Faceless Tax Assessment
Dr. Subhash Chandra Pandey
Date : 03 October, 2020
Progressive whittling down the physical interface between the tax officials and the taxable entities has been part of tax reforms agenda for long. It reduces the scope of harassment of taxpayers and corruption and also the cost of tax collection, leaving more resources to the government.
Statutory requirements have been progressively imposed on banks etc. to share more and more information through Annual Information Returns. Requirements of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are ever increasing. The TDS/TCS/AAR systems institute systemic controls on tax evasion and reduce the need of ‘raid raj’ – search and seizure. With increasing digitalisation of banking and financial services and the demonetisation forcing unaccounted cash to be routed through bank accounts, there are more digital trails than ever before of money flow trackable by tax authorities.
More than 90% income tax is collected through voluntary compliance by the taxpayers who are forced, through a combination of technology and psychology, not to try evading due taxes. A major milestone in whittling down the physical interface was announced on 13 August 2020: Near universal FACELESS assessment and appeal by the Income Tax Department.
At present, every assessee is ‘assigned’ to a particular jurisdictional officer of income tax department. His office maintains full file and case history and he may theoretically select any tax return to conduct detailed scrutiny but not anymore.
Bulk of the income tax returns are filed online. The returns for detailed scrutiny are selected, based on a risk-based profiling of returns – aided by any intelligence the department may have or linking with annual information returns etc. Subjectivity cannot be entirely ruled out but nevertheless a computer system can pick up a risk-based random sample of returns according to some program logic for detailed scrutiny. The scrutiny of tax return (whether on self-assessment basis or after receiving a notice from the tax department) could now be randomly assigned to ANY officer in a double blind manner. ITR will be made available for scrutiny after anonymising the identity of the taxpayer. The taxpayer does not know who is scrutinising the return and the scrutiniser does not known whose return he is scrutinising. Such ‘double blind’ scrutiny is gaining currency in several areas. All queries and replies to/from assesse under scrutiny will be routed through IT centres.
The e-assessment scheme was proposed in Budget 2019-20 and launched as a pilot project in October 2019. Only such cases were selected where the taxpayer had failed to file IT return on his own and filed it only on receiving a notice. 58,322 cases were selected for scrutiny assessment for AY 2018-19. The tax department has disposed of about 14 per cent of these cases.
From 13 August 2020, the pilot scheme has been restructured / expanded with access through a dedicated web portal having three elements: ‘faceless assessments’, ‘faceless appeal’ and ‘taxpayer charter’.
Under faceless assessment, all correspondence with the taxpayer during assessment phase takes place only through electronic means. There is no physical, face-to-face meeting with taxpayer or his lawyer/accountant/representative. Recorded video conferencing is permitted in some special circumstances. Similarly, appeals by taxpayers are be allotted to any officer randomly on all-India basis and his identity would not be known to the taxpayer. Faceless appeals will start from 25th September 2020. Therefore, the scope of any deal-making in assessment-appeal is eliminated. Of course, once the assessment is completed electronically, the case would then be transferred to the jurisdictional Assessing Officer for follow-up action.
Now almost ALL assessments selected for scrutiny would go through e-assessments except certain special categories. The faceless assessment/appeal will not apply in cases of serious frauds, major tax evasion detected during search and seizure, cases under Black Money Act or Benami Property Act. In these cases, deeper knowledge about the taxpayer is needed by the department.
By the time the normal last date of filing income tax returns (ITRs) for AY 2019-20 lapsed on 31st August 2019, over 5.65 crore ITRs had been filed for AY 2019-20 as against 5.42 crore ITRs filed for AY 2018-19 and 5.47 crore ITRs for AY 2017-18. Out of the 5.65 crore ITRs filed for AY 2019-20, 3.61 crores had been verified including about 2.86 crores through e-verification, mostly using Aadhaar OTP. Since the deadline for filing belated or revised ITRs for AY 2019-20 (with penalty) ended on September 30, 2020, final tally of ITRs filed for AY 2019-20 is not yet known. The CBDT has been relying more and more on the honesty of ITR filers. Every income tax return filed is not scrutinized. Earlier, the departmental officers had wider discretion in selecting a return for scrutiny. That discretion is being slowly reduced after it has emerged that the discretion is sometimes abused to harass particular tax payers. Now except for some special cases which come to department’s notice through special information channels, random selection of ordinary ITRs has been computerized.
The percentage of ITRs selected for scrutiny has being reduced. The percentage of total ITRs selected for scrutiny was 0.71% in AY 2015-16, 0.4% AY 2016-17, 0.55 per cent in AY 2017-18 and only 0.25% in AY 2018-19. The number of ITR files has increased by about 2.5 crores in the last 6-7 years but only 1.5 crore people pay tax. The tax department has to be vigilant for fake NIL filers who act as proxy for others. (The income may be split across a number of dummy / benami filers, each within tax exemption limit.)
Taxpayers are being educated about the need for linking their bank account with PAN to ensure direct credit of refund to taxpayer bank account through ECS and the requirement for linking PAN with Aadhaar. The CBDT has been doing great work in facilitating electronic filing, including provision of pre-filled auto-populated data though some problems remain with online utilities.
Government has also taken some other taxpayer friendly measures like increasing the monetary limits for income tax department filing appeals against orders in favor of tax payer. For appeals in Supreme Court, this limits has been revised from Rs.1 crore to Rs. 2 crores; for appeal in High Courts from Rs.50 lakhs to Rs.100 lakhs and for appeal before ITAT from Rs. 20 lakhs to Rs. 50 lakhs.
The harassment of taxpayers through fake, undocumented notices (which can be raised and settled for consideration) has been completely banned. From 1 October 2019, all notices have to come through a central electronic repository, the Document Identification Number (DIN).
Faceless assessment is a welcome measure but the tax reform agenda is far from over. The tax law is still rather complex, a source of livelihood for lawyers and chartered accountants. A fundamental restructuring going beyond mere tinkering with rates and slabs is long overdue.
A beginning has been made by offering lower tax rate to those individuals and corporates who choose to forego certain exemptions. The resulting complexity is temporary and hopefully the process of rationalization of rates and exemptions will get accelerated as soon as the taxpayers give the confidence to the government that the reforms will not lead to depletion of exchequer.
