There is an elaborate system of tax administration devised by the Income-tax Act, 1961 with hierarchy of authorities named in Section 116 in Chapter XIII of the Act entrusted with wide powers exercisable by the income-tax authorities without undue interference even by the CBDT which is at the apex of the income-tax authorities. This gives a wide scope to the income-tax authorities, amongst whom the Commissioners and Commissioners (Appellate) hold important ranks, to discharge their functions without interference in the best interest of the Revenue as well as the tax payers. Though the authorities are vested with the powers to enforce effective tax collection, the power is circumscribed by the usual legal restraints that check its arbitrary or malafide exercise.

II. Constitutional Perspective :

              The complexity of the provisions of the Income-Tax Act demands that only persons well versed and meritorious in the taxation field should be at the helm of affairs, not to mention absolute integrity which should be a common minimum factor expected of all the functionaries under the Act. The foremost requirement in tax enforcement is to keep oneself alive to the Constitutional perspective of tax enforcement. Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by the authority of law. An executive order or instruction cannot, therefore, justify an imposition. The rule against arbitrariness firmly embedded in the concept of rule of law enshrined in Article 14 of the Constitution should, in the context of tax compliance, keep at bay bias against tax payers to ensure that honest tax payers are spared of arbitrary inquisition. Though the people through their elected representatives, in a democratic set-up, choose to adopt laws having coercive measures for tax collection by constitutional consensus so that the fraudsters and cheats do not thrive at the cost of honest tax payers, there is a possibility, lingering in tax enforcement, of honest tax payers being subjected to unfair application of the coercive powers due to (i) complexity of the tax law resulting in failure of compliance, (ii) errors committed by the income-tax authorities in enforcing the laws and (iii) unscientific audit decisions or lack of proper audit policy, making even honest attempts to comply with the tax law insufficient to avoid interaction with the income-tax authorities. While at political level, the imposition and rates of taxes are controlled by political factors which affect the determination of tax policy, at enforcement level, the tax payer is at the mercy of the tax authorities which machinery may be coercively used to gain in revenue collection what is lost in the political bargains. The Constitutional imperative against arbitrariness to ensure just and fair exercise of powers should, therefore, inform exercise of all powers under the Act. This will ensure that the department does not get involved in avoidable legal disputes and the system does not create a need for action against the employees of the department who violate tax payers' rights.

III. Integrated Financial Management System :

              External loans and grants from international organizations carry strict conditions that tend to influence the economic and fiscal policies of the recipient nations, resulting in loss of freedom in making independent fiscal choices. Developing countries and economies in transition have seen a need to re-orient their tax systems and strengthen their administrative capabilities for revenue estimation, tax collection and tax administration. An effective tax structure should be based on the principles of efficiency and equity. These must be balanced to avoid loss of investment and social displacements. A broad-based tax system is considered to be both efficient and equitable. As a part of an integrated financial management system, an effective tax administration should have the following features :

    (i)  tax simplification,
    (ii) strategic reform in revenue source identification and collection techniques,
    (iii) high-level commitment to reform,
    (iv) proper public perception of taxation,
    (v)  technical competence, and
    (vi) impartial and efficient enforcement.

(See Report of the Secretary General E/1997/86 U.N. Programme in Public Administration and Finance (13th Meeting of Group of Experts).

IV. Essential Elements For Reforms :

              Any tax administration reform project has to be rated as highly risky if the general reform commitment from senior management and government cannot be secured. Tax administration processes are interdependent. An improvement in the audit selection process will have limited impact on tax revenues, if the collection function of the tax administration is not efficiently performing. A comprehensive reforms approach is essential for improved efficiency and effectiveness of tax administration. In the IMF Working Paper on the Reform of Tax Administration (WP/95/22 - Vito Tanzi and Anthony Pellechio), six essential elements required for tax administration reform are identified. These are :

    (i)  an explicit and sustained political commitment;
    (ii) a team of capable, hardworking officials dedicated full-time to tax admin. reforms;
    (iii) a well-defined and appropriate strategy;
    (iv) relevant training for staff;
    (v)  additional resources for the tax administration, and
    (vi) changes in incentives for both tax payers and tax administrators.

