Context: PM Narendra Modi, last week launched the platform for 'Transparent Taxation – Honoring the Honest' aimed at easing compliance and expediting refunds, benefiting honest taxpayers. Three main features of the platform are faceless assessment, faceless appeal and taxpayers' charter. The PM said focus is on making the tax system people-centric and public friendly, “banking the unbanked, securing the unsecured, funding the unfunded and honoring the honest". According to the PM, the four factors responsible for changes in the taxation system were policy-driven governance, belief in people's honesty, the use of advanced technology and efficiency in bureaucracy. 

About the Transparent Taxation Platform:

• It is aimed at bringing transparency in income tax systems and empowering taxpayers.
• The main features of the platform are faceless assessment, faceless appeal and taxpayer charter.
• The faceless assessment and taxpayer charter will come into place immediately from the launch, while the faceless appeal is going to be applicable from 25th September 2020.

Faceless Assessment

• Under faceless assessment, the scrutiny of returns of a taxpayer will be done by a tax officer selected at random and not necessarily from the same jurisdiction. 
• This will do away the need for any face-to-face contact between the taxpayer and tax official, thereby reducing the chances of coercion and rent-seeking. 
• The move is expected to ease the compliance burden for assessees and reward the “honest taxpayer”, who plays a big role in nation-building. 
• A faceless tax system would give the taxpayer confidence on fairness and fearlessness. 
• It helps to maintain the privacy and confidentiality of income taxpayers.
• The assessment system seeks to eliminate corrupt practices by doing away with the territorial jurisdiction of income-tax offices.

Faceless appeal facility

• This facility would be available to all citizens from September 25 (Deen Dayal Upadhyaya’s birth anniversary)
• A faceless appeal system would allow the taxpayer to appeal against a tax official’s decision without the need of making a physical representation.

Taxpayers’ charter

• The taxpayers’ charter was announced in the Union Budget for fiscal year 2020-21 by the Finance Minister. 
• The charter outlines the rights and duties of an honest taxpayer. 
• It also defines the commitment of the tax department and the expectations from the taxpayers.
• It is a step towards bringing together rights and duties of the taxpayer and fixing the government’s responsibilities towards the taxpayer

Taxation System in India

• Direct taxes – A tax that is paid directly by an individual or organization to the imposing entity (generally government) and it cannot be shifted to another individual or entity. The Central Board of Direct Taxes (CBDT) is the authority that looks after the administration of laws related to direct taxes through the Department of Income Tax.
• Indirect taxes – An indirect tax (such as sales tax, a specific tax, value-added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

Constitutional Provisions Pertaining to taxation in India

• Art 265 states that no tax shall be levied or collected except by the authority of law. It means that whatever tax is being charged has to be backed by the law passed by parliament or state legislatures. In other words, no tax can be levied if it is not backed by legislation passed by either Parliament or state legislatures. Any tax levied by the government which is not backed by law or is beyond the powers of the legislating authority may be struck down as unconstitutional.  
• The 73rd and 74th constitutional amendment act have provisions to levy taxes by panchayata and Municipalities respectively. A State may by law authorise a Panchayat (or Municipality) to levy, collect and appropriate taxes, duties, tolls etc.

Types of Direct taxes

• Income Tax : According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. It is a direct tax. It is progressive in nature.
• Corporate Tax: Corporation tax is a direct tax imposed on the net income or profit of the companies. Companies, both public and privately registered in India under the Companies Act 1956, are liable to pay corporation tax. This tax is levied at a specific rate according to the provisions of the Income Tax Act, 1961.
• Dividend Distribution Tax (DDT): Companies distribute dividends out of their profits to their shareholders. The tax which is levied on this dividend is called Dividend Distribution tax (DDT). It is levied in addition to income tax.
• Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits. 

Merits of Direct Tax

• Progressive Tax: related to ability to pay principle. So an important tool to reduce inequalities of income and wealth.
• Elasticity: A direct tax can be varied according to the needs of the government as well as according to the changes in the income of the people. For example – if the income of the people rises, the government may increase the direct tax and vice versa. 
• Certainty: A person liable to pay direct tax knows with certainty how much he has to pay and when he has to pay
• Equity: It is generally progressive (based on ability to pay principle). Through it rich people can be made to pay more taxes than poor.Similarly, in case of necessity, low income group people can be given relaxation and the super rich can be made to pay more. Thus, an important tool to reduce income inequalities.

It is an important tool in Fiscal policy of the government. For example – In case of high inflation, the government may increase the direct tax rate to reduce money in the hands of people so as to bring down the consumer demand. Similarly, to boost demand and improve employment, the government can reduce rates of direct tax.
Demerits of Direct tax

• Tax Evasion: People try to evade direct taxes by using different means (such as submitting false returns, etc). Thus it is also prone to excessive litigation. For example – Government has come out with Direct Tax Vivad se Vishwas Bill 2020, to provide for a mechanism for resolution of pending tax disputes related to income tax and corporation taxes
• Disincentive to work: Direct tax may be disincentive to work. In case of high direct tax rate, a large part of the income earned will be given to the government in the form of taxation. Thus It may disincentive people to work hard. It may reduce people’s willingness to work. Further, high direct tax may act as hurdle to Foreign Direct Investment to the country.
• Sectoral Imbalance: Certain sectors such as corporate sector is heavily taxed. Whereas, agriculture sector is tax free. Even rich farmers are exempted from personal income tax.

Other Recent Direct Tax Reforms

• The Central Board of Direct Taxes (CBDT) has carried out several major tax reforms in direct taxes in recent years. The focus of the tax reforms has been on reduction in tax rates and on simplification of direct tax laws.
• Corporate Tax rates were reduced from 30% to 22% in 2019. For new manufacturing units the corporate tax rates were reduced to 15%.
• Dividend Distribution Tax was also abolished in 2019.
• The CBDT has also taken several initiatives for bringing in efficiency and transparency in the functioning of the Income Tax (IT) Department, such as:
• Bringing more transparency in official communication through the newly introduced Document Identification Number (DIN) wherein every communication of the Department would carry a computer generated unique document identification number.
• Pre-filing income tax returns to increase the ease of compliance for taxpayers and to make compliance more convenient for individual taxpayers.
• Direct Tax Vivad se Vishwas Act, 2020 to provide for resolution of pending tax disputes.

Road Ahead

• All these above reforms are likely to empower citizens by ensuring time-bound services by the Income Tax Department. PM appealed to those not paying taxes, despite having the ability, to come forward and commit themselves to the cause of making the country self-reliant.