The faceless assessment system marks an important milestone in the long journey of over 20 years in computerization of the income tax department that has incrementally evolved module by module. It started to respond to the administrative problem of handling growing number of paper returns and refunds. Digitization of ITRs and electronic credit of refunds to bank accounts has improved taxpayer facilitation, ended harassment/ corruption and decluttered the departmental workload. Once bulk is taken care of by automatic information capture, CBDT can focus on the high risk tax evasion – getting on corporate transaction trail, shell companies, fraudulent transactions, money laundering, etc.
Non-salary/pension incomes carry higher risk of evasion. Admissibility of allowable deductions and exemptions claimed by businesses and professionals, corporates, LLPs, HUFs, Partnership firms, Societies, Trusts remain a major oversight area. Agriculture income is tax exempt but has to be reported. Siphoning off of taxable corporate profits through questionable business expenses and misuse of the exemptions given to charitable trusts are the other areas of enduring concern.
As more IT systems are linked to PAN/AADHAAR and connectivity of different IT systems improves, we will see CBDT capturing money trail of income, spending and investment. Pre-populated draft ITRs presently capturing salaries, may soon have pre-populated interest/dividend/capital gain data, seamlessly transferred by banks etc. We also wait for the real estate registries get fully automated. The data transfer to the department would be more automatic/ seamless and less dependent on disclosure by assessee.
Once tax base expands, we can hope to see lower rates. Just 1.5 crores paying income tax would not inspire government to fully trust in mere voluntary compliance by taxpayers. The government would like to reduce the tax burden and trust the taxpayers but for this to materialise, potential taxpayers have to match the expectation and not betray the trust. Wilful breach of trust has to invite exemplary punishment. ‘Trust, but occasionally verify’ would continue to be the motto of tax administration.
Festival Offer from Government
Dr. Subhash Chandra Pandey
Date : 15 October, 2020
Recently, Hon. Finance Minister announced two special offers for Central government employees, which she hopes can also be suitably modified and extended for State government employees and availed by even private sector employees in organised sector.
The CG employees can choose to get some ready cash if they forego their LEAVE TRAVEL CONCESSION entitlement for the Block 2018-2020.
In addition, every CG employee, irrespective of rank, is entitled to a prepaid Rupay card loaded with Rs.10000 interest-free advance. Swipe it for any expense by 31/03/2021 (no cash draw) and repay the advance in 10 monthly instalments. No interest, no tax on deemed benefit.
Under LTC scheme, CG employees get reimbursement of the cost of some personal travels undertaken by them and their family members. For civilian employees, it is travel to hometown once in 2 years and to anywhere in India in next block of 2 years. For defence personnel, it is annual hometown and alternative year to anywhere in India in lieu of hometown travel. There are similar provisions of LTC benefit for judicial and legislative branch of the State with different set of entitlements and rules.
The current LTC Block year is 2018-2021. During this 4 calendaryears’ period, a civilian CG employee can avail reimbursement of fare for two travels from his place of duty, one travel in 2018-19 and another in 2020-21. Both travels can be to Hometown or one to Hometown and the other to anywhere in India.
The concession admissible for a particular block of two years, which is not availed during that block, can be availed of in the first year of the next block. So if someone hasn’t availed LTC during Jan 2018-Dec 2019, he can do so by Dec 2020. Likewise, the LTC due for 2020-21 can be availed by Dec 2022, subject to certain conditions.
To promote tourism to remote areas, the government has been allowing employees to use their Hometown LTC to visit specified remote areas and also allowing air travel to these areas to even those employees who are not normally permitted to travel by air at government cost. This has been a hugely popular move.
This special scheme is now extended upto 25th September 2022. Conversion of hometown LTC is allowed for travel to North-Eastern States, Sikkim, Jammu & Kashmir, Ladakh, Andman & Nicobar Islands. Air travel to these destinations is permitted for all employees. Also, such travels in lieu of Hometown LTC are permitted even by private airlines as an exception because normal rule is that a travel at government cost must be by Air India only. (The government servants whose hometown and place of posting is the same are not allowed this conversion.)
Whenever LTC journey is undertaken, government allows 10 days’ earned leave to be encashed. Total 60 days earned leave encashment with LTC is allowed during whole service. Employees get earned leave of 30 days every year and the earned leave not availed cannot be accumulated beyond 300 days.]
The Finance Minister has announced that an employee can choose not to travel on LTC for block year 2018-21 and instead get some tax-free cash in lieu.
Cat I/II/III employees entitled for business class air travel/economy class air travel/Rail travel will get upto Rs.36000, Rs.20,000 and Rs.6000, respectively for each family member who foregoes one LTC subject to following conditions.
The employee must produce proof of having spent Rs.108,000/Rs.60,000/Rs.18,000 by 31/03/2021 through digital means on buying GST-invoiced goods/services with minimum GST of 12%.
The employee must also produce proof of having spent the entire amount of 10 days earned leave by 31/03/2021 through digital means on buying GST-invoiced goods/services with minimum GST of 12%.
Less spending means pro rata cut in actual cash benefit to be disbursed.
Most processed/packaged food items, healthcare/medicinal, toiletries, cosmetics items attract 12% GST. Telecom services bills, insurance premia both life insurance and general insurance, ULIPs etc. attract 18% GST. Then of course there are addictive ‘sin goods’ in high GST bracket. So even without buying any expensive white goods/gadget/car, it should be possible – except for some very frugal living souls – to produce eligible GST invoices for monthly average spending of less than Rs 21600/12000/3600 for Cat I/II/III employees from now to March 2021. The few who might struggle to get sufficient invoices may buy stuff for others. Petty invoices don’t even carry buyer name and there are limits to how many checks can be there to check misuse.
There have been intermittent suggestions in the past that the government should give some lumpsum cash in lieu of LTC benefit and save itself the hassle of processing the LTC claims, not all of them are genuine. Long ago, many employees in an office were found to have submitted fake LTC claims for long distance travel by road. The travel was actually not performed as there was no entry of the quoted private bus have crossed various toll booths. Dozens were dismissed from service in severe disciplinary action. After that the government made a rule that road travel by private bus will not be eligible for LTC reimbursement. Cases of LTC claims based on fake air travel – some even by high public functionaries – forced some offices to introduce provision for submission of proofs of actual travel in case of air travel like some photographs etc, all of which can also be manipulated in this age of technology. It was found that LTC claims were processed on tickets that were later cancelled.
