Compliance Challenges – Simplicity and Proper Systems Are Still a Far Cry for Taxpayers

TAXATION in India is a complex subject that involves various laws, regulations, and compliance requirements. The Indian tax system is governed by the Income Tax Act, of 1961. Besides this, there are laws on GST, Customs, and a host of other areas, from banking to finance transactions. These collectively lay down the provisions related to the levy, assessment, and collection of taxes. To ensure compliance, the design and implementation of business processes and systems should start at the beginning of the interface. This aims to embed tax compliance to make it easier for taxpayers to meet their obligations and put less burden in form of taxation compliance challenges.

With the aim so clear, why does a taxpayer still face significant challenges while meeting compliance? We’ll discuss this at length in our blog.

Compliance & Taxation Go Hand-in-Hand

Compliance is a shadow to Taxation. Wherever and whenever taxation has been imposed, the compliance issue thereto cannot be segregated. Of course, the length of the shadow depends upon certain factors which impact the taxation scheme. The question as to what extent the taxation measures shall be complied with depends upon two critical factors. These factors are the structure of taxation and the administrative set-up for implementing taxation.

Factors Causing Compliance Challenges

1. Structural Simplicity

The taxation structure, broadly speaking, would comprise direct and indirect tax and the ratio in which the two kinds of taxes contribute to the Government Revenue. The structure of taxation is also critically dependent upon the decentralising responsibility to levy and collect tax among the Central Government, the State Governments and the Local Bodies.

In our country, Constitutional provisions, by and large, provide the broad framework for the taxation structure. However, it is the Parliament and the State Legislatures which, through statutory provisions, give precise structures to taxation laws.

The taxation structure would also encompass the rates, the slabs and the exemptions. These are primarily consequences of government policy initiatives. Such policy initiatives are often subject to more frequent changes than the framework provided under the Constitution and the statutes.

Tax compliance varies between direct and indirect taxation and depends on which Government authority is responsible for levying and collecting the tax.

The policy initiatives in designing such a tax structure in terms of its rates, slabs and exemptions will also have a bearing on its compliance.

Even in the 4th Century BC, Kautilya enunciated in his Arthashastra that the design of taxation should be such that the compliance burden is the least for the taxpayer so that the government derives tax like a bee government deriving nectar from a flower.

There is a school of thought that believes that lowering the tax rate results in higher revenue collection. However, this may not always be true!

The moot point is that compliance standards are better for a tax structure that entails a minimum burden on the taxpayer in meeting compliance. Besides the apparent burden arising from monetary liability from paying tax, some are non-economic, such as time and stress costs.

Meeting the requirements of too many complex procedures adds to the compliance burden and further compliance challenges.

2. Administrative Adroitness

The second factor that impacts the extent of compliance is the administrative setup for implementing tax structure, more commonly known as taxation bureaucracy. The taxmen must be skilled and efficient to be considered professionals. The administrative cost of collection of revenue has to be minimised. To be adequately skilled, the bureaucracy at all levels of the organisational hierarchy must undergo professional training at the inception and various mid-career stages. This is a big compliance challenge for an organization whether big or small.

It is vital that such capacity building encompasses the inculcation of a value system with a high emphasis on integrity and honesty. Compromise in executing their responsibility will inevitably result in non-compliance and revenue leakages. So, this is a compliance challenges that result in losses.

Necessary caution needs to be exercised as taxation bureaucracy, like any other, tends to expand, which is often mistakenly attributed to the widening of the tax base.

In fact, the objectives of minimising administrative costs and improving compliance may necessitate complete overhauls of the administrative setup.

It may be interesting to note that the Central Board of Excise and Customs had to transition to become the Central Board of Indirect Taxes and Customs in 2017. They were bestowed with the responsibility to collect Central Goods and Service Tax.

The organisational set-up should promote compliance rather than cause hindrances to it. It cannot be forgotten that any compliance cost is a deadweight loss.

The design of the taxation organisation determines the standards of compliance with the taxation regime in an economy. Discretion can blur objective decision-making. Rule-based decision-making has led to the adoption of an automated ecosystem as an intrinsic part of the taxation organisation.

The challenge of covering ever-increasing transactions has been met by the development of state-of-the-art technology that has benefitted compliance levels. The organisational set-ups have become faceless with minimal human interface. A couple of years back, the Central Board of Direct Taxes introduced a faceless assessment scheme and appealed to usher in new compliance standards.

The Burden is Totally on The Taxpayers

With new measures, the government is constantly putting the burden of compliance on taxpayers, furthering new compliance challenges.