V. Enforcement :

              Tax revenue would depend upon the provisions of the tax code as well as the tax collection efforts. The tax enforcement policy is contained in the Act itself which has elaborate and complex tax base and collection provisions. The enforcement provisions which constitute a small part of the entire taxing statute tend to lose their importance and significance which can be assured by a separate enactment dealing with tax enforcement policy. The tax enforcement measures separately enacted would also afford an opportunity to the taxpayers to notice changes that may be made in the enactment which tend to go unnoticed whenever periodic changes are made in the taxing statute. There is low rate of voluntary compliance of the provisions of the income-tax law causing serious concerns to tax administration in many developing countries. Lack of proper reforms and strategies would tend to lower voluntary compliance and result in improper and faulty enforcement. Improvement in the economic condition of the people, commercial and industrial growth, the broadening of the base to bring in the net more tax-payers and other factors have increased the workload of the tax authorities at all levels of the units of administration. There has been some criticism that increasing revenues of tax compliance does not seem to be a significant priority for most senior officials. (See "Tax Administration Reform And Tax-Payer Compliance in India : Theory and Empirics" by Arindam Das-Gupta, Shanto Ghosh and Dilip Mookherjee).

VI. Audit Strategy :

              There is a need to adopt a proper audit strategy to decide the type of returns that should be picked up for scrutiny assessments and those which can be summarily assessed. There are useful indicators for this in Chapter XIV of the Act dealing with "Procedure for Assessment" which include inquiry before assessment under Section 142 and assessment under Section 143. Section 143(1) contemplates proceedings "on the basis of" the return made under Section 139 or Section 142(1); but sub-sections (2) and (3) of Section 143 give the indicators where scrutiny assessment is to be made. Scrutiny assessment will be justified only when there is reason to believe that the claim made in the return is inadmissible, or the Assessment Officer considers it necessary or expedient to ensure that income is not understated, excessive loss is not computed or tax is not underpaid. The increase in workload and need for efficient and speedy recovery system would make it impossible to achieve the desired results by manual scrutiny of each and every return of the tax payers. Therefore, methods should be devised to identify which returns to audit. Rigorous audit strategy spotting the defaults and designs resulting in tax evasion, and aimed at minimum interference with the honest tax payers would be a hallmark of good tax administration. Currently, in the U.S., Internal Revenue Service (IRS) calculates a scoring formula for each return and uses it as one of the criteria to determine which return to audit. (see "Evaluating the Effect of Sample Size Changes on Scoring System Performance using Bootstraps and Random Samples", Paper presented by William Wong and Chih - Chin Ho, Internal Revenue Service, at the `2002 American Statistical Association'). A scoring formula is derived from a stratified random audit sample and the score is one of the criteria used to determine whom to audit. A large size audit sample would yield a scoring formula that would increase the amount of revenue obtained from audits and decrease the burden of auditing those who filed their returns accurately. However, too large an audit sample would be self-defeating, since selection of many returns for the audit sample would not result in more revenue from the sample and would increase the audit burden on those selected, because, no one likes to be audited, when an accurate return is filed. A systematic study of the audited returns would identify the returns that exceed minimum threshold discrepancy between the reported and audited tax amounts.