Some private airlines used to misuse the LTC to include even hotel stay etc. in packaged fare because only ‘fare’ is reimbursed. All other costs of boarding/lodging at destination is expected to be borne by employees. To overcome this fraud, government introduced standard LTC fares and restricted travel to Air India only (except for North East etc.).
Frauds by a few dishonest end up making life miserable for everyone with stricter regulations. Checking LTC fraud is an administrative hassle and some argue that it is better to unconditionally give cash in lieu of LTC. So far, this argument has not carried weight for two reasons.
Firstly, the government wants employees to rejuvenate themselves through travel and promote domestic tourism. Secondly, LTC is not availed by everyone. There are many who don’t find time and many others who find that they cant afford non-fare expenses entailed by travel. If government decides to give cash in lieu of LTC, it would give to everyone, even to those who would have not availed LTC on their own. For them, cash equivalent is a bonanza.
Central government hopes that the State governments and private sector will take a cue and offer similar schemes with Centre promising not to tax the cash equivalent of LTC. Many States limit their LTC scheme to travel within the State and so the financial impact would also be limited.
For private sector employees, tax concession on Leave Travel Allowance can be a big incentive. All they have to do is to produce GST invoices (min 12% GST) for 3 times LTA. Spending 3 times LTA by March 2021 may not be burdensome for most. Typically, LTA is equal to one month’s salary and so one is being asked to spend 3 months’ salary by March to save income tax on LTA. Of course, there is option for buying for others. Governments put riders and creative minds invent workarounds. Invoices of online orders have to guarded against refund/cancellation.
Giving cash in lieu of LTC or giving tax concession on LTA subject to certain minimum spending of certain type will certainly boost short-term consumption demand. Some of it would be mere displacement of expenditure that would have happened with or without the concession. This surrender outbound LTC travel till December 2022 would negatively impact travel/tourism. It is a demand swap; present with future, FMCG with travel/tourism.
NEP 2020 : A Battle Half-won
Dr. Anju Srivastava
Date : 18 October, 2020
The education system of a country is entrusted with the responsibility of producing talented and well-trained humans with good values, who contribute in the growth and development of society with passion and vigour. Education and development are inseparable. Only a robust system of education can help achieve multi-fold economic growth. At the same time, the value of the education system lies well beyond economic growth – it promises to transform individuals and make an inclusive, fair, prosperous and healthy society. As Nelson Mandela said, “the power of education extends beyond the development of skills we need for economic success. It can contribute to nation-building and reconciliation”.
Macaulayism, the process of introducing English education to erstwhile British colonies, had the most lasting imprint on the Indian education system, since several artifacts of this system remained in place post-independence. While we have seen reforms in Indian education over time, it is clear that the influence of Thomas Babinton Macaulay has been a fixture. A system where rote-learning and memorization is rewarded cannot produce human capital. In spite of having more than a thousand universities and forty thousand colleges, not one of our institutions features in the top 100 worldwide.
For the first time in the twenty-first century, the Government of India has released a National Education Policy (NEP). This policy has been long overdue, given that the last one was formulated in 1986. This NEP promises to bring progressive long-lasting changes, and to restore ethos of cultural and community pride in the coming years. The final sixty-three page document distilled from a five-hundred page draft has been formulated after incorporating feedback from 2.5 lakh village level stakeholders, two parliament committees, workshops and conferences to ensure a participatory and consultative process over the last couple of years. The policy represents a blend of modern thinking and traditional ideas, and makes for a sincere effort to reform the system.
The policy envisions a paradigm shift in the education system encompassing a revamp of all aspects of education from school to higher education. The design of its framework is deeply rooted in Indian ethos and emphasizes holistic development that would empower the country to compete with the best in the world. It also aims to address issues of institutional regulations and quality control.
One of the most welcome features of the new policy is the attempt to universalize early childhood education and foundational learning (3-8 years). National Council for Education Research and Training (NCERT), for the first time, has been assigned the job to develop a curriculum for children in the age group of 3-5 years. This pre-school training will be part of the formal school education and is a step in the right direction as these are the most formative years, crucial for the development of the mental faculties of a child. The effort to bolster early childhood education will be a collaboration between the ministries of Education, Women and Child Development, Health and Family Welfare, and Tribal Affairs. The curriculum and pedagogy when executed with flexibility, with a focus on strengthening basic literacy and numeracy skills, will curb drop out rates and raise academic achievement in the long run.
The school curriculum for Preparatory Stage (Grades 3-5, covering ages 8-11 years) has been designed to include flexibility and experiential learning to give a wide range of exposure, while reducing load and drifting away from the burden of rote-learning across all disciplines (the sciences, mathematics, arts, social sciences and humanities). In the Middle stage (Grades 6-8, covering ages 11-14 years), and Secondary stage (Grades 9-12 in two phases, i.e., 9 and 10 in the first and 11 and 12 in the second, covering ages 14-18 years), a historic decision has been taken to reduce the syllabus and emphasis given to conduct teaching-learning largely in an interactive manner, and develop hands-on and vocational skills, to enable the students to identify their interest areas for pursuing study in the subject of their choice. Gradual enhancement of critical thinking has been designed to cultivate students’ aspirations. With this new norm of integrated school education from 3-18 years, the policy sets an ambitious target of a Gross Enrollment Ratio of 100 percent by 2030.
The NEP also provides for some welcome changes in the higher education ecosystem, with an explicit emphasis on high quality among deemed, central, standalone institutions and universities. In the twenty-first century, solutions to problems faced by a rapidly changing world cannot be found within the silos of traditional subjects – there is a dire need to break down the walls between disciplines and develop a truly wide-ranging approach.
The policy places a combination of two views in higher education—the institutions which, according to certain well established parameters, have achieved a certain degree of excellence be given more liberty and freedom to grow further, and those institutions which are below these thresholds be encouraged to achieve the same in a regulated atmosphere, whereafter they will be given a similar degree of regulatory freedom.
