An evening with Mr Ramesh Krishnamurthi
On Friday, April 11, we had an insightful session by Mr Ramesh Krishnamurthi, the Central Provident Fund Commissioner. Mr Krishnamurthi shared his experiences while implementing major e-governance initiatives in the Income Tax department.
About Mr Ramesh Krishnamurthi
Shri Ramesh Krishnamurthi is a 1992 batch Indian Revenue Service officer. He holds a B.Tech. in Electronics Engineering from IIT-BHU, Varanasi, an MBA from IIM Calcutta, and a Master of Science in Finance from Texas A&M University, USA. His research at Texas A&M focused on Supply Chain Management, e-Commerce, Industrial Distribution, and ERP.
Before assuming charge as Central P.F. Commissioner, Mr Krishnamurthi held the charge of Addl. Secretary, Ministry of Labour & Employment. With his extensive experience in economic affairs and taxation combined with his leadership roles in the Ministry of Labour & Employment and EPFO, he has made significant contributions to India’s public administration. He has pioneered various critical e-governance initiatives.
During his time at Income Tax, Mr Krishnamurthi led policy and technical initiatives for Centralized Processing and Electronic Filing of Income Tax Returns. He also designed and managed the Centralized Processing Center (CPC) in Bangalore, which today processes tens of millions of returns, and the Electronic Filing project for online tax return submissions.
Transformation of the income tax department
In the last 20 years or so, we have seen a major transformation of the country’s Income Tax department. Processes have been revamped and automated using information technology. Mr Krishnamurthi has been in the thick of these initiatives from 2006 to 2022, except for a brief three-year gap. The key governance initiatives include:
- Electronic filing of Income Tax Returns – E-filing 0.1 – 2006
- Centralized Processing of Income Tax Returns, Bengaluru – CPC 1.0 – 2009
- Electronic filing of Income Tax Returns – E-filing 1.0 – 2012
- Income Tax Business Applications – ITBA 1.0 – 2018
- Integrated E-filing and CPC – IEC or CPC 2.0 - 2021
E-filing 0.1 – 2006
A pivotal moment came in 2004 when the department outsourced the permanent account number (PAN) card, followed by the electronic payment of income tax. Prior to this, tax payments were made in person at bank counters.
In 2006, the government mandated that corporations (which in general had advanced infrastructure and capabilities within corporate HR, payroll, and tax departments), must file their taxes electronically.
CPC 1.0-2009
Initially, the department managed the entire program internally, operating from a modest data centre within the office. However, it soon became evident that the department’s resources were insufficient to meet the growing demands. This realization led to the development of a centralized processing system for income tax returns, a landmark project known as CPC 1.0, launched in 2009.
E-filing 1.0 – 2012
The electronic filing of income tax returns version 1.0 was launched in 2012.
ITBA 1.0 – 2018
(ITBA) version 1.0 involved computerizing the internal applications used by departmental officers. This resulted in faceless assessments. Departmental officers could interact virtually and remotely with taxpayers, even in cases of scrutiny or investigations.
IEC or CPC 2.0 – 2021
Then came IEC or CPC 2.0 which converged E-filing and the Centralized Processing Centre (CPC). This was launched in 2021 during the Covid-19 pandemic.
All these initiatives have matured and yielded significant results. The processing time in many cases has been brought down to one day. If one files a return today, within a week, the refund is credited to the bank account. There is no intermediary or human involvement. So, it serves the Government's purpose of making sure that citizen grievances are minimised.
But we must always remember that E-governance projects require time to deliver outcomes. So, we should not expect immediate results.
Note: There were 4 crore filings when the CPC was set up. Today, it is about 9.19 crores.
Conceptualization
The conceptualization phase marks the inception of any E-governance initiative. The rationale should be clear. What is the problem we are trying to solve? This is most important and must be thought through carefully.
The trigger for electronic filing was a mix of legislative intent and ease of doing business. The idea was to remove the persistent negative image of long queues/return filing melas and mountains of paper in the Income tax department and replace it with the comfort of anytime / anywhere filing.
During the Q&A, Mr Krishnamurthi added that for the Government, the pain point was that returns were not getting processed in time and refunds were getting delayed. The department would be processing returns in 14 to 18 months and carrying nearly one and a half years of backlog. This led to many complaints from the citizens. The government wanted quick disposal of all the returns. The Government also wanted to get rid of petty corruption.
