Direct Tax Alert: Faceless Penalty Scheme, 2021 notified

With an intent to achieve transparent taxation, the Hon’ble Prime Minister of India, Shri Narendra Modi, had unveiled Honouring the Honest platform to bring about structural reforms. The three main pillars of this platform are: Faceless Assessment^[1], Faceless Appeal^[2] and Taxpayer’s Charter.^[3]

While the Faceless Assessment Scheme was introduced by The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the Finance Act, 2020 have amended section 274 of the Income-tax Act, 1961 (IT Act) granting power to make Faceless Penalty Scheme. Recently, the Central Board of Direct Taxes (CBDT) notified^[4] the Faceless Penalty Scheme, 2021 (Faceless Penalty Scheme) which is effective from 12 January 2021. The Faceless Penalty Scheme provides for disposing penalty proceedings in a faceless manner.

We, at BDO in India, have analysed and summarised hereunder the Faceless Penalty Scheme:

Functions of different Units

1. National Faceless Penalty Centre (NFPC)

To facilitate the conduct of faceless penalty proceedings in a centralised manner, which shall be vested with the jurisdiction to dispose penalty in accordance with the provisions of Faceless Penalty Scheme.

2. Regional Faceless Penalty Centres (RFPC)

To facilitate the conduct of faceless penalty proceedings, which shall be vested with the jurisdiction to impose penalty in accordance with the provisions of Faceless Penalty Scheme.

3. Penalty Units (PU)

• To facilitate the conduct of faceless penalty proceedings.
• Drafting penalty orders, including identification of points or issues for imposing penalty under the IT Act.
• To seek information or clarification on points or issues so identified.
• To provide the taxpayer an opportunity of being heard.
• To analyse the material furnished by the taxpayer.
• Such other functions as may be required for the purposes of imposing penalty

4. Penalty Review Units (PRU)

• To facilitate the conduct of faceless penalty proceedings.
• To review draft penalty orders which include:
  • Checking whether the relevant material evidence has been brought on record
  • Whether the relevant points of fact and law have been duly incorporated
  • Whether the issues on which penalty is to be imposed have been discussed in the draft order
  • Whether the applicable judicial decisions have been considered and dealt with in the draft order
  • Checking arithmetical correctness of computation of penalty (if any)
•  Such other functions as may be required for the purpose of review.

Procedure for Faceless Penalty Proceedings

The Principal Chief Commissioner or the Principal Director General in charge of the National Faceless Penalty Centre (with prior approval of the CBDT) have been conferred power to transfer the penalty proceedings to the income-tax authority or the NFAC having jurisdiction over the taxpayer or any other person, in whose case the penalty proceedings are initiated.

Process flow for Rectification Proceedings

Appellate Proceedings

An appeal against the order passed by NFPC shall lie before the First-Appellate Authority having jurisdiction over the jurisdictional Tax Officer or before the NFAC , as the case may be.

Exchange of Communication

• All communication between the NFPC and the taxpayer or his authorised representative shall be exclusively exchanged by electronic mode; and
• All internal communication between NFPC, NFAC, RFPC, PU, PRU and any Revenue Authority shall be exclusively exchanged by electronic mode.

Personal appearance in Centres or Units

• Taxpayer or his authorised representative is not required to be personally present in connection with any proceedings under Faceless Penalty Scheme before the Revenue Authority at NFPC or RFPC or PU or PRU under the Faceless Penalty Scheme.
• The taxpayer or any other person or his authorised representative, as the case may be, may request for personal hearing so as to make his oral submissions or present his case before the PU under Faceless Penalty Scheme.
• The Chief Commissioner or the Director General, in charge of the RFPC, under which the concerned unit is set up, may approve the request for personal hearing if he is of the opinion that the request is covered by the specified circumstances.
• Such personal hearing shall be conducted exclusively through video conferencing, including use of any telecommunication application software which supports video telephony, in accordance with the procedure laid down by the CBDT.
• CBDT to establish suitable facilities for video conferencing including telecommunication application software which supports video telephony at such locations as may be necessary, so as to ensure that the taxpayer, or his authorised representative, or any other person is not denied the benefit of Faceless Penalty Scheme merely on the ground that such taxpayer or his authorised representative, or any other person does not have access to video conferencing at his end.

Authentication and delivery of electronic record

• An electronic record shall be authenticated by the NFPC by affixing its digital signature or the taxpayer by affixing respective digital signature or through electronic verification code.
• Every notice or order or any other electronic communication under the Faceless Penalty Scheme shall be delivered to the taxpayer, by way of:
  • Placing an authenticated copy thereof in the taxpayer’s account on a designated portal.
  • Sending an authenticated copy thereof to the registered email address of the taxpayer or his authorised representative.
  • Uploading an authenticated copy on the taxpayer’s mobile app followed by a real time alert.
• The taxpayer or any other person shall file its responses to any notice or order or any other electronic communication under the Faceless Penalty Scheme through its registered account and the response shall be deemed to be authenticated once an acknowledgement is sent by NFPC.

BDO Comments

With the Indian Government moving towards transparency, Faceless Penalty Scheme is in line with its desired objective. The overall structure and functioning of the Faceless Penalty Scheme is more or less in lines with the Faceless Assessment Scheme, 2019 and Faceless Assessment Scheme, 2020. Post Faceless Penalty Scheme being notified, CBDT issued an order^[5] directing  units set up under Faceless Assessment Scheme 2019 to act as the NFPC/RFPC/PU/PRU. Also, CBDT has issued another order^[6] clarifying that following proceedings shall not be disposed by the NFAC / NeAC:

i. Penalty proceedings in cases assigned to Central Charges;

ii. Penalty proceedings in cases assigned to International Tax Charges; and

iii. Penalty proceedings arising in TDS charges.

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