This is important for a broad-based foundation for universities and colleges which can be designed to expand the accessibility of higher education by offering a wide range of UG and PG courses that would cater to the heterogeneity of socioeconomic conditions. While providing holistic education with affordable fee structure across all streams the policy lays stress on the induction of entrepreneurial, industry oriented and vocational skill based courses for value addition for a large majority of students. A liberal arts approach to education proves to help in developing critical thinking and problem solving skills in real life settings. Industry tie ups and partnerships for courses of study, internships and trainings empower the learners significantly and simultaneously increase their employability manifold. Synergy between academia and industry through research collaborations and partnerships will pave the way for becoming self reliant and economically progressive. At all levels from school to universitiy, integration with ICT based teaching learning is envisaged to significantly increase the intake capacity while providing higher education in the 21st century.
A single, all embracing body, Higher Education Commission of India (HECI), will be set up by the assimilation of University Grants Commission, All India Council for Technical Education, and other such bodies. These changes in the higher education system will happen through an Act of the Parliament and one has to wait for the actual provisions in the HECI Act and the rules framed thereunder. There are provisions in the policy for four verticals in HECI but how lawmakers will put it on paper, and how the persons entrusted with its implementation will interpret them remains to be seen. To sum up, one has to be cautiously optimistic – the right intentions are only a battle half won.
Statutory Regulation of Foreign-funded NGO
Dr. Subhash Chandra Pandey
Date : 18 October, 2020
Foreign Contribution Regulation Act 1976 sought to regulate foreign funding by banning, requiring prior permission or intimation of/to government. While retaining the 1976 basic framework, the Act was rewritten in 2010 by addition/updation and amended recently on 28th September, 2020. Amendments seem to have stirred a hornet’s nest.
The 1976 Act banned election candidates, ‘correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper’, judges and government / PSU employees, legislators, political parties and their office bearers from accepting any foreign funds. (The 2010 Act added television and digital media also.) The 1976 Act prohibited “organisations of a political nature, not being a political party” from accepting any foreign contribution directly or indirectly through any proxy WITHOUT prior permission of the Government.
Further, the 1976 Act allowed non-political entities ‘having a definite cultural, economic, educational, religious or social programme’ to receive foreign assistance provided they register with the government and keep the government informed about its quantum, source, time, purpose, bank account and actual utilisation. But the 2010 Act tightened control on ultimate recipients of foreign contributions by stipulating that FCRA registered entities can transfer funds only to other FCRA registered/regulated entities. Recent 2020 amendment has totally banned transfer of funds to others. The receiving NGO must spend all foreign contribution itself. It cannot become a distributing intermediary.
The 1976 Act authorised government to deny access to foreign contributions if it prejudicially affected (i) the sovereignty and integrity of India; or (ii) the public interest; or (iii) freedom/fairness of election to any Legislature; or (iv) friendly relations with any foreign State; (v) harmony between religious, racial, linguistic or regional groups, social, castes or communities. (The term ‘social’ was added in 2010).
The evolution of FCRA law clearly shows its basic intent: Foreigners indulging in local politics are not welcome. The legislative intent was to curb foreign interference in domestic politics, media, judiciary and government. Critics saw the law as an attempt to clamp down on political dissent.
Foreigners are treated somewhat differently everywhere. They must comply with local laws. While basic human rights are assured by India to everyone including foreigners, some rights are available only to Indian citizens. Foreign debt, equity, grants all are regulated in so far as they impinge on national security or where these can prejudicially affect culture, education, religion, social harmony. Foreigners are expected to stay away from local politics. They must stay away from divisive issues else they will get drawn into political controversies and will invite political backlash. Many NGOs have strong ideological biases and overtly political agendas. If an NGO indulges in political activities and religious conversion, it is bound to invite political backlash. It should be ready to face it.
Recent amendments to the FCRA Act generating controversy are analysed below.
(i) Cap on administrative expenses
The 2010 Act stipulated a ceiling of 50% on ‘administrative expenses’, which can be relaxed with the approval of government. The recent 2020 amendment has reduced this 50% to 20%. NGOs can seek government approval to exceed 20% limit with proper justification (like expenses on a non-recurring event). NGOs should spend more on implementation of projects, give more help to poor beneficiaries rather than lavishly spend on their high salaries, office rent and allied charges, business class travel, expensive event venues etc. Only 1328 NGOs reported administrative expenses exceeding 20% in 2018-19. 20% ceiling mainly hurts advocacy NGOs who don’t have projects.
(ii) Requirement to furnish AADHAAR/Passport/OCI credentials for key managerial personnel
New law requires NGOs to furnish Aadhar numbers of all key functionaries while seeking FCRA registration, renewal of registration, or prior permission to obtain foreign contribution. For foreigners/OCIs, copy of passport or OCI card will do. Why should anyone be hassled by this one-time requirement?
(iii) Routing of funds through a bank account in SBI, New Delhi
New law requires that foreign contributions are to be routed through a bank account with SBI in New Delhi. From there, funds can go to other FCRA accounts of recipient’s choice. The FCRA accounts must not receive other funding to avoid mixing regulated and unregulated funds. NGOs can continue using their preferred bank account after foreign funding inflows pass through this SBI account. This is a one-time hassle. NGOs don’t need to come to Delhi. They can approach nearest SBI branch. Of the 21,490 NGOs filing FCRA returns in 2018-19, 1,488 were Delhi-registered.
Government should give directions to SBI to facilitate / fast-track the process and may also give some transition time to NGOs so that the fund flow does not come to a halt during the current pandemic.
(iv) NGOs can’t be financial intermediaries to route foreign contributions
The most substantive change in 2020 amendment is that an FCRA-registered NGO cannot transfer funds to other NGOs. It has to directly spend all foreign funds it receives. Under the 2010 law, such transfer was permitted to other FCRA-registered entities. So bigger NGOs could act as a funnel to route foreign funds to grassroots organisations. Now these larger NGOs will have to reorient their working to start either direct spending or start connecting foreign donors and FCRA-registered grassroots organisations. Foreign funds will bypass the bank accounts of these intermediary NGOs and go direct to ultimate beneficiary NGOs.
Foreign funds received by NGOs totalled to Rs.18,337.66 crores in 2016-17, Rs.19,764.64 crores in 2017-18 and Rs. 20,011.21 crores in 2018-19. There are around 22,400 FCRA registered active (return-filing) NGOs in the country. About half of them did not receive any foreign grants in 2018-19. 2,214 NGOs were registered in 3 years between 2017-2019.