CPC was born out of Business Process Re-engineering. Bulk and repetitive functions had to be performed in a back office. This would ensure an end-to-end solution from E-filing in the front end till return processing and refund issuance at the backend. Speed, reliability, consistency were the key objectives.
Why Business Process Reengineering?
When computerization began, the leadership believed that electronic returns would be processed first due to the absence of data entry requirements. All the data had been entered, making the process seemingly straightforward. However, it turned out to be the opposite. The staff were unfamiliar with handling electronic returns, as they had never worked with them on a computer screen before.
This led to a business process reengineering project. The goal was to identify which functions could be performed in a back office. Centralized bulk and repetitive tasks were concentrated in Bangalore for efficient processing.
Also, the applications were received online, but the back-end had manual procedures. What was needed was an end-to-end solution from filing to refund issuance, all managed in a controlled back-office environment.
The key objectives were speed, reliability, and consistency. Speed referred to lower turnaround time by swift processing. Reliability aimed to eliminate variations in processing times by different officers, adopting a first-in, first-out basis for all returns. Consistency meant applying a uniform national rule to all returns, regardless of their origin, be it Guwahati or Kolkata.
Preparing the Requirements document
Once the problems are identified, they must be converted into a requirement document to convert the idea into reality.
Writing the functional requirements is extremely critical. It is necessary to plan big and in a comprehensive manner and visualize the future as best as we can. When planning e-commerce projects affecting the entire country, future requirements must be considered, even if this is not achievable in the first go. This is easier said than done, but it is worth the effort. Once things are in the requirements document, everyone is guided by it.
Domain knowledge always lies within the organization. So, it is important to organize a key team which can share this knowledge with the vendors. Similar processes must be studied. It is necessary to discuss with vendors extensively, visit their clients and study the projects they have completed. Consultants can help in technical documentation and Service Level Agreements (SLAs) but cannot substitute internal experts.
The Income Tax Department used an Oracle's rules engine to codify income tax laws into a set of rules. They conducted a pilot test using 95,000 income tax returns, and the results were included in the RFP document.
Mr Krishnamurthi added that any requirements document must be comprehensive and clear to ensure that implicit knowledge is translated into explicit knowledge for external stakeholders.
The user organization must define the requirements. Consultants can only supplement the domain knowledge of the team. The SLAs must stem from the domain expertise, highlighting the essential factors that must be monitored closely.
The ITR V Example
The E-filing process was initially not very efficient. Although the return was submitted electronically, taxpayers still had to go to the income tax department to file a paper copy or printout of the electronic return. This redundant exercise was required just to capture their signature and validate the submission in any court of law.
The department quickly decided to simplify this process by creating the ITR Verification Form (ITRV). The form allowed taxpayers to submit a one-page signed document to CPC by post. The document was barcoded, making it easy to scan and confirm receipt. This reengineering was inspired by the US IRS process, which uses a one-page signature form ( 8879) for electronic returns. In 2015, the department introduced Aadhaar-based e-sign as a substitute for ITR-V filing. Now most e-Returns are electronically signed.
Managing the RFP process
The Income Tax department was looking for high-quality bids. While most government projects prioritize the lowest cost, many now adopt the QCBS (Quality-cum-Cost Based Selection (QCBS) method. The Income Tax department was among the first to embrace this innovative approach. In 2007 and 2008, the department consulted the CTOs of ICICI Bank and HDFC Bank and Mr Ashish Chauhan, the Managing Director of NSE. These executives questioned why the department was handling hardware, software, and manpower requirements instead of letting the private sector manage these aspects.
CPC pioneered transaction-based pricing, specifically per return processed. This simplified bid comparisons. Of course, there were challenges for the vendors. They had to estimate volumes and model viable returns, using blended all-in costs. Higher volumes translated to more profits, while lower volumes could potentially lead to a loss. The statutory requirement for return filing provided a degree of certainty regarding volume, but predicting fluctuations was challenging.
Many tenders falter simply because their financial bid formats lack proper structure. Excessive line items complicate bid comparisons, leading to situations where bids are not directly comparable. Thus, one vendor might bid high on manpower but low on software licenses, creating a mismatch.
