Wanted, a panel to settle tax disputes

My friend Keval had a strange experience recently. He had filed a case against another party in court, which granted an interim stay order asking the other party not to take any prejudicial action till it gave a decision after a detailed hearing. This interim order had come around two years ago. The court has still not held a detailed hearing yet.

Now comes the strange part. The opposing party has been following up with Keval to find out the case’s status and whether further hearing has taken place. It appears clueless about what its own lawyers are pleading in the court. It has even asked Keval for a copy of his petition.

The case is a writ petition filed by Keval in the Bombay High Court against the Income-tax (I-T) Department. The Department has no ability to get these details from its high-priced lawyers. It, therefore, uses its statutory powers to force an update from taxpayers.

Whenever the Department loses a case, its officers mindlessly recommend filing appeals in higher judicial forums. The officials don’t have to bear the cost of litigation. Besides, they will be long gone or retired by the time the appeal comes up for hearing and is inevitably lost. Such mindless appeals impose a heavy cost.

Fortunately, the I-T Department has recently specified that appeals can be filed in higher forums only if the disputed amount is above a limit. This has eliminated some petty tax litigation.

In addition, the “Vivaad se Vishwas Tak” (VSVT) scheme has reportedly helped settle around 30 per cent of all tax disputes. VSVT allowed the taxpayer to pay the disputed tax amount without interest. In all likelihood, VSVT cases involved disputes which the government was likely to win, hence taxpayers availed of the scheme and paid up.

The disputes that are left are those the government is unlikely to win. The government should constitute a panel to examine the balance 70 per cent tax disputes, especially those where the tax department has lost in the lower forums and appealed in higher ones. The panel could even recommend increasing the disputed tax limits so that cases falling below those limits could be withdrawn. It could also list out those types of disputes which it can examine and then recommend a unanimous withdrawal if it is convinced the Department is unlikely to win.

Cases involving double taxation are a good example. (Disclosure: I have a personal interest in such a case). A cooperative housing society, of which I am a member, has gone in for redevelopment. The I-T Department has taxed both the Society and the members on the hardship compensation paid by the developer to the members. The result: The Department has neither been able to tax the Society (since it did not receive the amount) nor the members (since the Department has already taxed the Society for it, so it cannot double-tax the members on the same amount). In both cases, the Department has lost at lower levels and appealed in higher forums. If it were to withdraw its case against the Society, its chances of winning its appeal against the members would improve.

In many such cases, a “settlement” panel would be able to work out a way and thereby reduce India’s mountain of tax disputes. Truth be told, this will reduce the Department’s litigation cost and improve the ease of doing business. The Department can then hire better tax lawyers and focus on winning the “winnable” cases.

The government should constitute a panel to examine disputes, especially those where the Department has lost in the lower forums and appealed in a higher one