In 2018-19, 4,107 NGOs received Rs.1,768 crores as re-grants from bigger NGOs, with a median transfer value of Rs.7.6 lakhs. Half of them received less than Rs. 7.6 lakhs. So who should crib if big NGOs routing funds for smaller ones is disallowed? Pruning of intermediation cost would mean more bang for the buck for genuine foreign donors. It will help government to know which foreign donor is funding which Indian NGO. Intermediary NGOs were an obstruction to this transparency and may be adding to the cost. For, they could be receiving a fungible pool of funds from many donors!
When the FCRA money was being passed on by recipients to other organisations, both of them reported the same amount as foreign contribution, leading to double counting. Also, who received from which foreign donor was unclear. So who should crib? Anyone who is against such transparency! Anyone who benefits from creating smokescreens. Of course, to avoid sudden disruption of fund flow during pandemic, some transition time should be allowed.
(v) Non-compliance
The 2010 Act barred following types of entities from getting/renewing FCRA registration: “Fictitious or benami entities” , i.e., entities acting as proxy for hidden owners/controllers; or entities prosecuted or convicted for indulging in activities aimed at religious conversions through inducement or force; prosecuted or convicted for creating communal tension or disharmony in any part of the country; found guilty or diversion or mis-utilisation of its funds; engaged in propagation of sedition or advocating violent methods to achieve its ends; using foreign contributions for personal gains or divert it for undesirable purposes.
The Government has strengthened the mechanism to find out non-compliant NGOs. Period of cancellation of registration has been changed from “upto 180 days” to “180 days to 360 days”.
In so many spheres of G2C or G2B interface, government regulations often get more stringent when few deviant entities misbehave and flout the law. A few commit mistakes and the governmental system reacts to clamp down more controls, inspections, reports, a clear hassle for all.
NGOs play an important role in development. Many NGOs are engaged in implementing government schemes to help the poor. The friction between NGOs and government arises only when foreign funded NGOs venture into prohibited areas: Politics, religious conversion, communal and social disharmony.
FCRA registration of as many as 14,500 NGOs were cancelled in 5 years ending December 2019. Mostly, these were duplicate registrations held by some NGOs. Failure to file annual returns also invited some cancellations as was the case with crackdown on shell companies. In 2017-18, names of 2.26 lakh companies were struck off.
Since 1976, we have had a nanny State preventing foreigners fanning social disharmony. We are a proud open democracy. Like any human institution, our systems may not be perfect. We do have problems to resolve but we don’t need such foreigners who try to accentuate divisions, disaffection and alienation among people, playing on the insecurities of the wronged, deprived and misguided sections. Such foreign influences create social friction and weaken the nation.
The most vocal critics are actually the NGOs engaged in “proxy politics”, a no-go area for them right from 1976. If they fish in troubled waters, they will face pushback. They are free to go to undemocratic countries to help their voiceless people if they are allowed to operate there. Of course, the government needs to ensure that genuine NGOs are not hassled, rather facilitated, by officials. Genuine NGOs need not worry.
Advances in Digital Technology in Payment Systems
Dr. Subhash Chandra Pandey
Date : 07 November, 2020
On the occasion of the anniversary of demonetization or rather remonetisation of high-value currency notes, which has improved tax compliance, digitalisation and formalisation, it is apt to recall the progress made in adaption of digital payment technologies. The ease with which people are adapting is amazing. Workers used to put their thumb impressions on muster rolls, white collar employees would receive their salaries signing payees’ stamped receipts in registers to be meticulously persevered for audit verification, students would use Indian Postal Orders to pay for examination fee to UPSC/SSC, people would stand in queues to draw money using withdrawal forms and cheques in banks and post offices. All that has changed. Digital money transfers and ubiquitous network of Automated Teller Machines has reduced footfalls in these premises.
Cash transactions are still aplenty and one can’t always insist on paying through debit card, credit card or mobile wallet. Some sellers and service providers still operate on cash-only business. However, in moving funds from one bank account to another, the importance of cheques and drafts is steadily decreasing. The push to digital payment started almost a decade back with limited access to NEFT, RTGS and ECS payments. With UPI-based and app-based payments, digital payments have simply skyrocketed.
The Payment and Settlement Systems Act, 2007 empowers Reserve Bank of India (RBI) to regulate and develop efficient and secure payment and settlement systems available on user-friendly platforms at affordable cost.The latest in a series of initiatives taken by RBI and National Payments Corporation of India (NPCI) in this direction is the landmark developmenton 6 November, 2020when NPCI granted clearance to Facebook-owned messaging app WhatsApp to allow users of the platform the facility of Unified Payments Interface (UPI) payment service. NPCI has allowed WhatsApp to scale its user base only up to 2 crore registered users, from 10 lakhs. The transactions conducted on the platform will be capped at 30% of total UPI volumes from January 1. NPCI wants to ensure that the UPI ecosystem is not dominated by any particular payment service.
During 2019-20, payment and settlement systems grew by 44.1% in terms of volume and by 5.4% in terms of value.Between 2015-16 and 2019-20, number of digital payment transactions increased from 593.61 crores to 3,434.56 crores. Total amount of money transferred digitally grew from Rs.9,20,38,000 crores to Rs.16,23,05,934 crores.
During 2019-20, as high as 97.04% non-cash retail payments were through digital means. Share of paper clearing was only 2.96% in terms of volume and 20.08% in terms of value, fewer cheques but high-value cheques.In 2015-16, paper/cheque clearings accounted for a high of 15.81% in volume and 46.08% in value! Since then, the fall in use of paper-based payments has been dramatic and consistent.
In terms of volume – the number of transactions – the share of paper-based clearing fell down from 15.81% to 11.18%, 7.49%, 4.6% and 2.96% from 2015-16 to 2019-20, respectively.In terms of value – total amount of money transferred- the share of paper-based clearing fell down from 46.08% to 36.79%, 28.78%, 22.65% and 20.08% from 2015-16 to 2019-20, respectively.
The desks in bank branch that maintained the stack of signature cards for verifying signatures is redundant. Those records have moved to centralized locations. Inconsistent signatures, slight mismatch, would result in rejection by bank. Such hazards with travellers’ cheques would entail more hassle away from home.
The trend in volume and value of various types of payments in recent years is given in the following table:
Payment System Indicators – Annual Turnover (April-March)
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(Source: RBI https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1293 )
Payment and settlement systems are of two types: Gross and net. In a gross settlement system, each transaction of fund transfer between two entities is carried out separately and independently. In a net settlement system, a batch of transactions is lumped together and the entities transfer to each other only the net amount payable.
