face interaction with tax department to better explain the facts legal submissions especially in complex matters. The stakeholders are hopeful that the experience gained during the recent revenue audits would further help streamline the process.

The scheme has brought about greater flexibility for taxpayers professionals representing before tax authorities. It has resulted in substantial time savings on account of travel to tax office, waiting time over there, etc.

Also, online submission of responses outside of regular office hours has helped the taxpayers their representatives in better time management.

In a nutshell, the faceless assessment scheme is a significant tax reform a step in the right direction to achieve ease of doing business bringing in more transparency certainty in tax matters. Success of this scheme is the joint responsibility of both sides with increased collaboration between tax authorities taxpayers, the scheme can result in better quality assessments in future.

Consistency in tax positions on industry-wide issues would help provide certainty for taxpayers avoid unnecessary disputes litigation.

Sujay Paul Archana Kumar contributed to this article

Vikas Vasal is national leader, tax–Grant Thornton Bharat LLP