How tax systems unfairly penalise even honest, hardworking taxpayers

A man hoped marriage would bring small comforts — like someone to make him morning tea. Months later, he sighs and says to a friend: “Earlier I made one cup, now I make two.” So much for simplifying life. 

I apologise for starting the column with a politically incorrect joke. But it sums up the situation well: Things meant to ease life sometimes cause double the effort. 

The digital tax era promised ease — pre-filled returns, real-time data, and seamless reporting. Instead, it has created a Kafkaesque mess, especially for taxpayers who added a spouse or parent as joint holder to simplify succession. 

Here is how it plays out: Mutual funds (MFs) are required to report transactions of both the primary and the joint holder, according to the tax department’s format. So, MFs report it under both names. 

The tax department generates the annual information statement based on this data. The transactions show up under both holders. The primary holder accepts it. But the joint holder — who neither invested nor benefited — disputes the entry, explaining: “This pertains to the primary holder. I am listed only for succession purposes.” The tax department forwards the dispute to the MF. Since the format requires reporting under both names, the fund responds that there is “no error”. Admitting an error could invite a ₹50,000 penalty per case. 

The MF’s response triggers a notice to the joint holder. Now begins the real ordeal: The taxpayer — often a parent or non-earning spouse — must hire a consultant and respond via faceless systems. Ideally, a human reviewer at the tax department’s end would recognise the income belongs to the primary holder and drop the notice. But under faceless assessment, it may be treated as undisclosed income, and get added to the joint holder’s return, with resultant tax, interest, and penalties. The joint holder then faces the prospect of filing rectifications or appeals and escalating further. Even if they eventually win, it comes at a steep cost: money, time, and enormous stress. 

The tax department has created many such circular traps — flawed reporting formats, penalties for those who point out the flaws, and faceless assessors with no accountability. The result: Millions of taxpayers face needless harassment and procedural dead ends. 

Another example pertains to the goods and services Tax (GST). Businesses that cancelled their registrations — due to closure or falling below the threshold — are still receiving notices to file returns. A basic system check could avoid this. Instead, taxpayers must respond, upload proof, wait and pray. Globally, tax departments are not let off lightly. Take the US Taxpayer Advocate Service (TAS), headed by the National Taxpayer Advocate (NTA). It is an independent statutory body within the Internal Revenue Service (IRS—their version of our Income Tax Department) that helps resolve taxpayer grievances and recommends systemic fixes. TAS steps in when IRS systems are unresponsive, repetitive errors occur, or taxpayers face undue hardship. It reports directly to the US Congress and publishes detailed annual reports exposing inefficiencies like automated notices and flawed flags. It also piloted the enactment of an enforceable Taxpayer Bill of Rights. India has no counterpart to the US NTA. The Central Board of Direct Taxes and the Goods and Services Tax Network have grievance cells, but they function within the same bureaucracy and lack transparency. This gap highlights the need for a statutory Taxpayer Rights Ombudsman with powers to review automated notices and systemic errors. Like the NTA, it can submit a public annual report to Parliament. 

Truth be told, the tax department’s lack of accountability — combined with pressure to raise revenues — means honest taxpayers must continue enduring these bureaucratic nightmares with serious financial consequences. It is high time India began its journey toward an enforceable taxpayer charter and a statutory grievance authority like the US NTA. Otherwise, taxpayers will keep making two cups of tea — when all they wanted was relief from making even one. 

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X @harshroongta