Incorporating incentives within the SLAs and performance metrics can motivate the vendor, fostering a win-win situation. This approach ensures the attraction of high-quality bids and the successful execution of the project.
Clarifications
When implementation begins, numerous queries arise. Comprehensiveness and clarity in the initial documentation can significantly reduce complications. But it is also essential for someone to be available to answer questions and provide guidance during this phase. The domain team must be available, fully empowered, and capable of answering all questions.
Solution Architect
The role of the solution architect provided by the vendor is pivotal. This individual is responsible for the entire planning of the solution. Similar to a building architect conceptualizing a structure, the solution architect must meticulously plan each requirement. If this is done well, the final product will be successful.
Traditional vs Agile methods
Traditional methods involve writing down all the requirements, handing them to a team, and then proceeding with development and testing. On the other hand, agile development which promised nimbleness and speed, has often been disappointing and failed to deliver on its promises.
Newer methods, like Figma for screen development, offer a more effective approach. By creating dummy screens and process flows, stakeholders can visually understand the project’s progression, making it less abstract and more straightforward to follow. This approach is proving to be very positive and beneficial.
Sign offs
Typically, in most government departments, personnel are very reluctant to sign off on any document. They have concerns about new requirements emerging later. Vendors might assert that these were not part of the signed-off documentation, resulting in change requests. This wariness causes significant delays and should be avoided.
On the other hand, government projects are subject to numerous external dependencies. The annual changes in tax laws and regulations, make it difficult to avoid scope creep or changes. It is unrealistic to request the Parliament or the CBDT to postpone legislative changes until the project's completion. Thus, it is important to be prepared for such changes. Vendors must be sensitized to this reality.
Scope change
During the 12 to 18 months of project development, numerous changes occur. Once development is complete, assuming testing is done, the project is rolled out. It is common for the go-live date to be delayed due to reasons mentioned earlier, such as reluctance to sign off, delays in testing, bugs, and issues in the development cycle, leading to some incomplete modules. This results in a dilemma about whether to stick to the planned go-live date when only part of the project is ready. But in many cases, the department has decided to proceed with the go-live even if some modules have not been delivered.
From the vendor's viewpoint, there are notable challenges. Vendors frequently face difficulties related to project team availability, negotiation of terms, and the perceived one-sided nature of government contract terms.
Sometimes, requirements tend to be exceedingly intricate, demanding everything conceivable within the contract. This complexity often leads to ambiguities in project terms. So, during the bidding process, vendors might resort to shortcuts or fail to highlight loopholes and thoroughly address inquiries. As a result, submissions may lack clarity. This can later lead to problems. As the project progresses, the necessity for numerous changes becomes apparent.
Another complicating factor is that different stakeholders have varying timelines and expectations. Senior management might demand immediate dashboards, while the project team may need more time to finalize requirements.
Payments
A critical issue that often arises is delayed payments. Payment delays can severely impact the project's cash flow, leading to vendor frustration and disheartenment. Such financial strain may result in slow responses on the part of the vendor to requests for additional manpower and delayed salary increments for the people working on the project. There might also be career stagnation for people working in such projects. This diminishes the motivation levels.
Penalties
Penalties may arise on account of the following:- Milestones or requirements not met
- Outputs /outcomes less than desired
- SLAs not configured or not measured
- Personnel not up to the mark
- Delay attribution – vendor vs customer
Condoning penalties is not easy due to audit, and vigilance. A better way to mitigate risks of project overruns is regular review by senior management on both sides.
Planning for 2.0
Sooner or later, it is time for the end of the project and to start version 2.0. New opportunities, new requirements, outcomes that could not be met can be targeted for 2.0. In view of project fatigue, it is becoming common for a new team to be put in place for 2.0.The existing team continues with operations and maintenance.
Positive aspects
Despite the various challenges involved, there are positive aspects for vendors. Large e-governance projects like income tax, passport, MCA 21 (The MCA21 application was designed to fully automate all processes related to the proactive enforcement and compliance of the legal requirements under the Companies Act, 1956, New Companies Act, 2013 and Limited Liability Partnership Act, 2008.) have transformative effects. Vendors gain substantial experience, which they can leverage to secure other deals. In short, while navigating e-governance projects is tough for the vendors, the rewards can be significant.
