Two steps forward

Govt does well to settle tax & corporate cases quicker

An important contributor to the difficulty of doing business in India is the complexity, arbitrariness and length involved in resolving disputes with the government. At long last, however, some changes seem to be being made in this respect. For one, changes are being planned to the Companies Act of 2012 following the institution of a 10-member committee by the Union Ministry of Corporate Affairs. It is now reported that 90 per cent of the offences specified in the Act might be settled by the payment of a simple fine, avoiding the need for court proceedings. At present more than 40,000 cases related to the Companies Act are clogging up the judicial system, with many of them related to minor offences such as errors in the filing of balance sheets. Reducing the prevalence of such cases is an important reform, and it is to be hoped that the Act is amended along those lines as soon as possible. It is also, however, vitally important to keep in mind that it is essential to move on the decriminalisation of many of the offences that, while of a civil nature, nevertheless currently involve criminal proceedings and jail time.

While an arbitrary application of draconian provisions of the Companies Act is a problem, it is not the sole way in which companies in India can find themselves tied up in litigation. Tax issues are also a major constraint, given the tax authorities’ tendency to take a maximalist view of claims, to pursue disputes even if they are relatively small, and to appeal against verdicts without conducting due diligence. However, it has now also been reported that the Central Board of Direct Taxes, or CBDT, will not choose hitherto to appeal or to pursue pending cases related to income tax demands of less than ~2 million. This would require the withdrawal of over 90,000 cases that are currently before the Income Tax Appellate Tribunal, or ITAT, as well as elsewhere in higher judiciary. While, if all these cases were won, the government would be looking at ~100 billion in additional revenue, it is far more important to focus on cleaning up tax administration and making it easier to settle disputes. According to the Economic Survey for last financial year, 0.2 per cent of the almost 140,000 direct tax cases currently winding their way through the courts involved more than half of the actual disputed tax by value — while two-thirds of the cases involved claims of less than ~1 million and altogether represented less than 2 per cent of the total disputed tax by value. Meanwhile, the income tax department has not had a stellar record in terms of wins on appeal either. Clearly reducing the number of small-ticket cases is a win-win and the finance ministry is to be commended for moving forward on this issue.

Both these developments are welcome and will likely go a considerable way towards reducing the difficulty of doing business in India. Tax administration and regulation of corporations should focus on larger offences and reduce arbitrariness while speeding up the application of law. It is good news that these principles are now being given their proper importance by the government.