A robust dispute settlement system would help the government unlock tax revenues, and also aid ease of doing business.
After rationalisation of the corporation tax rates, India Inc is looking at the upcoming Budget for a blueprint of a credible dispute resolution system that proactively addresses ways and means to avoid tax disputes and litigation.
In case of a dispute, what businesses look for is greater certainty in the mechanism for out-of-court settlements and a time-bound litigation process.
By the end of the reporting year 2017-18, taxes pertaining to income, services, and excise locked up in disputes were pegged at Rs777,322 crore.
The maximum number of cases (70 per cent) is stuck in litigation with the Commissioner of Income-Tax (Appeals); around 20 per cent are in various tribunals, and the remaining in high courts and the Supreme Court.
The Economic Survey 2018-19 had noted that the revenue department is the largest litigant, even though it loses 65 per cent of its cases.
To curb tax litigation, the government has been upping the threshold for filing appeals in tax disputes.
Last year, the Central Board of Direct Taxes (CBDT) raised the threshold for filing appeals in tax disputes for the Income Tax Appellate Tribunal from Rs20 lakh to Rs50 lakh, for high court from Rs50 lakh to Rs1 crore, and the Supreme Court from Rs1 crore to Rs2 crore.
According to Sudhir Kapadia, partner & national tax leader at EY, there is a scope of improving the speed of settlement at the Settlement Commission where 50 per cent of the cases are pending.
Experts point out it is important to speed up disposal of cases at the Authority of Advance Ruling (AAR) where some matters are pending for three-four years.
This despite the guidance in the law to dispose-off cases within six months.
“This one single measure will go a long way in providing greater certainty and unclogging potential disputes in the system,” says Kapadia.
Officials note that the government has been examining a mediation mechanism between taxpayers and the CBDT to reduce tax litigation.
Under this, taxpayers may be allowed to opt for negotiated settlement before a group of commissioners once they receive the draft order.
“Mediation mechanism will help develop a level of trust between a taxpayer and the administration which will not only bring down litigation but also help improve compliance,” an official said.
The United Nations’ committee on domestic dispute resolution last year also advocated administrative mediation procedure to facilitate communications between taxpayers and tax officials.
Another measure that has been under the consideration of the government is setting up of a litigation management unit to manage the entire tax litigation process, right from deciding in which cases the appeals ought to be filed to devising the strategy to defend a case, according to sources.
This was suggested by the Direct Tax Code (DTC) panel.
For transfer pricing cases, a separate functional assessments unit may be set up, government officials said.
The immunity scheme of waiving penalty for revising returns is also aimed at reducing litigation, they said.
To nip the issue of tax disputes in the bud, many experts feel, the drafting of tax laws needs greater attention.
“They are drafted following inadequate consultation with businesses and as a result, they are one-sided,” says Mukesh Butani, managing partner, BMR Legal.
Further, the government has to make some tough decisions on matters relating to reforming the tax administration system.
“The functioning of the tax administration needs to be broken up into tax policy/administration and tax compliance/implementation,” says Butani.
Housing both functions under the Department of Revenue leads to conflict-of-interest situations, say experts.
On some issues the same set of officials become responsible for tax policy, who also have oversight on tax assessments, they add.
Experts highlight the need for greater accountability for field officers so that they act judiciously while fulfilling their assessment and audit roles.
Similarly, there has to be greater accountability in the system when the first appellate authority adjudicates upon disputes on points of law and facts.
“In the past two decades, the role of the first appellate forum has been reduced to a stamping authority,” says Butani.
Insofar as tax treaty disputes are concerned, experts are not in favour of residents of treaty partners being subjected to the long-drawn court process in India.
“India should review its treaty position to embrace a mandatory arbitration process in dealing with disputes under double tax treaties,” says Butani.
The Tax Administration Reform Commission had also recommended the introduction of arbitration and conciliation in the Income Tax Act.
Disputes involving simple questions of fact should be referred for conciliation, while those involving a mixed question of law and fact should be referred for arbitration, say experts.
It is a common practice in countries like the UK, Australia, the US, where many tax disputes are settled out of court through facilitated discussion or mediation.