Faceless tax assessments: Benefits, challenges, solutions for improvement
New Delhi, Jan 21, 2025
How can govt improve upon the faceless tax assessment system
The transition of Indian tax administration to a digitised and faceless assessment system, introduced in 2019 by the Narendra Modi government, represented a ground-breaking move toward providing a non-intrusive, non-adversarial tax ecosystem. Spearheaded by the National e-Assessment Centre (NeAC), faceless tax assessments were meant to eliminate human interaction, reduce bias, and improve transparency and efficiency in tax administration. The system promised timely case disposal, team-based assessments, and the standardisation of procedures, offering a streamlined and fairer approach for taxpayers across the country.
The elementary difference was that in the older manual assessments, the mode of the interface was physical and personal, whereas the 'faceless assessment', true to its name, is electronic, minimising chances of corruption. However, while the new system has clear advantages, large taxpayers say they face significant hurdles in adapting to it. Experts argue that these challenges not only complicate compliance but also undermine the system’s effectiveness in ensuring equitable tax administration.
Key challenges
One of the most pressing issues with faceless assessments is the difficulty in handling extensive volumes of data submitted by large taxpayers. Rajat Mohan, Partner at AMRG & Associates, explains: “Officers often struggle to analyse extensive financial records submitted by businesses, leading to delays and errors.” In some cases, overwhelmed assessing officers resort to arbitrary rejections of claims, which results in inflated tax demands.
Vivek Jalan, Partner at Tax Connect Advisory Services, points out that the lack of real-time interaction exacerbates these challenges. “A large taxpayer may have more than 10,000 creditor ledgers, and even if submitted, it is practically impossible for the officer to understand it unless one explains,” he said. This inability to clarify complex issues in person leads to unfavourable outcomes and creates friction between taxpayers and the tax administration.
Technical challenges within the faceless system further complicate compliance. Taxpayers frequently face system downtimes, slow processing speeds, and stringent file-size limits for document uploads. “Whenever taxpayers need to upload supporting documents that exceed the portal’s file size limits, it leads to splitting the data and prevents the submission of essential evidence, resulting in disallowances and adverse decisions,” Mohan notes. Additionally, strict deadlines imposed by the tax department often leave taxpayers scrambling to submit detailed responses.
The rigidity in granting deadline extensions further complicates the issue. Mohan highlights that such inflexibility often forces taxpayers to file appeals, which are both costly and time-consuming.
S. Sriram, Partner at Lakshmikumaran & Sridharan Attorneys, points out that the current restriction to a single virtual hearing for tax assessments poses challenges for businesses with complex structures, as they often require more detailed discussions to adequately convey their positions and clarify intricate financial arrangements.
Also, in some cases, it has been observed that an email/message is not sent to the taxpayer after a notice has been uploaded online, which results in the taxpayer missing the timeline to respond, says Akhil Chandna, Partner at Grant Thornton Bharat.
"Additionally, certain matters are still not completely covered under the faceless system, such as rectification requests which are practically not getting resolved through faceless mode and the taxpayers are approaching the jurisdictional officers for such rectification requests," says Chandna.
A growing line of appeals
The pendency of appeals has also increased significantly pursuant to the faceless appeals regime.
According to the "Central Action Plan 2024-25" report of Central Board of Direct Taxes (CBDT), the number of appeals still pending has gone up from 458,015 in 2020-21 to an estimated 516,484 in 2023-24. This means more people are waiting for their cases to be resolved.
That line is only growing longer with more new appeals being filed every year. In 2020-21, there were 47,752 new appeals. By 2023-24, this number has increased significantly to 144,064. Notably, the number of appeals resolved has also increased. From 40,931 appeals resolved in 2020-21, the CBDT managed to dispose of 111,506 appeals by 2023-24. While the CBDT is successfully resolving more appeals each year, the overall number of pending appeals is still on the rise, indicating a need for continued focus on improving the appeal process.
Building trust, communication channels
To overcome these issues, experts advocate for several improvements to the faceless tax assessment system. Key suggestions include enhancing communication channels, introducing flexibility in deadlines, and allowing taxpayers the option to request manual assessments for complex cases. Sriram advocates for allowing multiple virtual hearings or providing the option for physical hearings as this would enhance communication and enable businesses to present their cases more thoroughly, fostering a collaborative environment and building trust between taxpayers and tax authorities. "This flexibility is essential for ensuring fair outcomes and improving compliance, as it acknowledges the diverse needs of different businesses in navigating the tax assessment process," he said.
Jalan suggests prescribing conditions based on which taxpayers can seek to be assessed by Jurisdictional Assessing Officers (JAOs) for manual assessment instead of the faceless system. "Further, the income tax law allows for the conduct of assessment proceedings via video conferencing on request. However, the links for recordings of these sessions have limited validity period and sometimes these links are not even shared with taxpayers. Therefore, we suggest that these recordings be made accessible to the taxpayers on the income tax e-filing portal itself and be available for downloading," Jalan added.
To address technical difficulties, experts also recommend upgrading the e-filing portal’s infrastructure. Chandna emphasises the need for “technological advancements to reduce errors while uploading bulky data, improve the taxpayer notification process, and enhance the video conferencing facility.” He also highlights the importance of establishing dedicated help desks to address grievances promptly.
Counterpoint
CBDT sources concede they are aware of the challenges faced by large taxpayers with complex business structures, but maintain that the faceless assessment system is designed and well-equipped to handle such cases. “The cases are selected for scrutiny or re-opened on the basis of credible information available with the department through third-party reporting. Investigations are conducted after information passes through the test of Risk Management Strategy formulated for such purpose. More than 99 per cent of the returns filed by the taxpayers are accepted without any scrutiny,” an official said.
On increase in appeals since implementation of faceless assessments, the official said these are cases where the taxpayers exercise their right to appeal. “The department respects taxpayers’ right to challenge assessments and interpret laws differently. In a direct tax system, disagreements are inevitable, and taxpayers often prefer to explore all legal options before settling. The department cannot restrict this right and ensure that every taxpayer has access to justice,” the official added.
The tax official said CBDT is also in the process of further strengthening its technological backbone by upgrading the hardware and software such as Income Tax Business Application software (ITBA 2.0), PAN (Permanent Account Number) 2.0, TIN (Taxpayer Identification Number) 2.0 etc.
On the issue of difficulty in resolving rectification requests through the faceless system, the official added that the department conducts regular reviews to continuously monitor the status of disposal of rectifications. “Further, the department is in the process of enabling the assessees to file the applications for rectification of order directly on the e-filing portal, without the need for physically filing the applications before the Assessing Officer. On filing the applications on the portal, work items before the Assessing Officers would be created in the system. Thus, the delays attendant on the physical mode of filing applications would be eliminated,” he added.
"The Faceless Assessment Regime is a laudable initiative by the government to bring in more transparency in assessment proceedings and save time and costs in administrative matters," said Chetan Daga, Managing Partner at AdvantEdge Consulting. “Like every new initiative, the faceless assessment has some teething issues that needs to be sorted out through active dialogue and feedback between the taxpayer and the tax administration.”
[The Business Standard]
