India: New Faceless Tax Schemes Introduced in India23 February 2021
Earlier last year, India had taken up the opportunity of the Covid pandemic to continue to digitize various transactions and compliance procedures. As part of their efforts the central government had launched the “Transparent Taxation – Honouring the Honest System” which launched a Taxpayers Charter and a faceless assessment scheme, aimed at a tax system which is faceless, painless and seamless. In 2021, this scheme has been extended by also introducing a faceless penalty scheme which has come into effect since January 2021.
‘Transparent Taxation - Honouring the Honest’:
India launched a ‘Transparent Taxation’ system in 2019, which came into force in 2020. The goal of the system has been to create a seamless, transparent and digital system of tax assessment and penalty proceedings. The initial scheme consisted of a taxpayer’s charter, a faceless assessment scheme, and faceless appellate scheme. In 2021, a faceless penalty scheme has also been introduced to further expand e-assessment facilities.
The main parts of the system are briefly explained below:
The taxpayer’s charter details commitments that are made by the tax authorities and expectations the authorities have of the taxpayers. The Charter acts as a framework that emphasizes the goals of a transparent and honest tax assessment and redressal system. The Charter details that the income tax department is committed to:
- Providing fair, courteous, and reasonable treatment.
- Providing mechanisms for appeal and review.
- Collecting the correct amount of tax.
- Respecting the privacy of the taxpayer.
- Maintaining confidentiality.
- Providing a fair and just system.
- And other such duties.
The Charter imposes duties and responsibilities on both sides: the taxpayers and the authorities with the end result of creating a more responsible tax redressal system. While the charter imposes no legal obligations, it is a useful tool to reinforce the expectations of integrity in the tax assessment and dispute settlement system. The Charter came into effect in August of 2020.
Faceless Assessment Scheme:
The faceless assessment scheme was notified in 2019, and came into force in September of 2020. This scheme has been introduced as a measure to reduce human interface in tax proceedings. Under this new system, national e-assessment systems have been launched with whom the taxpayers will be communicating, albeit only electronically. Taxpayers will no longer need to personally visit or inquire with the local tax authorities for assessment matters.
A national e-assessment centre has been established which will head the process centrally and assessments will be conducted by regional assessment centres in the local jurisdiction and assessment units with the help of technical units, verification units, and review units.
The working of these units is structured as described below:
- Assessment Units: These units will be facilitating the conduct of digital assessment by performing the functions of making assessments, identifying points or issues that are material to the determination of liability, seeking information or clarifications on the issues identified, analysisng the materials furnished by the taxpayers, etc.
- Verification Units: These units will perform the functions of verification which is inclusive of enquiry, cross verification, examining books of accounts, recording statements, analyzing witnesses, and any other functions that may fall within verifying the details under assessment.
- Technical Units: These units will help provide any assistance related to legal, accounting, forensic, information technology, valuation, transfer pricing, data analytics or other such technical services that may arise during the process of assessment.
- Review Units: These units will review the draft assessment order and check whether relevant materials and evidence haven brought on record, if the points of law required have been reflected in the Order, checking for the correctness of the order and whether any modifications are necessary, etc. Essentially, they review the Order for any corrections or additions before it is sent to the assesee.
There will not be any communication between the assesee and the various units or between the various units themselves. All communication will be routed through the National e-assessment Centre. Assessees and tax payers can communicate by filing responses to the nation e-assessment Centre digitally. All documents uploaded by taxpayers must be signed by way of a digital signature or through an electronic verification code.
The following assessments will be covered under this scheme:
- Assessments initiated under section 143(2) of the Income Tax Act.
- Scrutiny assessments under section 143(3) of the Act.
- If no tax returns have been filed in response to notices issued under section 142(1) and section 148 of the Income Tax Act.
Faceless assessment cannot be used for the following:
- Assessment under central charges, i.e. seizure and search cases.
- International tax matters and disputes.
Since the faceless assessment scheme intends to introduce a news seamless system, the new procedure for assessment under this scheme is as follows:
- The National e-assessment Centre will serve notices to the assessee specifying the reason for the assessment, and the assesse will have fifteen days to file a response.
- This response has to be filed to the National e-assessment Centre.
- The Centre will then assign the assessment to specific assessment units in a regional e-assessment centre.
- Communication can then be made between the assessment centre and the National e-Centre in regard to needing more information, evidence, conducting enquiries, etc. The National e-Centre will also co-ordinate any requirements between the assessment units and the verification, technical, and review units. This is also true for all requests for verification, review or technical assistance that is made by the assessment units.
- The assessment unit will after assessment provide a draft assessment order where they either accept the income returns of the assessee or provide a revised tax return. They may also specify any penalty proceedings in the order, if any are required.
- The order will then be sent to the National e-Centre where they will conduct a review and finalize the order after providing an opportunity to the asseessee to represent themselves. It will also be sent to the review units to be reviewed.
