Income Tax: The More Things Change the More They Remain the Same

Computerisation of income tax returns has been taken up seriously in India over the last decade to improve the efficiency of the revenue department-to handle the backlog of assessments, increase taxpayer compliance and comfort, focus the attention of tax administrators on high value tax evaders and above all generate more revenue with less effort.

Online filing of returns has become mandatory for taxpayers with incomes above Rs. 5 lakhs and this has ensured that manual handling of returns is substantially reduced.

On the plus side, we now have registration of taxpayers by PAN numbers, automatic processing of returns and early issue of acknowledgements, orders and refunds, ready access to documents and their processing status, the establishment of dedicated Computer Processing Centres (CPCs) with a separate chain of command, close interaction with banks, employers and other agents performing tax deduction at source duties and a courteous and knowledgeable help line.

For many law abiding taxpayers, however, especially those with identifiable and limited sources of income-salaries or pensions and interest on bank deposits-the new dispensation has only introduced one more nightmare layer of orders and obligations, which cannot be tackled by a simple visit to the assessing officer with the necessary records. The main problems relate to coordination and cooperation:-between the CPC branch and the regular assessing staff and -between income tax authorities and banks who dispense salaries/pensions and pay interest on deposits as well as collect tax at source on both items

Many of these issues can be fixed with some imagination and empathy, but these are usually scarce in government departments.

Change management is not easy in any mammoth organization and the Revenue Department is no exception to this rule. The traditional hierarchy of assessing officers resent powers being usurped by the CPC in respect of the initial examination of taxpayer returns. This results in each branch passing the buck to the other, leaving the hapless taxpayer shuttling between two offices. The help line as well as officers of each branch invariably refers taxpayers to the other one for rectification or solution. Are revenue officers nervous about taking decisions to correct wrong assessments and allow legitimate refunds? One wonders if there are internal departmental pressures penalizing officers who respond positively to taxpayer claims.

The CPC’s role appears to be first level examination of tax paid on the declared income by validating data presented in the return with information entered by tax collecting entities like banks and employers. If everything seems to be in order on a preliminary examination, the refund sought is allowed and it is directly transferred to the taxpayer’s bank account. It seems that at the CPC level, there is little or no attempt to examine whether the income declared is accurate-the focus is on computation of tax and its collection and reporting by other sources. Whether there is scope for further validation of income data using internet connectivity needs to be considered to avoid revenue losses.

From the taxpayer’s point of view, however, what is essential is a clear concept of the duties of the CPC and of the regular assessing officer. Assessing officers are, on the whole, not comfortable looking at or working with computers. Many of them used to employ their own people by paying wages out of their own incomes (how they could afford it if they were honest government officers is a question that needs to be asked) to work on office computers, but the practice has been discontinued after a recent scandal revealed the extent to which confidential income tax data was being accessed by unauthorized persons.

The department has now recruited its own personnel for handling computers. Nevertheless, it is essential that assessing officers are also capable of looking at data on computers and understanding and rectifying it, since, very often, taxpayers are asked to hang around their offices waiting for elusive and much-in-demand computer staff to make their appearance. They are also told that data on computers cannot be seen or rectified by the assessing officer, because it has not yet been transferred to his office by the CPC. Surely, this transfer can be done immediately and automatically after an order is passed by the CPC!

It is quite common these days to see lines of unhappy, law abiding taxpayers, clutching copies of documents relating to income and tax payment, hanging around the offices of assessing officers-clear proof that computerization of income tax returns has hardly reduced the travails of taxpayers.

Visits to tax offices can be considerably reduced if the CPC’s orders are more informative. It is normal for taxpayers to have deposits in more than one bank branch and for one bank branch to do TDS on salaries/pension and on deposits for the same taxpayer.

But the standardized CPC order form does not separately give details of each bank which has reported TDS and income for a single assessee. This means that when there is a discrepancy between the total TDS reported by banks and that claimed in the tax return, the only way for the assessee to get to the root of the problem is by visiting the assessing officer.