Every RTGS(real-time gross settlement system) transfer is put through immediately and independently as a standalone transaction without waiting for bunching it with other transactions. It is like sending each cheque separately for payment rather than making bundles of cheques at the end-of-day for each drawee bank. Under NEFT, which is a net settlement system, hourly and then half-hourly batches were introduced on weekdays to speed up payment process.NEFT, which was operating in 23 half-hourly batches was made available 24x7x365, with effect from December 16, 2019, a significant milestone.
Among small value payments still done through cheques, offline payment of water, electricity, gas, television and telephone bills is still widely prevalent. Drop boxes provide a solution to those who have no access to the internet or to a telephone or mobile. Customers can drop their bills with cheques and bill payment slips.
On 31.08.2016, National Payments Corporation of India had launched a pilot project called Bharat Bill Payment System for collection of five types of bills: direct-to-home (DTH), electricity, gas, telecom and water bills. Presently, BBPS covers Electricity; Telecom (Mobile Post-paid, Landline Post-paid and Broadband); DTH; Piped Gas; Water; LPG Gas Booking; Insurance (Life, General, Health); Loan Repayments; FASTag Recharge; Cable TV; Education Fees; Municipal taxes. Other categories like mutual funds, subscription fees, credit cards, housing society, recurring deposits, and services etc. are expected to be covered shortly.
RBI has taken steps to improve security and customer confidence in digital payments. From January 2019, use of only EMV chip and PIN-based debit and credit cards has been mandated. Facility to switch on/off transactions and flexibility to set spending sub-limits for net-based transactions has been provided.Introduction of two-factor authentication such as a combination of password/PIN and OTP has enhanced security of digital payments.
In digital payment systems, signature-based identity verification is replaced with more secure methods. Passwords, PINs, Digital Signatures, Aadhaar OTP based authentication, and security layers in Netbanking OTP, CAPTCHA, I’M NOT A ROBOT type access checks create barriers trying to prevent unauthorised money transfers. As visual CAPTCHAs got more complicated, audio based CAPTCHAs got introduced. Some websites like IRCTC use even CAPTCHAs for advertising.
These security controls prevent fraudulent, unauthorized payments, something what would have been the result of forged signatures on a cheque. From 2010, the RBI implemented Cheque Truncation System or Image-based Clearing System for faster clearing of cheques, thereby obviating physical movement of cheques. The CTS-2010 standard specify certain security features on cheque leaves. Standardisation of field placements on cheque forms enables straight-through-processing by use of optical / image character recognition technology.
From 1st January 2021, RBI is introducing “positive pay system” for cheque payments to reduce chances of fraud through forged cheque. The cheque issuer would have to inform his bank with full details of cheques issued.It will be applicable for cheques above Rs.50,000 at the discretion of account holder. For payments above Rs.5 lakhs, banks may make it mandatory. The issuer of the cheque will need to submit details of issued cheque to the drawee bank, electronically through SMS, mobile app, internet banking or ATM. Details to be shared are Cheque Number, Cheque date, Beneficiary/Payee name, Account number, Amount etc. along with an image of the front and reverse side of the cheque, before handing it over to the beneficiary. This systemmay cover about 20% and 80% of total cheques by volume and value, respectively.
With CTS and Positive Pay,a supposedly paper –based transaction of cheques has embraced digital technology. Full trail of cheque processing is digitally available for track and trace as for digital transfers. Cheques/drafts etc. may soon become history.
Digital payment system has been a boon during the pandemic though, in line with shrinkage of economic activity, cumulative value of digital transactions declined during January-May 2020 by 25.5% (y-o-y) as compared with a strong growth of 20.6 per cent a year ago. Low demand and suspension of e-commerce operationsduring lockdown contributed to decline in digital payments. With all high frequency indicators pointing to strong revival of economic activity, digital payments may resume their upwardly mobile normal growth.
Decriminalisation of Minor Economic Offences
Dr. Subhash Chandra Pandey
Date : 24 November, 2020
Today 3,61,30,556 court cases are pending in various courts, out of which 2,62,80,291 are criminal and 98,50,265 are civil in nature. 1,60,89,064 criminal and 58,96,321 civil cases are more than a year old. What types of cases are clogging the criminal courts and how can the government ease the burden on these courts?
Indian Penal Code is our primary criminal law but many other laws have stipulated that this or that act of commission or omission would be treated as an ‘offence’ punishable with jail term or fine or both. For example, the Negotiable Instruments Act, 1881 was amended in 1989 to introduce 1 year jail term, enhanced to 2 years in 2003 for cheque bounce.
Issuing of post-dated cheques or signing of irrevocable mandates to banks to debit the agreed EMI on a fixed date every month is a common practice when loans or goods purchased on credit are repaid/paid on EMI basis. If the cheque or automatic electronic debit is dishonoured by bank for want of funds/mandate and the debtors fails to clear the dues within 15 days of written notice (to be given within 30 days of dishonour) the creditor can file a criminal complaint. For, the debtor commits an offence punishable with upto 2 years jail or fine upto 2 times the amount of cheque or both. Criminal case can be dropped in case of a compromise settlement. This is so provided under Section 138 of the Negotiable Instruments Act, 1881. The objective of all this is to promote the efficiency of banking operations and to ensure credibility in transacting business through cheques.
The Negotiable Instruments Act, 1881 was amended in 1989 to introduce 1 year jail term, enhanced to 2 years in 2003 but the offence was made ‘compoundable’, meaning thereby that the criminal proceedings can be dropped if some compromise is reached between the parties.
A PIL filed by Indian Banks Association in 2013 highlighted that out of 270 lakh cases then pending in courts, about 40 lakhs were cheque bounce cases involving about Rs.1200 crore. Cheque bounce cases were estimated to be about 20% of total caseload in 2018.
The question is should cheque bounce continue to be treated as an offence? Can it be decriminalised by amending the law? Do we have enough jails and judges to convict every offender? Shouldn’t we have a hierarchy or priority list of offences to be targeted by prosecution and adjudicating systems? Should the debtors who have already mortgaged movable and immovable properties be further subjected to criminal liability?
