Govt to set up faceless digital mechanism to levy income tax penalties

After implementing faceless assessment and faceless appeal systems on income tax matters, the government has decided to set up a National Faceless Penalty Centre to have an unbiased and transparent digital faceless mechanism for imposing penalties on tax defaulters.

The government on Tuesday notified the faceless penalty scheme, which will have a National Faceless Penalty Centre at the apex level. It will be assisted by regional centres, local penalty units and penalty review units, two officials with direct knowledge of the matter said requesting anonymity.

“The system will provide adequate opportunity to assessees to be heard and also have provisions for review on legal and technical grounds. A review could also be initiated on the ground of arithmetical correctness of computation of penalty,” one of the officials said.

Till the time the National Faceless Penalty Centre, its regional centres and local units are set up, the Central Board of Direct Taxes (CBDT) will direct the National e-Assessment Centre (NeAC) and its units to also act as faceless penalty system, he said.

Faceless schemes – inspired by the concept of digital governance -- are in line with Prime Minister Narendra Modi’s August 13, 2020, announcement of three key structural tax reforms under the Transparent Taxation - Honouring the Honest platform. They are – Faceless Assessment, Faceless Appeal and Taxpayers Charter. The technology-driven faceless systems aim to end overreach by officials, while the charter defines the rights and responsibilities of taxpayers, a second official said.

Naveen Wadhwa, DGM at Taxmann, the publisher on taxation matters, said that faceless systems will certainly curb corruption, but it will also serve the larger purpose of reforms in tax administration. “The income tax department is aiming to build a complete eco-system of an end-to-end digital solution for all proceedings under the [Income-Tax] Act,” he said.

“India is the first country to build a system for faceless assessment, appeal and penalty proceedings. This is just another step to harness the power of technology in reforming the income tax department,” he said. Currently, all key processes related to income-tax administration, such as permanent account number (PAN) enrolment, filing of returns, assessment proceedings, penalty proceedings and appeals, are governed digitally.

Sanjay Kumar, partner at consultancy firm Deloitte India, said, “Faceless system does remove person-to-person contact. It also ensures that any tax or penalty imposition is not done by an individual, but is technically reviewed by a panel of senior officers.” This peer-review is essential to make sure that tax adjustments and penalties are not imposed on the basis whims of officials, he said.

“Faceless system also ensures that the cases are picked up in a centralised manner, and dealt in a centralised manner, ensuring uniformity of approach and proper application of law,” he said, adding that a fair and efficient system is now evolving. “Though the output is still to come, but I’m quite confident that it would be able to achieve the desired fairness and efficiency,” he added.

The faceless penalty centre would help in creating a fair and efficient system, said Wadhwa. “Currently, AO [assessing officer], who is assessing the taxpayer, is required to conduct penalty proceedings. It is often seen that the penalty order passed by the AO is challenged by the taxpayer on the grounds that it has been passed without following the principles of natural justice or an incorrect assumption of law. Under the Faceless Penalty Scheme, this issue will be ruled out as the penalty proceedings shall be done by an entirely different unit, and not by the unit conducting the faceless assessment,” he said.