1. Electronic Filing and Reporting

The government has introduced electronic filing and reporting. Taxpayers are required to file their returns online with various reporting requirements.

2. Taxpayer Identification

The Income Tax Department assigns each taxpayer a unique Permanent Account Number (PAN). This base serves as the foundation for deriving other identifiers in GST and DGFT. The universal UIDAI AADHAR links to PAN as another layer.

Other data on face recognition, CCTV, QR codes, and what you have are linked. The state’s eyes and ears are now watching what the taxpayer is doing. Soon, it may make you do what you are not doing! Various transactions require PAN and it’s an essential requirement for tax compliance.

3. Compliance Verification

The tax authorities have implemented robust systems for compliance verification. They use data analytics, artificial intelligence, and other technologies to analyse taxpayer data and identify discrepancies. They address all grey areas and colour them black. The taxpayer may be free under one law, but another may not allow the otherwise free action. But the computer will implement the stricter of the two laws!

4. Digital Payments Drive

The government has been actively promoting digital payments to curb the use of cash and enhance transparency. The government has introduced various incentives, such as reduced tax rates for digital transactions, to encourage taxpayers to adopt digital payment methods. Yet cash reigns supreme in the field. No digital system can beat its ease and negotiability.

5. Real-time Reporting

Under the GST regime, businesses must submit regular returns, including sales and purchase data, on a real-time or near real-time basis. This enables the tax authorities to monitor transactions and identify potential non-compliance promptly. However, a lot of tax experts manage to beat the system with clever and creative reporting. There is little verification. See the performance of credit rating agencies; the big ones escape after defrauding investors, while authorities blacklist small users for life based on one-time non-compliance.

Technology Reforms – Simplifying Compliance with Tax Software Solutions

The government has encouraged the development of tax compliance software and tools that help businesses automate tax calculations, return filing, and reconciliation processes. The designs of these software solutions ensure accurate tax compliance and minimize errors, lowering the scope of compliance challenges. Yet taxpayers must use experts to understand what the software front ends actually mean in complex formats. GSTR is an example!

The tax authorities conduct regular awareness programs and workshops to educate taxpayers about their tax obligations and the importance of compliance. These initiatives aim to improve taxpayers’ understanding of tax laws and promote voluntary compliance.

This education is only to collect more and more taxes, not to educate the users on their rights to eliminate discrimination by the taxman or remove difficulties. Public representatives in Parliament should be responsible for obtaining relief for the common man.

Other Compliance Challenges

1. Design Flaws in Taxation Structure

The taxation system in India is such that the Central and State Governments levy taxes in India. Some minor taxes are also levied by local authorities such as Municipalities and Local Governments.  

The government requires money to run and manage a state’s affairs. So, the government imposes taxes in many forms on individuals’ and companies’ incomes. These taxes are messing up the compliance system at the very design stage causing grave compliance challenges.

2. A Struggle for Comprehensive Taxation

One of the primary struggles faced by taxpayers is the lack of standardized processes and systems across different tax regimes. With varying regulations, forms, and filing requirements, taxpayers encounter significant complexities in doing compliance tasks. This lack of uniformity not only adds to the administrative burden but also increases the likelihood of errors and inaccuracies in tax filings.

3. Complexities and Analysis of Excise Duty

Excise duty or Central VAT is a tax on manufacturing goods within the country. Excise duties are levied under the Central Excise and Salt Act, 1944, the Excise Tariff Act, 1985, and the Modified Value Added Tax (MODVAT) scheme or CENVAT. Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir.

The rates of excise duty levied vary depending on the item manufactured, the manufacturing concern, and the place of ultimate sale. The Excise does not merge into the GST structure, resulting in many complications at both the design and compliance stages, furthering compliance challenges for taxpayers

What The Future Holds For Taxpayers and India’s Compliance

The responsibility of collecting the tax lies with the Central Board of Excise and Customs (CBEC). It is no wonder that India has the most complex tax laws in the world. These are only becoming more and more complicated with time, with interpretations and court rulings. The computer may ease the compliance burden, but in practice, it is making the system even more cumbersome since the State intends only to collect more tax without being just and fair to the taxpayer.

While the government is taking significant strides to improve tax compliance in India at a diminishing cost, this should not cause complacency. There are still areas of concern in our attempt to transition from control-based checks to trust-based systems. Large unorganised sectors in the economy throw up their own challenges. Policy initiatives by the Government to emphasise digitization and formalisation may sooner or later bring this sector into the taxation fold.

Therefore, the country and taxation realm require persistent efforts to build compliance parameters into the tax regime. Only then can we inculcate compliance as a behavioural pattern in the economy.