The proposal for reforming tax administration has been underplayed and almost overlooked at various post Budget discussions and debates. The importance of reforms to tax administration cannot be over emphasised in the current environment and hence merits special attention.

While, the Government’s economic policy is reflected in Finance Minister’s mool mantra - ‘higher growth leading to inclusive and sustainable development’, the essence of tax policy is captured in the intention to provide ‘clarity in tax laws, a stable regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary’.

Experience in recent years has shown that the economic and tax policies have not always remained aligned and tax policy often becomes a casualty in order to meet short term revenue targets.

Under such circumstances, recognising adverse impact on investments and growth on account of an adversarial approach is the first step to creating an environment conducive to growth.

The announcement for reforming tax administration therefore assumes importance and a significant shift in approach to tax policy. To give effect to this policy, it is proposed to set up a Tax Administration Reforms Commission (TARC) for reviewing application of tax policies and tax law and recommend measures to strengthen the tax system taking into account global best practices. The proposal has not clarified the authority under which the Commission is to be set up or its scope.

It is, however, important to note that the Department of Administrative Reforms acts as the nodal agency of the Government for administrative reforms and public grievances relating to Union Government agencies. A commission set up under such an independent authority is likely to be more effective than a committee set up within the Finance Ministry which seems to be the intent. It will therefore be interesting to see the constitution and scope of TARC.

Further, it would be desirable that Commission’s scope includes administration processes relating to tax payers’ rights and make recommendations for preservation and protection of such rights as adherence to the rule of law which is fundamental to achieving sustainable economic development.

Uneven enforcement of regulation, corruption, insecure property rights, and ineffective means to settle disputes drive away both domestic and foreign investment. The revival of economic growth on back of restoration of investor confidence will depend on Commission’s recommendations and its implementation.

Finance Minister’s recognition of the need for reforming tax administration may well be an important signal to the investors. An improvement of tax administration will also provide greater assurance to the Government for effective implementation of tax policy for sustainable development and economic growth.

From investors’ perspective, a tax administration that demonstrates accountability, transparency, responsiveness, effectiveness and efficiency, reflects the subsistence of the rule of law. Strengthening of the tax system so as to reduce tax uncertainties caused by prejudiced interpretations and protracted litigation will go a long way in restoring investors’ confidence.

Implementation of measures in this regard will create a credible tax system that investor community expects. Correspondingly, an effective, efficient and fair administration will also create conducive environment for tax compliance and discourage aggressive tax claims/planning.

Initiating reforms to the tax administration should be regarded as a key tax proposal and deserves debate among various stakeholders. Improvements in the administration will not only mean sustained economic development, it will also redeem India’s reputation as an investment destination. Idealistic as it may appear, it is the step in the right direction, though the benefits might not be seen immediately .

(The author is Partner, Deloitte Haskins & Sells)

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