"Understanding India's Faceless Assessment Scheme: Key Tax Reforms Explained"

Introduction

Prime Minister Shri Narendra Modi's vision for a corruption-free India leverages Information Technology under the initiative known as Digital India. During a national conclave for tax officials, he advocated for a faceless assessment scheme aimed at assisting honest taxpayers while enhancing efficiency, transparency, and accountability in the assessment process.

To realize this vision, the Central Government has implemented measures over the past few years to minimize direct interaction between taxpayers and tax authorities, ensuring consistency and greater efficiency through technology. On August 13, 2020, the Honorable PM launched a taxpayers' charter and the faceless assessment system, part of the broader "Transparent Taxation – Honoring The Honest" initiative, designed to simplify compliance and recognize integrity among taxpayers.

Key Announcements on Tax Reforms:

Faceless Assessment initiated on August 13, 2020.
Faceless Appeals began on September 25, 2020.
Taxpayers’ Charter introduced alongside these reforms.

Analysis of Legal Provisions for Faceless Assessment

The Central Government inserted two new sub-sections—143(3A) and 143(3B)—through the Finance Act, 2018, detailed as follows:

Section 143(3A)

The Central Government (CG) may establish a scheme via notification in the Official Gazette with the aim of assessing the total income or loss of an assessee under sub-section (3) to enhance efficiency, transparency, and accountability by:

a) Reducing the interface between the Assessing Officer and the assessee wherever technologically viable.
b) Optimizing resource use through economies of scale and functional specialization.
c) Implementing a team-based assessment with flexible jurisdiction.

Section 143(3B)

The CG may, for enforcing the scheme under sub-section (3A), notify that any provisions of this Act relating to the assessment of total income or loss shall not apply or shall apply with specified exceptions, modifications, and adaptations.

Note: No such directions can be issued after March 31, 2020.

Subsequently, the Government announced the "E-Assessment Scheme, 2019" under section 143(3A) via Notification No. 61/2019 dated September 12, 2019, which was further supplemented by Notification No. 62/2019 on the same date to initiate e-assessment proceedings starting September 12, 2019.

Scope of E-Assessment Scheme, 2019

Under the E-Assessment Scheme, "Assessment" is defined as the total income/loss assessment under section 143(3) of the Act. The Finance Act, 2020, made amendments to sections 143(3A) and 143(3B) as follows:

In Section 143(3A), the phrase “Section 144” was added, allowing the CG to develop a scheme for assessments under both sections 143(3) and 144.
In the proviso to Section 143(3B), “Year 2020” has been replaced with “Year 2022,” permitting directions to be issued for the scheme notified under section 143(3A) until March 31, 2022.

On August 13, 2020, the Hon'ble PM stated that all assessment proceedings from this date forward would be conducted in a faceless manner.

To implement this directive, the CG issued two notifications:

Notification No. 60/2020 declared the amendment of the E-Assessment Scheme, 2019 to the Faceless Assessment Scheme, 2019, which now includes assessments under section 144.
Notification No. 61/2020 modified previous directions under Notification No. 62/2019.

In alignment with the PM's announcement, the Central Board of Direct Taxes (CBDT) released an order on August 13, 2020, directing that all assessment orders must be processed through the Faceless Assessment Scheme, except for:

i. Assessments assigned to Central Charges.
ii. Assessments assigned to International Charges.

Procedure for Faceless Assessment under Income Tax

The following steps outline the procedures established under the Faceless Assessment Scheme:

Notice Issuance: The NeAC will serve a notice on the assessee under section 143(2), detailing the issues prompting the assessment selection.
Response Requirement: The assessee must respond to the notice within 15 days.
Assessment Commencement: If a return has been filed under sections 139, 142(1), or 148(1) with a notice under 143(2) from the AO, or if no return has been filed in response to a notice under 142(1) or section 148(1):
- NeAC will notify the assessee of assessment being conducted under the e-Assessment Scheme, 2019.
Case Assignment: Upon receiving the response, the case will be allocated to an Assessment Unit (AU) within any Regional e-Assessment Centre (ReAC) via an automated system.
Request for Further Information: The AU can request additional information or conduct inquiries as needed.
Communication of Requests: NeAC will communicate requests for information to the relevant parties.
Response to Requests: The assessee or any other person must respond to these requests within specified timelines.
Verification and Technical Assistance: Requests for verification or technical support will be assigned through automated allocation systems.
Failure to Respond: If the assessee does not comply with notices, NeAC will issue a notice under section 144, providing an opportunity for the assessee to explain why the assessment should not be concluded based on the best judgment.
Draft Assessment Order: After considering available information, the AU will prepare a draft assessment order.
Examination of Draft Order: NeAC will review the draft order according to a specified risk management strategy.
Finalization of Assessment: Based on the review, NeAC may finalize the assessment or provide opportunities for comments.
Assessment Unit Comprised of Multiple Units: The assessment procedure will involve various specialized units, including Verification Units and Review Units, all operating without the assessee knowing the specific unit assigned to their case.
Electronic Communications: All communication under the Faceless Assessment Scheme will occur exclusively via electronic means.
Personal Hearing Provisions: No personal hearings are mandated; however, upon issuance of a show-cause notice related to a draft assessment, an assessee may request a personal hearing.

Conclusion

The introduction of the Faceless Assessment Scheme represents a significant reform in India's tax administration, aimed at enhancing transparency, efficiency, and accountability while lessening the burden of compliance for taxpayers. This approach utilizes technology to streamline the assessment process, ensuring that taxpayers can interact with the system in a straightforward and efficient manner. With processes embedded in law, stakeholders must stay updated on the evolving legal framework to effectively navigate the new landscape of faceless assessments.