Risk analysis and reform in the Indian income tax compliance management strategies in a globalized environment

Abstract

Tax risk management has become a critical focus area in the modern economy, as countries increasingly realize the necessity of maintaining a state of comparative tax advantage in a globally integrated financial environment. International capital investment is sensitive to the effects of tax laws upon net returns from projects in foreign countries, thus creating tax competition among nations which seek such inflows. Countries have today become acutely aware of the growing linkage between their tax policies and the process of globalization of their economies. Several public policy issues arise in the realm of efficient tax risk management. The interplay of continuous demand-side and supply-side dynamics between the principal stakeholders, the revenue authority and the taxpayer, creates critical gaps between their mutual expectations. Tax risk management strategies adopted by both camps are conditioned by their respective compulsions, which are often diametrically opposed to each other. The revenue authority faces the primary risk of non-compliance with its laws, whereas the taxpayer faces the risks of additional costs, enforcement and prosecution. Thus, pursuance of evasion on the part of the tax-gatherer is equally matched by ingenious mitigation strategies by the taxpayer. Starting with a theoretical and international experience perspective, we attempt to identify some crucial elements and dynamics of tax risk analysis processes adopted in India. Risk initiatives taken by the Indian Income Tax Department (ITD) in recent years are analyzed to pinpoint areas where more focus is called for. A policy tool (TCPM) is suggested for continuous measurement of compliance, in order to enable ITD to achieve comprehensive risk profiling of each taxpayer. Along with that, we have also devised a matrix (TRAM) to elicit regular feedback on tax policy which will enable the ITD to accurately identify areas where policy interventions are called for. The litigation risk policy of the ITD is also reviewed in the context of practical approaches adopted by the IRS of USA, and certain recommendations are advanced.