Civil cases, which only result in award of monetary compensation/damages or confirmation of civil rights, require a less stringent standard of evidence: Proof based on ‘preponderance of probability’. On the other hand, in a criminal case, the law tilts in favour of defendants. It prefers some guilty being set free rather some innocents being convicted. For criminal courts, the standards of evidence are set very high – ‘prove beyond reasonable doubt’. It prima facie means criminal cases involve more intensive examination of records and witnesses produced by opposite parties.
Normally, for criminal liability to be pinned to a person, presence of mens rea, i.e. malafide intention is a must. However, in cheque bounce cases, malafide intention may or may not be there and need not be proved. A strict liability has been created without going into cheque issuer’s intentions as a measure to build trust and credibility in cheque transactions.
Government is considering decriminalising cheque bounce and some other ‘civil wrongs’. On 8th June, 2020, Finance Ministry sought stakeholder comments on its proposal to decriminalise 39 ‘minor economic offences’ created under 19 Acts, including non-repayment of loans and dishonor of cheque or automatic electronic debit. Government thinks it will ‘improve ease of doing business and help unclog the court system and prisons’.
The decriminalisation proposal has been opposed by the Indian Banks’ Association, Confederation of All-India Traders, Finance Industry Development Council, Federation of Industrial and Commercial Organisation and some Bar Councils.
The Bar Council of Delhi has highlighted the effect of the pandemic on the lawyers community and how every advocate is facing a financial crisis. The Bar Councils of Maharashtra and Goa have also opposed the proposal to decriminalise Section 138 of NI Act. They contended that offence of cheque bounce should not be termed as a ‘minor offence’ by the government in its bid to decriminalise the same. For lawyers, decriminalisation clearly means adverse impact on their livelihoods.
For traders selling on credit also, there is a genuine problem of having often no security against customer default. Instalment purchase of goods on equated-monthly instalments (EMI) is supported by post-dated cheques, and no one will accept cheques if its bouncing is decriminalised. Trade will be left at the mercy of civil litigation that takes several years for justice. Even after the current stringent Section 138, more than 20 per cent of all pendency of cases across the country is only pertaining to cheque bounce.
Bankers’ opposition to decriminalisation can also be understood for cheque bounce against unsecured loans. However, there is absolutely no justification for continuing with this additional protection to secured creditors. While sanctioning EMI based loans, banks insist on mortgage of immovable property or shares/debentures/FDRs etc. or obtain guarantees from employers for deduction from salary. In such cases, the cheque bounce should be considered for decriminalisation to begin with. Borrowers – distressed by coronavirus pandemic – have been provided some relief by way of moratorium and deferral of fresh applications for insolvency proceedings but the criminal liability under Negotiable Instruments Act, 1881, as amended in 1989, 2003 and 2018 remains.
The objective of amending Section 138 of the Negotiable Instruments Act in 1989 was to ensure credibility in transacting business through cheques. Current realities are so very different from 1989 when cheque bounce was first criminalised.
Provision of criminal liability – prosecution/imprisonment – on strict liability basis without need to prove malafide intention – is an identified deterrent for attracting new investment. It is in larger public interest to declog our criminal courts and jails.
In Kaushalya Devi Massand v. Roopkishore Khore, the Supreme Court held that the offence committed under Section 138 of the NI Act cloaks a civil wrong as a criminal wrong and the gravity of offence under Section 138 of the Act cannot be equated with an offence under the provisions of the Indian Penal Code or other criminal offences.
In Makwana Mangaldas Tulsidas v. State of Gujarat & Ors, the Supreme Court on 5 March 2020 favoured decriminalisation of dishonour of small value cheques. The court suggested various ways to deal with the over flooded situation of cheque bounce cases pending for adjudication across the country. The Court suggested developing a mechanism for pre-litigation settlement in these cases.
The Centre, while decriminalising some defaults, has to balance the interests of lawyers, business community and welfare of public at large especially those who are not wilful defaulters. We need to find a balance so that malafide intent is punished while other less serious offences are compounded. As the working of SARFESAI Act and IBC has shown that the cases of wilful defaults are very few and offenders continue to dodge while a large number of non-wilful defaulters continue to suffer harassment in courts. Public policy is all about balancing conflicting requirements and expectations. Creditors would like to have as many remedies as possible and pursue all those remedies simultaneously but such an approach has a deleterious effect on business sentiment. It may end up having a chilling effect on potential borrowers and consumer demand.
If fear of imprisonment and litigation charges along with fine truly had a deterrent effect on timely payment of cheques, the courts would not have had such a big pendency. Huge backlog of cheque bounce delays trial of more serious crimes, with public faith in the judicial system being adversely affected.
Hence, decriminalisation of bounce cheque should be seriously pursued. Secured creditors have remedies available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and Insolvency and Bankruptcy Code, 2016. Hence, cases involving secured lenders should be decriminalised except borrowers declared ‘wilful defaulters’ or ‘fugitive economic offenders’. Even in cases involving unsecured creditors, the criminal cases should be continued against repeat offenders and a more lenient view may be taken for the first time defaulters/offenders.
There should be very clear articulation of legislative intent as to its retrospective or prospective operation. To reduce a large pendency of court cases, retrospective application based on a differentiating criterion like secured/unsecured creditor and wilful/non-wilful defaulters would be necessary and desirable.
While the ‘crime’ of issuing a bounced cheque or not ensuring availability of funds in bank account when an automatic debit drops in has been discussed in detail, same logic applies to many ‘other economic offences’ like delay in filing reports and returns to tax/regulatory authorities.
Criminalising procedural lapses and minor non-compliances increase burden on businesses and courts alike without serving broader public interest. It is essential that we relook at criminalising provisions for mere delays and defaults, more so if these are procedural in nature and do not impact national security or public interest at large. For example, to jail someone for not filing a report that no one is seriously examining or making use is not justified.
GST awaits realisation of Full Potential
Dr. Subhash Chandra Pandey
Date : 15 December, 2020
Government is cracking whip on tax evaders to ramp up GST collections.Nationwide raids by Directorate General GST Intelligenceunearthed4,586 ‘fake’ entities registered under GST,arrested132 persons in 1,430 cases of illegally availing or passing on fake input tax credits.More than six months’ default in filing monthly tax returns led to cancellation of GST registrations of 1,63,042 entities.
