Introduction

The introduction of Faceless Scrutiny Assessments under the Indian Income Tax framework was aimed at improving transparency, reducing human intervention, and making the tax assessment process more efficient. While the initiative was introduced with the goal of reducing corruption and increasing efficiency, it has also brought a new set of challenges for taxpayers. This blog explores the various difficulties taxpayers face in faceless scrutiny assessments, why these issues arise, and how they impact the overall tax compliance experience.

What is Faceless Scrutiny Assessment?

Faceless scrutiny assessments were introduced by the Central Board of Direct Taxes (CBDT) as part of the Transparent Taxation - Honoring the Honest initiative in 2020. Under this system, tax assessments are conducted digitally, eliminating the need for physical interaction between taxpayers and tax officers. The assessment process is managed through a centralized system that assigns cases to officers randomly, ensuring that the identity of the assessing officer remains anonymous.

Objectives of Faceless Scrutiny:

• Eliminate face-to-face interactions to reduce the scope for corruption.
• Bring greater transparency and accountability to the tax assessment process.
• Minimize bias and favoritism in tax assessments.
• Make the assessment process quicker and more efficient.

While the system has introduced many positive changes, it has also created significant challenges for taxpayers.

Challenges Faced by Taxpayers in Faceless Scrutiny Assessments

1. Lack of Personal Interaction and Clarification

In the traditional system, taxpayers or their representatives could personally meet the assessing officer to clarify doubts, present additional documents, and explain complex transactions. In the faceless system, this personal interaction is completely removed.

👉 Challenge:

• Taxpayers often struggle to explain the nuances of their cases through written communication alone.
• Misunderstandings or misinterpretations can lead to incorrect assessments and penalties.

2. Complex Documentation and Upload Process

The faceless assessment system requires all supporting documents and responses to be uploaded online through the e-filing portal.

👉 Challenge:

• The portal can be difficult to navigate, especially for those unfamiliar with digital platforms.
• Large or multiple documents may exceed file size limits or face technical issues during upload.
• Any delay or incorrect submission can result in adverse assessments.

3. Technical Glitches and System Errors

Since the process is fully digital, it is prone to technical glitches such as:

• Portal downtime.
• Inability to upload files.
• Error messages while filing responses.

👉 Challenge:

• Taxpayers may miss submission deadlines due to technical issues.
• The lack of human support for resolving such issues increases frustration.

4. Standardized Approach Leading to Misjudgment

Faceless assessments rely heavily on algorithms and automated scrutiny methods.

👉 Challenge:

• Automated systems may not consider the unique circumstances of each case.
• Complex cases involving international transactions, capital gains, or business restructuring may be misunderstood by the algorithm.
• The lack of a case-by-case assessment can result in unjustified tax demands.

5. Inadequate Opportunity for Rebuttal and Explanation

In traditional assessments, taxpayers could meet the officer to explain discrepancies or defend their claims. In faceless assessments, this opportunity is restricted to written communication.

👉 Challenge:

• Taxpayers may not have enough time to gather and submit all necessary evidence.
• There’s limited scope to provide real-time clarifications.
• The lack of interaction reduces the taxpayer’s ability to argue their case effectively.

6. Mismatch in Data and Lack of Context

Faceless scrutiny relies heavily on automated cross-verification of financial data, including bank transactions, Form 26AS, and other financial statements.

👉 Challenge:

• Minor mismatches due to rounding errors or timing differences may trigger scrutiny.
• Algorithms may flag discrepancies without considering genuine reasons, leading to unnecessary penalties.
• Lack of human judgment to understand context increases errors.

7. Delayed Responses and Communication Gaps

The faceless system operates through a centralized system that assigns cases randomly. This can lead to delays in communication and responses.

👉 Challenge:

• Delayed responses from the department increase anxiety for taxpayers.
• Taxpayers may receive multiple notices simultaneously without clarity on how to respond.
• Lack of real-time communication increases the risk of miscommunication.

8. Increased Burden on Tax Professionals

Tax professionals and chartered accountants (CAs) play a crucial role in helping taxpayers respond to scrutiny notices.

👉 Challenge:

• Increased complexity of online filing increases workload for tax professionals.
• Professionals face pressure to meet short deadlines while navigating technical issues.
• Miscommunication with tax authorities can lead to adverse consequences for both taxpayers and tax consultants.

Why Do These Problems Arise?

1. Overdependence on Technology

• The faceless assessment system is entirely dependent on digital infrastructure.
• Any technical glitch or system failure can delay responses, misplace documents, or cause submission errors.
• A weak internet connection or system downtime can prevent taxpayers from meeting deadlines.

2. Lack of Human Judgment

• Faceless assessments rely on algorithms and automated systems to analyze data and detect discrepancies.
• Automated systems lack the ability to consider subjective factors, business complexity, or industry-specific variations.
• Complex cases requiring professional judgment are often misinterpreted by the system.

3. Poor Communication Infrastructure

• Communication between taxpayers and tax authorities is restricted to the e-filing portal.
• Lack of direct interaction limits the ability to provide context or real-time explanations.
• Miscommunication or delayed responses from the department increase uncertainty.

4. One-Size-Fits-All Approach

• The faceless system follows a standardized procedure for all cases, regardless of complexity.
• Simple cases may be handled well, but complex cases involving multiple jurisdictions or financial instruments may be mishandled.
• The absence of case-specific handling increases the risk of incorrect assessments.

5. Inadequate Training and Awareness

• Many taxpayers, especially small businesses and individuals, are not familiar with the faceless system.
• Lack of clear guidelines on how to respond to scrutiny notices creates confusion.
• Insufficient training for tax professionals on the new system adds to the complexity.

