ARE WE GETTING THERE?

India needs bold measures to set right a broken tax assessment and appeal system

The phrase ‘tax terrorism’ has become part of the tax lexicon, ever since the BJP, in its manifesto for the 2014 polls, promised to end it. More than once, finance minister Arun Jaitley has expressed his resolve to end it and usher in a non-adversarial tax regime. While many steps have been taken, the effects of it are yet to be seen on the ground, where the I-T officers implement policy.

High pitched assessments

Cairn and Vodafone, where the taxman has raised multi-billion dollar demands (doubtful to say the least), are not even the tip of the iceberg. Both Cairn and Vodafone have invoked international arbitration against the government and neither of the disputes looks likely to be settled anytime soon. While the ‘Dispute Resolution Scheme’ was introduced in this Budget to reduce litigation, it may be a non-starter as one of the conditions is for the taxpayer to accept the primary tax liability, and the only concession one gets is a waiver of penalty, that too only when the disputed tax amount is less than R10 lakh . It is also surreal to expect that victims of high-pitched assessments due to the retrospective tax will just pay up and not contest the tax because penalty could be partially waived. Can there legally be interest and penalty on a retrospective tax at all?

The CBDT also made a welcome move, warning action against I-T officers found guilty of high-pitched/unreasonable assessments. But until the Board takes action in a few cases and sets an example, it is unlikely that the CBDT’s circular will have any deterrent effect. The high-pitched assessments of the past are winding their way slowly through the tax system. Nobody knows when they will be finally settled—one reckons, in a minimum of 10-15 years. Taxpayers may accept a perverse assessment system and a quick appeals process but when both are broken, there is no hope!

Disputed demands, inflated treasury & overstretched judiciary

Statistics tell the story! A whopping R5 lakh crore demanded by the taxman is contested by the taxpayer and is stuck at various levels of the litigation chain (see accompanying graph). Over the last five years, many high-pitched demands have been driven by the unreasonable targets set by UPA II.

Where the taxpayer does not get a stay from appellate authorities, she has to pay atleast a significant portion of the demand upfront, thereby contributing to the government coffers but with a big sword hanging over the final outcome of the disputes. These piled up litigations have another important consequence—they rob the tribunals and courts of valuable time, which could have been used to hear cases having ramifications for an entire industry. For instance—the IBM case, that has repercussions on the entire software sector (taxability of packaged software payments) is awaiting a hearing from the apex court for over 3 years, despite being granted special leave. While the ITAT has brought down pendency by a few thousand cases, the figure of 1 lakh outstanding cases means it shall take several years to reduce this by even half. One of the laudable measures taken by the ministry last year was to give retrospective effect to its circular increasing the monetary threshold for Revenue to appeal against CIT(A) and ITAT orders. But the limit of R5 lakh and R10 lakh is too low and needs to be atleast tripled to drastically cut the litigation pile up.

Statistics don’t lie.. and it ain’t rosy for Revenue!

A recent report by Deloitte & Taxsutra, shows that 76% of the 670 transfer pricing cases in FY16 were decided in favour of the taxpayer at the Tribunal/HC level.

This should be an eye-opener for the CBDT as to how poor the assessments have been. It is high time that it takes a policy decision not to file appeals in all and sundry matters and gives some primacy to the ITAT—the final fact finding body. Only cases involving a substantial amount or an important question of law, should be appealed against to the HC & SC.

Alternate dispute resolution mechanisms—light at end of tunnel?

When it comes to attracting FDI, perceptions matter and Harish Salve nailed it when, at a seminar recently, he brought out the contradiction between our leaders reaching out for global investments and the tax department undermining them. While our PM and FM promise a red carpet welcome, the tax department shows a red signal! Why is it that a majority of the tax controversies involve MNCs and IT companies? Most of them are governed by strict laws in their home countries and therefore have no room to make any compromises during the assessment proceedings in India. The advance pricing agreements (APA) regime, introduced over three years ago, to settle the transfer pricing disputes, has found lot of takers among MNCs. While the signing of 50+ APAs is great news, the piling up of pending applications—500 as of date should be a cause for worry. The FM, in his Budget Speech in July 2014 raised expectations when he announced the setting up of benches of the Authority for Advance Ruling (forum for non-residents to seek tax clarity on a particular transaction). But the benches are not yet functional and meanwhile the pendency has crossed over 1,000 cases. Sample this—applications filed in 2011 are coming up for hearing now, making one wonder whether it should any longer be called ‘advance’ ruling!

Raining circulars—but dil maange more!

Our FM and revenue secretary walk the talk when it comes to reducing litigation. The record number of circulars issued by the CBDT last fiscal, is adequate testimony. Add to it the fact that the FM accepted a good 17 recommendations of the Justice Easwar Committee (appointed to recommend simplification of I-T Rules ) in this Budget, shows his commitment to the cause. A high powered Committee led by Ashok Lahiri (on same lines as Shome Committee) was given the task of interacting with trade and industry to solve vexed tax issues concerning their specific sectors. Its been exactly a year since they took charge and while we haven’t yet seen any action/tangible output on this front, they probably deserve the benefit of doubt as putting a full stop to legacy disputes is not an overnight job. One expects the Lahiri Committee to take up 3-4 sectors this year and clarify on the tax issues. In the meantime, CBDT can do a David Warner and double the strike rate of circulars this year!

Overall there has been some improvement, tax terrorism has come down marginally. But unless the sins of the past are cleared expeditiously, investment flows, trust in the tax system and in promises will be low. We can see the impact in a declining investment/GDP ratio. We need bold measures to set right a broken tax assessment and appeal system.