Striking a balance in India's faceless income tax assessment

India's faceless income tax assessment system, launched on April 1, 2021, marks a significant move towards modernising and improving transparency in tax administration. The aim is to reduce corruption, ensure fair application of tax laws, and make the process more efficient by minimising human interaction. However, as with any major reform, there have been both positive and negative reactions, highlighting areas that need refinement for the system to truly benefit taxpayers.

Background of Faceless Assessment in India
The faceless assessment initiative is part of a global trend towards digitising public services. By randomly assigning tax cases to officers irrespective of their location, the system aims to eliminate biases and malpractices that can occur with direct interactions between taxpayers and tax officials. This digital transformation promises increased efficiency, reduced legal disputes, and greater taxpayer confidence in a fair and transparent system.

Advantages of the System
The faceless assessment system offers several benefits. It reduces the risk of corruption by minimising direct contact between taxpayers and officials, speeds up the assessment process, and helps clear backlogs.

Additionally, it ensures consistent application of tax laws across different regions and allows taxpayers to submit and track their documents online conveniently.

Challenges and Criticisms

Despite its advantages, the faceless assessment system has faced criticism from organisations like the Institute of Chartered Accountants of India (ICAI) and the Confederation of All India Traders (CAIT).

The ICAI has pointed out several issues, such as frequent technical glitches in the income tax portal that make it difficult to upload documents or respond to notices on time. They also note that complex cases often need a nuanced understanding that a faceless system may struggle to provide. Additionally, there have been instances of inconsistent treatment of similar issues across different assessment units, leading to confusion and potential legal disputes. The response times for notices are often too short, particularly for complex matters, and the current dispute resolution mechanisms within the faceless framework need improvement. The ICAI also highlights the need for specialised knowledge in certain sectors, which may be lacking in a random allocation system.

The CAIT has raised concerns about the digital divide, particularly for small traders and businesses in smaller towns and rural areas who struggle with the digital system due to lack of infrastructure and technological know-how. The system primarily operates in English, creating difficulties for those more comfortable in regional languages. Its complexity can be burdensome for small businesses that lack dedicated accounting staff. There are also significant concerns about the security of sensitive financial data transmitted online, especially for businesses not well-versed in digital security. The CAIT calls for comprehensive training programs and support systems to help traders use the faceless assessment system effectively. They also suggest a phased approach to transition to the new system, highlighting the need for adequate support mechanisms.

International Perspectives
India is not alone in its pursuit of faceless assessments. Other countries have also embraced similar digital transformations with varying degrees of success. The Australian Taxation Office (ATO) uses advanced analytics and digital tools to streamline tax assessments and enhance compliance. Their strategy focuses on providing high-quality, verifiable data, expanding fraud detection capabilities, and improving self-service options. The United States' Internal Revenue Service (IRS) integrates various digital tools to simplify tax filing and assessment processes while maintaining robust support systems, including hotlines and in-person assistance. The UK’s HM Revenue and Customs (HMRC) has implemented digital tax accounts and automated assessments to simplify the tax process, ensuring mechanisms for personal interactions.

Singapore's Inland Revenue Authority (IRAS) has successfully implemented a digital tax system, reducing the time taken to file taxes and decreasing tax-related inquiries.

Technological Improvements
To address the challenges and enhance the effectiveness of faceless assessments, India can consider several advanced technological improvements, inspired by the ATO’s Digital Strategy.

First, improving the user interface and digital literacy support is crucial. Implementing AI-driven chatbots and virtual assistants can guide taxpayers through the portal, answer queries in real-time, and provide personalised assistance. Offering online tutorials, interactive guides, and virtual workshops can help taxpayers, especially those less familiar with digital platforms, navigate the system more confidently.

Next, investing in reliable internet connectivity across rural and remote areas is essential. Government partnerships with telecom providers can facilitate the deployment of necessary infrastructure. Utilizing edge computing and cloud services can enhance system performance and accessibility.

Combining faceless assessments with optional in-person interactions, powered by AI, can provide flexibility while maintaining efficiency. Implementing blockchain technology can ensure transparency and immutability in the assessment process.

Integrating encrypted video conferencing solutions within the tax assessment platform can facilitate virtual personal hearings. Using AI to schedule and manage virtual hearings can streamline the process.

Developing an AI-powered grievance redressal system that can efficiently categorise, prioritise, and route complaints is important. Utilising blockchain to log grievances and their resolution steps can ensure accountability and trust.

Implementing state-of-the-art encryption methods to protect sensitive taxpayer information and deploying AI and machine learning algorithms to detect and respond to potential security threats in real-time are crucial.

Using blockchain to securely share data between different government departments and agencies can ensure that all transactions are recorded and verifiable.

Policy Recommendations
To ensure the effective implementation of these technological improvements, a comprehensive strategy document should be developed with inputs from key stakeholders, including tax officers, tax practitioners, and taxpayers. This document should outline a clear vision and roadmap for digital transformation in tax
administration.

Engaging stakeholders through regular consultations and workshops is essential. Establishing a dedicated advisory panel to oversee the implementation of digital initiatives can help gather feedback and suggestions. A phased implementation approach can enhance the user interface, launch digital literacy programs, implement
AI-powered chatbots and virtual assistants, introduce blockchain for transparency and virtual personal hearings, and fully integrate the AI-enhanced hybrid model and advanced security measures.

Creating accessible content in multiple languages to guide taxpayers through the digital assessment process, integrating tax literacy into school and college curricula, deploying mobile tax literacy vans to reach remote areas, and developing interactive and engaging methods to teach tax concepts to younger taxpayers are
important steps.

Amendments to the Income Tax Act to formally recognise virtual hearings and digital assessments, updating legislation to accommodate blockchain technology, and ensuring equitable access to digital tax services through new laws are necessary.

Cost-Benefit Analysis
While the initial investment in these technological improvements may be substantial, estimated at approximately Rs 500 crores over five years, the long-term benefits are significant. These include potential savings of Rs 200 crores annually through increased efficiency, reduced litigation, and improved compliance
rates.

Long-term Impact and Vision
A successful faceless assessment system could transform India's tax landscape by 2030. We envision a 90% digital tax filing and assessment rate, streamlining the process for most taxpayers, a 50% reduction in tax-related litigation through clearer, more efficient processes, a 25% increase in tax compliance due to ease of

use and transparency, and significantly improved taxpayer satisfaction and trust.

Conclusion and Call to Action
India's faceless income tax assessment system represents a bold step towards modernisation, but its promise remains partially fulfilled. The Finance Ministry must act decisively to refine this initiative, balancing digital efficiency with human understanding. By embracing technological innovations, fostering digital literacy, and
maintaining flexibility, we can create a tax system that truly serves all Indians.

The time for action is now. As we stand at this digital crossroads, let's ensure that the next chapter in India's tax story is one of inclusivity, efficiency, and trust.

(The author is a Chartered Accountant)