- Once the assessment is complete, the National e-assessment Centre will transfer the records to the assessing officer for imposing penalty, collecting demand, rectifying mistakes, etc.
There will be no need for the assesse to present themselves personally before the National e-assessment Centre or the regional assessment centres under this scheme. If the assessee requires a personal hearing, they may file a request with the National e-assessment Centre and a personal hearing will be granted exclusively through digital communication.
Faceless Appeal Scheme:
The Faceless Appeal Scheme covers appeals that may be filed before the Commissioner of Income Tax under section 246A(1) of the Income Tax Act i.e. appeals before the Commissioner by taxpayers in relation to denying liability to deduct tax. The scheme will also cover situations of admitting additional grounds under the appeal, and admitting additional evidence for the appellate proceedings.
Similar to the faceless assessment scheme, the faceless appeal scheme also introduces three main types of institutions for the appeal process: the National Faceless Appeal Centre, Regional Faceless Appeal Centre, and Appeal Units.
These centres will perform the following functions:
- National Faceless Appeal Centre: They will be the central authority set up for disposing appeals under this scheme.
- Regional Faceless Appeal Centre: They will facilitate the proceedings within their jurisdictions.
- Appeal Units: they will dispose appeals, and related functions such as admitting additional grounds for the appeals, making inquiries, directing the National e-Assessment Centre or Assessment Units to make inquiries or seek information or clarifications, providing opportunities to be heard to the appellant, etc.
Similar to the faceless assessment scheme, the National Faceless Appeal Centre will be the only point of communication for appellants and appeal units, as well as for National e-Assessment Centres and assessment units.
In brief, the following will be the new procedure for the appeals under section 246A(1):
- The National Faceless Appeal Centre has an automated system by which they will assign appeals to specific appeal units under the regional centres. If the National Centre feels that there is sufficient cause and evidence the appeal may be admitted, or else rejected.
- If the appeal is admitted, the appropriate appeal units may request the National Appeal Centre to co-ordinate with the National e-Assessment Centre to obtain further information, documents, evidence or reports.
- The appellant should file a response within the stipulated time period with the National Faceless Appeal Centre.
- After the proceedings and considering all the material on record including any additional grounds, evidence, and information that may have been filed; the appeal units will forward a draft order in accordance with section 251 of the income tax act to the National Faceless Appeal Centre.
- The National Faceless Appeal Centre may either finalise the order or send for review to the Appeal Units. If there is no review required, they may finalise the order and communicate the same to the appellant, to the Commissioner of Tax, and the National e-Assessment Centre. If any penalty proceedings are to be initiated as part of the order then the appellant will be intimated of the same.
Faceless Penalty Scheme:
The faceless penalty scheme is the latest part of the honest taxation system, and has come into effect as of January 2021. The scheme covers penalty proceedings under section 274 of the Income Tax Act. The scheme will be covering all penalty proceedings that have been initiated as of 12.01.2021, and all previous proceedings will be covered by the previous non-faceless provisions.
Under this scheme, new a National Faceless Penalty Centre, regional Penalty Centres, Penalty Units and Penalty Review Units have been introduced. In terms of functions, the units will function similar to the Centres and units under the Faceless Appeal Scheme. The National faceless penalty Centre will be the centralized authority, and will also coordinate all communication between the assessee and the units and also between the Centres and the units.
If the appeal order passed under the Faceless Appeal Scheme has initiated penalty proceedings, then it will be initiated under this scheme. If the National Faceless Assessment Centre has recommended the initiation of penalty proceedings in the Appeal order, then the case will be referred to the National Faceless Penalty Centre who will automatically allocate it to a penalty unit. They will then create a draft recommendation on whether to continue with the proceedings or not, and will revert to the National Penalty Centre. A show-cause notice will then be served to the assessee, who may file a response within the stipulated time period. After all material on record is considered, the report regarding the imposition or non-imposition of penalty will be recorded in a proposal by the penalty units and forward it to the National Penalty Centres. The National Penalty Centre will then finalise the order after considering whether any reviews are required.
Effect on Taxpayers:
All the faceless schemes for assessment, appeal and penalty proceedings have been introduced with the intention of making the tax assessment and dispute redressal system simpler, faster and more streamlined. This move is encouraging as the disposal of systems through a centralized automated system will encourage a streamlined and faster system of redressal.
The drawback is that for assessment, appeal and penalty proceedings there are no automatic personal hearings that will be granted to the assessee. Requests for personal hearing will have to be filed within the appropriate time periods. Further, the set up for video-conferencing and subsequent procedures to be followed are currently being created and notified.
As the new system becomes more widely used, here are some details that taxpayers should be careful of:
- Taxpayers should ensure that their contact details are fully updated on the e-filing portal.
- Ensure that if personal hearings are required, ten notices are filed at the appropriate times.
- Maintain and provide extensive documentation for all transactions.
For further information, please contact:
Gautam Khurana, Managing Partner
India Law Offices, New Delhi
t: +91 (11) 24622218
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