Experience shows also that the CPC does not seek out details of advance tax payments paid through challans in different locations, even when challan details have been furnished in tax returns. Minor changes in CPC procedures on matters like this could substantially reduce the harassment to which ordinary taxpayers are subjected.

Banks have been inducted closely into all areas of income tax assessment and collection. They are bound to deduct tax at source on salaries and pensions disbursed through them, report the interest paid on deposits and collect and remit tax on interest earned. Systems used by banks are, however, not in accordance with those required for tax purposes, leading to miscomputation and misreporting. The problem is compounded by the fact that public sector banks have outsourced tax remittance and tax reporting functions with the result that individual bank managers express total helplessness when confronted with inaccurate statements. The same Finance Ministry is responsible for the performance of public sector banks and the revenue department and it should be possible for it to enforce the required compatibilities.

Computer systems used by banks compute accounts on accrual basis. Individual taxpayers should legitimately pay tax on cash basis, except under exceptional circumstances, when they receive pay arrears or windfall earnings. When a fixed deposit is opened in a bank, the bank enters the maturity value of the deposit on the certificate. This is generally used for computing the gross interest income of the depositor, who must report it in his tax return for the year in which the deposit matures. But, this is not the gross income he actually receives, because banks compute interest on quarterly or half-yearly basis, deduct tax from the interest income and redeposit the remaining amount into the FD account of the depositor.

At the end of the maturity period, therefore, the gross income of the depositor is actually likely to be higher than the amount indicated on the certificate, because it is computed with compound interest. The TDS done is paid into the treasury by the bank every quarter or half year after it is deducted from the depositor’s account. What the taxpayer should declare as gross interest income on FDs on cash basis is never accurately known to him and what is declared based on the maturity amount shown in FDs is always wrong. This figure does not also correspond with what the bank reports as interest income earned by the taxpayer for a year, since that is declared on accrual basis although the taxpayer does not receive that income, unless his deposit has matured during the year. The TDS done by the bank during the year is, however, part of the tax paid by the depositor during that year, since it is actually collected and remitted to the government during that period.

This is not the only anomaly in tax handling by banks. Many banks, including the State Bank, do not separately give taxpayers information about gross salary/pension paid and TDS collected-they enter only the net amount in passbooks and maintain a separate record of their own annual assessment of the taxpayer’s tax liability, which is not necessarily what is ultimately used to deduct income tax. Some, like Corporation bank, however, have made a more intelligent arrangement-they enter the gross salary/pension as a credit in passbooks and show tax deducted as a separate debit, making it easy for depositors/taxpayers to make their own income and tax calculations.

Bankers have also been known to make the most egregious errors while drawing salaries/pensions and making tax deductions. One, for example, simply drew the net amount of salary/pension from government, deducting tax at source, but reported the gross amount and tax deducted to depositors. This resulted in notices and harassment of taxpayers by the revenue department, when the fault lay with the bank, which had neither drawn the full salary nor separately paid government the full tax after deduction!

Bankers and their outsourcing partners do not like joint deposit accounts. Depositors use joint accounts for purposes of convenience as well as to avoid difficulties in transferring funds to survivors in case of unfortunate happenings like death or disablement of a single account-holder (given the difficulty in our country of obtaining a legitimate succession certificate without indulging in corrupt practices). But banks report all the income earned and tax deducted on joint accounts against one of the joint holders only, displaying invariably, in our male chauvinistic society, a preference for the oldest male. This inevitably leads to anomalies between tax returns and bankers’ reports creating rich fodder for the CPC and his counterparts on the assessment side.

No wonder then that computerization of the revenue department does not make life easier even for the very basic taxpayer with no source of income besides salary/pension and interest earned on deposits.

Since there has been no improvement in the usual habits of the department-in demands for “chai” money at the entrance to offices, or requests to “send your chartered accountant”, in the inaccessibility and discourtesy of officers and staff as well as their unpunctuality and non-availability, in the confusion in which papers sent to the department are maintained and processing delayed, in total memory loss about the previous history of any taxpayer (necessitating repeated furnishing of the same documents to the same office with every encounter)-the hope for immediate improvement in taxpayer comfort and compliance as a result of computerization will not be realized.