Tax evasion is rampant and strong anti-evasion measures are needed as GST collections are below expectations and potential. Lok Sabha was informed in March that GST evasion of Rs.70,207 crore had been detected during July 2017-January 2020 of which Rs.34,591 crore had been recovered.Directorate General of Analytics and Risk Management has identified over 12,900 business entities suspected of availing input tax creditthrough fake invoices worth over Rs.100,000 crore by March 31, 2020 since July 1, 2017.
Tax collections from taxes subsumed in GST was about 6% of GDP in 2016-17. In contrast, GST collections to GDP ratio was 6.25% in 2018-19 and 6% in 2019-20. GST collections were about Rs.7,40,650 crore in 2017-18, Rs.11,77,370 crore in 2018-19 and Rs.12,22,131 crore in 2019-20 crore.
GST collections were about Rs.32,000 crore and Rs.62,000 crore during April and May. Next 4 months saw average collection of Rs.90,000 crore pm, which improved to Rs.105,000 crore pm in last two months, showing robust recovery.
If GDP at factor cost (proxy for total base of indirect taxes) is assumed to be Rs.160 lakh crore and 60% of this GDP pays average GST of 15%, then the GST revenue should be Rs.120,000 crore per month. Obviously, GST revenue is below expectation and potential.
Governments are taking steps to overcome resistance to formalisation and digitalisation, rationalisation of GST rates and curbing tax evasion through claims of fake or excess input tax credits, misinvoicing or undocumented sales.
GST system includes certain checks on tax evasion like mandatory audits, matching of returns, e-way bills, reverse charge mechanism and invoice matching. These are being gradually introduced.
To check the practice of setting up shell firms for fraud, government has mandated Aadhaar authentication for taking GST registration. GST law permits deemed registration 21 days after an application is filed. Authorities will now physically inspect to verify entities obtaining deemed GST registration without Aadhaar.
Ever since Economic Administration Reforms Commission (chaired by Shri L K Jha1984) highlighted how 80% of Excise manpower then guarded gates of low revenue yielding factories, tax administration has been moving away from physical controls to self-assessment.A trust-based tax assessment system is effective only when there is deterrence of test check and fear of penal action on detection of breach of faith in test check. Otherwise, the tax system will be no different than managing DAAN PATRAS placed in temples!
Since tax inspectors no longer guard gates of factories and godowns, ‘E-Way Bills’ system was rolled out in April 2018 to trackmovement of taxable goods. This also reduces the income tax evasion by transporters as they need to get registered. Capturing the vehicle registration numbers into a trackable IT system, the eWay Bills and FASTag systems help check other malpractices. (In Bihar fodder scam, CAG detected certain vehicles supposedly used for fodder transport were actually registered two wheelers, proving fake procurement.)
Officials have found lakhs of eWay Bills being cancelled within few hours indicating undocumented delivery to intra-city or nearby destinations or multiple trips being made against a single eWay Bill to transport excess undeclared goods. To curb misuse, EWBs are now being integrated with the FASTag system being used for electronic collection of tolls on National Highways and Vahan database.
Instances have been found where unscrupulous dealers have used fake invoices for inputs (not received) to claim undue input tax credit. Such invoices don’t have any corresponding supply of goods/services or not to the full extent and do not involve actual payment of GST on inputs.This practice also leads to defrauding banks by exaggerating turnovers and money laundering.
CAG report on GST (July 2019) expressed concern on continuing delay in full invoice matching system which has made the system prone to input tax credit frauds. The system was intended to be designed based on 100%invoice-matching to ensure system-verified input tax credit, correct settlement of IGST and minimizing direct human interface with assesseees.
After full automation is adopted by taxpayers, even “assessment” as understood in the manual system may no longer be necessary. The tax returns can be generated by a system that matches invoices. Tax evasion can be detected by applying analytical tools and AI to the massive data that crores of invoices generate.
In fact, the GST system should reach the same maturity in terms of providing visibility of Input Tax Credit as is now available for verification and tracing of TDS/TCS credits by Income Tax assesses.
One common problem especially for small businesses is that the GST system is not designed to distinguish a sale for full upfront payment and a sale on credit; a sale on EMI. Why force a seller to pay GST even before he gets paid for the supplies? Even allowing quarterly filing of GST returnswith monthly payments does not addresses this problem. Small businesses selling to big buyers including governments and PSUs routinely face payment delays though some progress has been made recently. It would be desirable if in a GST2.0 upgrade, a receipt-based GST system can be implemented where the GST would be payable to the Treasury only on receipt of full or pro rata payment for the supplied goods/services. One theoretical option to implement this at least for small businesses could be to allow them to opt for Cash Accounting rather than Accrual Accounting but that will create problems when they grow and have to leave the small business tag. Better option will be to introduce payment tracking whose benefits will go beyond the GST sphere in checking defaults and delinquencies.
It is a creditable achievement that the number of registered businesses under taxes subsumed in GST has increased from 72 lakhs to 1.28 crore despite significant de-registrations due to increased thresholds for registration and voluntary deregistration by some Central Excise-exempt units located in Himalayan/ North Eastern States whose business became unviable under the destination-based GST.Some 82 lakhs registered sellers filed detailed returns for November 2020 and over 20 lakh GST taxpayers opting for ‘composition scheme’are exempt from filing detailed returns. As a taxpayer facilitation measure, almost 94 lakh small GST taxpayers are now allowed Quarterly filing of Return with Monthly Payment.
GST rate rationalisation is also on course. Almost 99 per cent of all commodities are now taxed with GST@18 per cent or lower. Consumers tend to compare GST rates with erstwhile Sales tax/ VAT rate not realising the basic fact that the GST subsumes Central Excise which has been hidden in the price of products on which VAT was applied. When the invisible Central Excise and other taxes are subsumed in visible GST, the GST is bound to be seen higher than VAT. (Pre-GST taxation of goods was a typical standard VAT @14.5%, Central Excise @12.5% and CST@4%. With cascading effect of tax on tax, total tax paid by end consumer was beyond 30%. The entertainment tax was being levied by the States from 35% to 110%.
Inclusion of petroleum products in GST, if necessary by adjusting non-GST taxes like Customs, allowing input tax credit across full value addition chains, further lowering of rates with continuing strict action against tax frauds can make GST more acceptable and yield more revenues.
Digitalisation and formalisation of businesses poses some short-term costs and hassles but it is inevitable and it alone holds the promise of giving long awaited justice to the overtaxed. Rates can come down when compliance improves for this grand reform.