Q&A
The IT department has picked up various lessons from developed countries like USA (detailed user manuals), Singapore and Australia. The department has borrowed a lot of ideas from banks (ICICI, HDFC). The department has also learned from many tax administration systems across the world.
Banks are among the leaders in the use of technology. While consulting the CTOs of banks, the department noticed that banks would only take the request in the front office. The actual dispatch of the cheque book, loan processing, etc would happen in the back end. Banks were not only leveraging economies of scale but also ensuring a high degree of consistency in customer service. That could be done only in a controlled environment.
The beauty of the CPC system is that there is a small team of only about 55 to 60 officers of course supported by the manpower from the Managed Service Provider team (about 400 to 500). But overall, nearly 9 crore returns are now processed at CPC in a very seamless manner by this small team. Earlier this work was spread across 750 offices.
The Income Tax department was the first in the country to introduce Aadhaar eSign as a legitimate basis for signature. Another innovation was net banking login. A tax payer could go to the internet bank account login of the bank, and using the tax sub menu, enter the income tax department website. This kind of a redirect using a federated identity management made sense. The department could be sure about the identity of the person because he was coming through a trusted partner like a bank.
The learning never stops, and it is important to keep making tweaks and changes. For example, take the recently introduced annual information statement (AIS). Today, the income tax department can capture the interest income, the dividend income, etc, gains from the sale of house property, etc in one statement. Everything is visible to the taxpayers. This builds trust. Taxpayers can see what the department knows. If they have omitted something, they can take corrective action.
In the Income Tax department, Mr Krishnamurthi’s role was mostly in IT implementation. So, the direct interface with politicians was limited. For technocrats like him, it was about ensuring that the heirarchy was completely aligned with the project and could convey the importance and impact to the political set up.
However, the interaction with the political ecosystem may vary for different roles. The political system in India enables politicians to be aware of the pulse of the people and their expectations. As long as the executives can demonstrate they are moving in the right direction to meet the expectations of people, political support is assured. In short, in large transformative projects the persons in executive and political roles have to be in sync to deliver outcomes for the common citizen.
AI has been a buzzword for more than 3-4 years. But it has taken off only after the arrival of the large language models (LLMs) in the last 2 years. AI use cases have now exploded particularly in case of compliance through pattern matching and fraud analytics. The LLMs can digest a lot of the FAQs in user manuals. So, it is possible to have a really intelligent AI driven chatbot. One promising use case is for providing customer support in case of any doubt while making a claim in the EPFO portal. This roll out is being planned.
Different countries have embraced UPI and digital payments to different degrees. This has mostly to do with the evolution of their payment systems. China is the global leader in the advanced use of technology for integrated payment systems. India is also doing extremely well in this regard. The USA is lagging mainly because of extensive credit card usage.
EPFO works with various intermediaries, including banks to make it easy for people to comply and make their PF contributions in a seamless manner. Mr Krishnamurthi feels it is necessary to make the processes simpler and make the laws and regulations simple, so that it is easy for people to comply. The department must take the first step forward, and then we would expect that in the evolving trust based system, there will be better compliance.
Traditionally, the employer approvals have been required in some situations such as an employee changing jobs. The general direction the EPFO is taking is to make the individual members take ownership and have full access to their accounts. Going forward, in 99% of the cases, the employer will not have much role to play after accurate onboarding of the employee. The individual member will be able to transact with full empowerment.
In some states, citizens send their grievances to the government through WhatsApp. How do we ensure privacy? Mr Krishnamurthi responded that to solve any problem be it a pothole on the road or a problem with EPF account, some information will have to be shared with the concerned department. After the problem has been resolved, if it is not required for any purpose, then may be the personally identifiable information could be deleted. Also, when publishing data in the public domain, it is advisable to work with aggregated data. Personal information should be shared only with the law enforcement agencies. However, the issue of privacy cannot not be taken too far. To solve problems, some personal information will have to be shared. There are no two ways about it.
Of course, it has changed over time. For example, till 2015, EPFO did not invest in equity. Now it does. But EPFO is extremely conservative. EPFO invests only in index funds: Nifty and Sensex. Today, up to 15% of the corpus can be invested in equity. Very recently the central board of trustees of EPFO permitted investments of up to 3% of the overall portfolio in public sector infrastructure investment trusts. EPFO handles pension and provident funds, which are meant to provide old age security. So EPFO always has a longer investment horizon.