VII. Statistical Data :

              For a proper insight into the types and causes of discrepancies between the reported and audited tax amounts in the audited returns, there would be need to maintain statistics to ascertain income-tax data. Following the passage of the Revenue Act of 1916 in the U.S., the I.R.S. began "Statistics of Income Program" (SOI), for annual publication of statistics. The SOI Division of the I.R.S. offers income-tax data in electronic format. These include individual tax-payer data by geographical area, such as, individual income and tax data by State and size of adjusted gross income; county income data; county-to-county migration data; State-to-State migration data; ZIP Code area data. The Individual Income and Tax Data by State and Size of Adjusted Gross Income for a particular period presented tables showing aggregate of all returns filed and processed through IRS"s Individual Master File System. The tables are made available through the IRS website. Some of the 57 income and tax categories reported on the individual income-tax data by State Tables are, number of returns, number of exemptions, adjusted gross income (total and components), total itemized deductions (total and components), total credits (total and components, including the earned income credit and the child care credit), and tax liability, taxes due and overpayments. The Locality Data would show how trends in population, income, financial markets and even a City's likelihood to attract and retain residents can be tracked. (See paper on "Electronic dissemination of Internal Revenue Service Locality Data", presented by Emily Gross and Beth Kilss, Internal Revenue Service, at the "2002 American Statistical Association"). If the required data is maintained and is easily accessible to the users, tax payers' compliance can be measured on its basis, and difference between taxes owed and taxes voluntarily reported can be estimated. From the returns that have been audited, the aggregate level of non-compliance may be computed directly by summing the relevant adjustments on each return. In order to estimate the magnitude of under reporting on returns that have not been audited, it would be necessary to predict the magnitude of the adjustments that would have been made if the returns had been audited. An efficient data maintenance and auditing function would promote sound administration of the nation's tax laws by conducting comprehensive, performance and financial audits to assess efficiency, economy and accomplishments of the operations, ensure compliance with applicable laws and regulations and prevent, detect, and deter fraud, waste and abuse. The department should continually strive to achieve these tasks while maintaining the highest level of integrity and assuring tax payer privacy, and to ensure that all parts of the tax paying public pay the proper amount of tax.

VIII. Quality of Service :

              There has to be a process by which quality among services that the Income-tax Department provides to tax payer can be measured. The most obvious mirror to know the quality of its service for the Income-tax Department would be the tax payers themselves. The simplest system of quality review was to seek response to "mock" questions to determine the quality of service taxpayers received. This could be done by the trained reviewers making telephonic inquiries from the ITD by posing questions prepared beforehand for the purpose of the study. The reviewers would then rate the quality and accuracy of information provided by the department to them in response to their queries. The artificiality of this process was its major flaw, because, the quality reviewers would be assessing the responses to fictitious questions. Even in the method of reviewer remaining present when the departmental officer attending to consumer service was attending the tax-payer's call for help or information, the response of such departmental representative to the tax-payer would be modified due to the presence of the reviewer, and would not be the correct indicator of his response when the taxpayer's call is not monitored and response is not watched. In the U.S., the IRS has developed a process by which quality among services provided by the IRS to the tax-payer is measured. Telephone review process is adopted through remote monitoring from a centralized site where deficiencies would be recorded on a single, universal data base. In remote monitoring a quality reviewer who is a trained expert, can tap into a telephone line to listen to the conversation between the tax-payer and the departmental representative whom he calls, without their being specifically notified about such review, though both the taxpayer and the representative know that any call is subject to quality review. The IRS has a goal to institute call recording based in the SOI sampling plan in which calls would be selected and recorded at the Centralized Quality Review System site and reviewed at later time so that the quality reviewers could work normal hours and the call recording system would record live calls across the operational hours. In order to enable the tax-payers to have a proper access to the administration for resolving their problems and getting assistance towards the discharge of their statutory obligations, procedures can be developed under which to the extent practicable, a taxpayer's matter is handled by the same employee until it is resolved, and the taxpayer may be given unique identifying number of the employee of the department with whom the tax-payer can contact telephonically or in person for information and departmental assistance. In Australian Taxation office there is a scheme known as `Tax Help' that works with relevant community organizations to ensure that taxpayers are given assistance to fill out their tax returns and understand their tax obligations. Strategies should be developed to improve access to relevant information for all taxpayers. That may go a long way in refurbishing the image of the tax administrators.

IX. Conclusion :

              There is an urgent need to update the administrative approaches to cope up with the ever increasing workload of the income-tax department. Computerization of tax administrations is an important tool to improve efficiency. Availability of statistical data on the lines of S.O.I. and adoption of proper audit strategy call for continuous efforts by highly specialized personnel. A separate reform wing can be set up to prepare and assess the data for each unit of administration and to make a scientific study of tax compliance and tax-gap levels from the audited returns and the deviant behaviour of the tax-payers who tried to escape their liability, with a view to work out the parameters that can generally guide in the process of selecting the returns for audit which are likely to have disclosed income lower than what would be liable to tax. There should be regular monitoring of the quality of service provided by the employees of the department, and, providing better service to tax-payers should be the key concept behind the Department's plans to modernize the service. An anti-corruption strategy can be developed and implemented on priority basis to ensure that the reform strategy does not fail due to corruption that may be gnawing the revenue administration.

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