The faceless audit system is well-intentioned, but its execution lacks finesse.
In this world, nothing can be said to be certain, except death and taxes, said Benjamin Franklin, American founding father, whose fame for this phrase competes with that for his visage adorning the hundred-dollar bill. Franklin knew a thing or two about electricity, running a newspaper, being an ambassador for his country, and the postal system, which he presided over. But he was presumptuous about the certainty of taxes, particularly in India.
In India, a company pays taxes in advance, files its returns and waits for the tax department’s audit. Even before Vinod Rai put, as Comptroller and Auditor General of India, the fear of God in anyone who dared cause a loss to the exchequer, the taxman was conditioned to demand additional taxes, over and above what the company had filed in its return. Before 2020, this led to several rounds of meetings between the taxman and the company’s chartered accountant, a certain level, and kind, of give and take, and eventual finalising of the company’s taxes. In 2020, the government introduced faceless audit, hailed as revolutionary by industry.
Now, the faceless audit is preceded by Computer Aided Scrutiny Selection. Not everyone is blessed with the taxman’s special attention. Only those chosen by that arbiter of modern existence, an algorithm of some description or the other, is destined for this privilege. And when chosen for scrutiny, the company’s interaction with the taxman is faceless: anonymous, based on documents and remote discussion, without scope for personal interaction or personal give and take. This, indeed, is most welcome.
However, the literal meaning of revolutionary has to do with going round in circles. This revolving exercise does not have a swift or happy ending, either – thanks to the faceless remoteness of the interaction between the taxman and the chartered accountant.
Two kinds of problems come up. India is up there with the advanced world, when it comes to audit standards. Having near-identical standards does not translate into uniform styles of presentation. How the accounts are presented in SAP would differ from how the same accounts look for a company that relies on Oracle for its enterprise resource planning software. These would look different, again, in the style of home-grown Tally.
Large multinational companies, Indian or foreign, would use an offering from one of the larger ERP software providers, SAP, Oracle, Microsoft and a few others. Taxmen from our major cities, who habitually look at the accounts of big companies, would be familiar with the different presentation formats of these different ERP providers. But not necessarily those from smaller towns.
The trouble is that the taxmen selected for faceless audits for large companies are not necessarily drawn from the metropolitan circles. A company could land with a taxman from Lucknow or the Kerala Circle. Incomprehension would lead to endless queries, delays, frustration and extended prevarication. The solution? Restrict allocation of large accounts to taxmen from large cities for faceless audit, while undertaking extensive training of all taxmen on all styles of accounts presentation.
Improve The Review Process
Another problem is the delay in taking up a return for review. Often, the axe would fall shortly before expiry of the deadline for review. A summary notice would be shot off by the taxman, extending the period of review and finalisation.
By the time the company files its reply, answering every query raised by the taxman, the officer who raised the query might well have been transferred out. His replacement would take his time to wrap his head around the queries and the answers. Yet more delay, in other words.
There could be two kinds of reasons for taxmen putting off scrutiny of the files under their charge till the last moment. Either they are too few, and handle more accounts than they can efficiently manage. Or the system of supervising taxmen and holding them to account for deviating from their expected standards of performance is badly deficient. Either way, companies all geared up to celebrate the faceless audit system end up like Indian fans at the ICC World Cup finals this year at Ahmedabad.
The faceless audit system is well-intentioned, but its execution lacks finesse. A mountaineer might make a bold leap over a crevasse, and fellow climbers might applaud. However, if the leap is not long enough to carry him over to the other side, the result would be disaster, however courageous the decision or however graceful the takeoff.
There is no excuse whatsoever, in a country of millions of eligible jobseekers, for a vital government department like direct taxes to go understaffed. Given the intent to improve ease of doing business and ease of tax compliance, there is no excuse for not instituting either proper training or work supervision of the taxmen.
India needs faceless audit, but faceless audit must, as it were, have a humane, functional institutional framework, and not leave tax-filing companies to struggle against a wall of impenetrable incomprehension.
TK Arun is a senior journalist based in New Delhi
This article was first published in the Money Control on November 23, 2023 as Faceless audit needs a human face
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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