6. Lack of Opportunity for Clarification and Explanation

• Since personal interaction with assessing officers is not allowed, taxpayers cannot explain complex issues directly.
• Written communication may not always capture the complete context of a transaction.
• The inability to provide real-time clarification increases the chances of misjudgement.

7. Data Mismatch and System Errors

• The system relies heavily on data from Form 26AS, AIS (Annual Information Statement), and TDS filings.
• Minor mismatches due to timing issues, clerical errors, or data format variations can trigger a scrutiny notice.
• Automated systems may misinterpret these discrepancies as tax evasion attempts.

8. Time Constraints and Increased Pressure

• Short deadlines for responding to scrutiny notices increase pressure on taxpayers and tax professionals.
• The requirement to provide comprehensive responses within a limited time frame increases the risk of errors.
• Increased pressure on tax professionals handling multiple cases simultaneously reduces efficiency.

How Can Taxpayers Overcome These Issues?

1. Seek Professional Help

• Engage with experienced chartered accountants (CAs) or tax consultants to handle complex cases.
• Tax professionals can help interpret notices, draft responses, and ensure that submissions comply with tax laws.
• Professionals are also better equipped to navigate technical glitches and file documentation correctly.

👉 Example: If a taxpayer receives a notice regarding a mismatch in TDS filings, a tax consultant can review the records and respond with appropriate clarifications.

2. Maintain Proper Records

• Maintain detailed and organized records of all financial activities, including:
• Bank statements
• Business invoices
• TDS certificates
• Form 26AS and AIS data
• Regularly reconcile financial records with tax filings to avoid mismatches.
• Ensure that all supporting documents are readily available for submission.

👉 Example: If the assessing officer requests clarification on business expenses, having a detailed record of invoices and receipts will simplify the response process.

3. Respond Promptly and Clearly

• Carefully read and understand the scrutiny notice before responding.
• Ensure that responses are clear, accurate, and supported by documentary evidence.
• Submit responses well before the deadline to avoid last-minute issues.
• If clarification is needed, respond promptly through the portal.

👉 Example: If a notice seeks clarification on foreign income, responding promptly with detailed foreign bank statements and tax certificates will prevent penalties.

4. Use the E-Filing Portal Efficiently

• Familiarize yourself with the e-filing portal’s interface and submission process.
• Ensure that uploaded files meet the format and size requirements.
• Regularly check the portal for updates, notifications, and responses from the tax department.

👉 Tip: Keep a screenshot or acknowledgment of successful submissions for future reference.

5. Monitor Communication and Follow Up

• Keep track of all notices and communications through the e-filing portal.

• If there’s a delay in response from the tax department, follow up through the portal or helpline.

• If the issue remains unresolved, consider filing a complaint with the Income Tax Ombudsman.

👉 Example: If you haven’t received a response to your submission within the expected timeframe, initiate a follow-up through the portal.

6. Explain Complex Issues Clearly

• When responding to a complex tax issue, provide a detailed explanation supported by documentation.
• Use a professional tone and avoid vague or incomplete answers.
• Attach supporting documents, such as legal opinions or expert reports, where applicable.

👉 Example: If the system flags a capital gain as suspicious, a detailed explanation of the sale, along with brokerage statements and sale agreements, can resolve the issue.

7. Review and Cross-Check Data Regularly

• Regularly review Form 26AS, AIS, and TDS data to identify and correct discrepancies early.
• Ensure that employer, bank, and financial institution records are aligned with tax filings.
• Promptly report any errors or mismatches to the tax department for correction.

👉 Example: If Form 26AS reflects a higher TDS than what’s reported in your filing, consult your employer or the deductor to resolve the issue before scrutiny.

8. File a Request for Reassessment (If Necessary)

• If an assessment order is based on an incorrect interpretation or data mismatch, file a request for reassessment.
• Support the request with proper evidence and legal backing.
• Engage a tax professional to prepare a strong case for reassessment.

👉 Example: If an incorrect tax demand arises due to a misinterpretation of a foreign income exemption, filing a reassessment request with supporting documents can rectify the issue.

9. Stay Updated on Policy Changes

• Keep track of changes in faceless assessment procedures, deadlines, and compliance requirements.
• Follow updates from the Central Board of Direct Taxes (CBDT) and the Income Tax Department.
• Adapt responses and filing strategies based on the latest guidelines.

👉 Example: If new guidelines allow additional time for complex scrutiny cases, ensure that you take advantage of the extended deadline.

10. Leverage the Grievance Redressal Mechanism

• If the tax department issues an unfavorable order despite providing adequate evidence, escalate the matter.
• File a grievance with the e-Nivaran portal or seek intervention from the Income Tax Ombudsman.
• If necessary, consult a legal professional to challenge the order in an appellate tribunal.

👉 Example: If an assessment results in an unjustified tax demand, filing a formal appeal with the tax tribunal can help secure relief.

Conclusion

Faceless scrutiny assessments have revolutionized the tax assessment process in India by making it more transparent and efficient. However, the shift from personal interaction to a fully digital system has created several challenges for taxpayers, ranging from technical issues to inadequate opportunities for clarification. By understanding these challenges and adopting a proactive approach, taxpayers can effectively navigate the faceless assessment process and ensure a smoother compliance experience.

If you require assistance with Income Tax Notices/Demands, Manthan Experts can be your trusted advisor. Contact them at info@manthanexperts.com.to discuss your specific needs and explore how their expertise can benefit your business.