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Tax Litigation - How do we minimize

Currently, tax litigation in India takes more than two decades to reach finality. With Budget 2017 approaching, this brief write-up discusses a range of approaches to minimize tax litigation through negotiation / a defined process.

Ashesh Safiisand Afroz Galeria | January 30, 2017 | Updated 19:32 IST
Tax Litigation - How do we minimize

Currently, tax litigation in India takes more than two decades to reach finality. With Budget 2017 approaching, this brief write-up discusses a range of approaches to minimize tax litigation through negotiation / a defined process.

The Hon'ble Finance Minister, in the Budget Speech for 2016, mentioned that more than three lakh income tax cases are pending before the first level appellate authority with a disputed amount worth 5,05,000 crore. Further, as per details available, as on March 2014 there were 35,266 direct tax cases pending before all benches of the Income Tax Appellate Tribunal across India, 35,696 cases pending before the High Court and 5,960 cases pending before the Supreme Court.

Followed by the Finance Minister's commitment in the last budget to provide a stable and predictable tax regime, the government's attempt towards tax simplification and improving the tax litigation framework in India are noteworthy but still it needs more clarity and improvement. It is taxpayer's expectation that the upcoming Budget 2017 shall provide for policies and roadmap to settle and clear the backlog of tax litigation and provide a friendly tax regime facilitating the ease of doing business in India.

Budget 2016 introduced The Direct Tax Dispute Resolution Scheme 2016 to provide taxpayers an opportunity to settle disputes pending as on 29 February 2016 before the Commissioner (appeals). No doubt, it was a good attempt to settle tax litigation. However, it has a narrow application. The scheme provided for settlement of the entire appeal and does not provide for settlement of a part or any issue / ground in the appeal. Thus, there is a dire need for the government to think of other methods to reduce the pending tax litigation in India.

The government also needs to work on improvising the current tax litigation process in India ensuring that the disagreement between the taxpayer and the tax department ends on legal issues at a faster track and dispute relating to factual aspects are closed at the Department level.

It is essential to draw inspiration from tax practices / programmes followed in developed countries. Following are some of the schemes / practices prevalent in other countries. Insights can be taken from the below practices in redefining the tax litigation system in India.

Practice followed in other countries

The Portugal laws provide the taxpayer an option to take the tax dispute before Tax Arbitration whose decisions have the same legal value as court judgements. The right to refer to arbitration is a prerogative of the taxpayer, and is not at the discretion of the tax authorities. The arbitration procedure completes in six months.

The USA tax laws provide for Fast Track Settlement as an alternate way for settlement of tax dispute. Fast Track Settlement is designed to help large, mid-sized and small business / self-employed taxpayers resolve tax disputes. The taxpayer has the option to withdraw from the Fast Track settlement process at any time. If any issues remain unresolved at the conclusion of the fast Track Settlement process, the taxpayer retains all of its otherwise applicable appeal rights.

A few suggestions to minimize tax litigation in India in brief are:

Voluntary Tax Litigation Settlement

With an intention to reduce the tax litigation pending at all the appellate levels, and to ensure fast track dispute resolution, the Indian tax laws could provide for a scheme where the taxpayer can invoke settlement of the matter pending at any level. The invocation could be for appeal filed by the assessee or the Department. The settlement should be by way of negotiation between the parties within specified time. If the settlement proposal is accepted by both the parties, there should not be any further proceedings for the said year including reassessment, penalty or prosecution under the Income-tax Act.

Levying cost for unsuccessful litigation

The law should provide for levy of cost against the appellant / respondent against whom decision has been rendered. This will ensure that litigation is not undertaken in frivolous matter / issues. The cost should be recovered from the unsuccessful party within the given time frame. The cost range should depend upon amount involved, time taken for disposal, appellate level etc. This could also have the effect of discouraging the tax administration from overly aggressive assessments and also tax payers from litigating on frivolous issues.

Assessment in public interest

The Assessing Officer at the assessment stage ought to pursue the public interest in correct application of tax laws and not the collection interest of the tax administration. Arbitrary and irrational demands are raised because of the revenue target linked performance evaluation and incentive policy of the tax officers. The quality of the decision / assessment order should be the highest parameter for evaluation of the Assessing Officer's performance. Further, if the addition or disallowance proposed by the Assessing Officer is lower than a certain percentage of the taxable income offered by the assessee, no such additions or disallowance should be made while concluding the assessments. This will ensure that the litigation is only for high value assessment.

Global Best tax Practices

The tax department could consider having a separate cell dedicated to study global trends and best practices relating to tax assessments / litigation on a regular basis. Based on such study, the concerned cell / department should provide recommendations to make India a tax-competitive jurisdiction.

Complex or unclear tax laws lead to higher level of disputes

The disputes arises mainly due to interpretation of tax laws. One reason for the massive build-up of tax disputes in India is that many provisions in Indian tax laws suffer from poor drafting and are amenable to multiple interpretations. If taxpayers have a clear understanding of their obligation, a greater number of them will be inclined to comply appropriately, thereby reducing the potential for litigation. Undue complexity of tax laws and an excessive rate of amendment can lead to disputes / litigation. It is important that tax laws be technically well drafted, with care of precise and simple language. Complexity and changeability of tax laws cannot be totally avoided, but should be minimized. On regular basis CBDT should consider issuing clarification along with clear guidance to the tax payers so that the law is correctly understood without any ambiguity.

Authority for Advance Ruling ('AAR')

Currently the Authority for Advance Ruling addresses the litigation for foreign taxpayers and public sector undertaking (PSU). The scope for AAR should be increased to permit any taxpayersapproach AAR for settling their disputes.

While it may not be possible to have litigation free environment, but tax friendly strategies and policies for minimizing litigation can help to have less tax litigation society.

Ashesh Safiis is Partner; and Ms. Afroz Galeria is Deputy Manager with Deloitte Haskins and Sells LLP

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