Just too much tax litigation

India is a litigious country — more so since we have several laws and regulations which are inherently complex. This is notwithstanding the fact that litigation is a costly affair.

Income tax is an area that sees a lot of litigation. The last decade witnessed an increase in the volume and scale of litigation on income tax issues.

As on June 11, 2012, there were 2,59,523 assessment cases pending. It is estimated that ₹4.37 lakh crore of income tax is locked in litigation (current estimate is around ₹8 lakh crore).

Also, around 3,600 cases were taken up for transfer pricing assessment during FY2013-14 and additions and adjustments (estimated to be ₹60,000 crore) have been made in half of them.

Ensure accountability The most astonishing feature of these statistics is the fact that the revenue authorities are the biggest litigator — more so, since they have a tendency to go on appeal, irrespective of the merits of the case on hand.

This is appropriately reflected in the relatively low success rates on appeals filed by the Revenue Department (estimated to be between 15 per cent).

In a recent ruling in the ITO vs Growel Energycase, the Mumbai Income Tax Appellate Tribunal (ITAT) has made certain important comments.

The Tribunal observed: “In fact this is a peculiar case where even the Commissioner (Administration) who is supposed to supervise the proper functioning of the AO, under his charge, has allowed him to file appeals without properly examining the assessment order and the order of the learned CIT(A), which results in unnecessary expenditure to the assessee when appeal is filed by the Revenue and the assessee had to undergo the trauma of engaging counsel and paying substantial fees to defend the case when the Revenue has no case at all.”

The Tribunal went on to direct the commissioner and the assessing officers to pay costs arising out of their improper actions on the assessee. Such judicial precedents reiterate the dire need for ensuring accountability in appeal matters.

Do we have a solution to this problem of alarming proportions? The answer is a categorical “yes” — but it requires serious efforts and collective will to make it work.

Advance, retreat One of the initiatives undertaken to provide certainty to non-resident investors on tax matters was the introduction of advance rulings, but after 20 years of its existence it has proved to be a huge disappointment largely because the implementation has remained tardy and hence unsuccessful.

Currently, nearly 500 cases are pending disposal by the Authority for Advance Rulings (AAR) and it takes around one year to get an advance ruling through.

How can these by any stretch of imagination be called an advance ruling? The solution lies in strengthening the process of advance rulings by introducing more benches and providing a clear timeline in disposing of matters.

Secondly, another way to approach this is to have external participants in the bench — similar to the manner in which the UK GAAR (General Anti Avoidance Rule) panel works.

The panel implements a system wherein people with relevant expertise are appointed as a part of the panel to provide assistance on a case-by-case basis.

Get it right Interestingly, the GAAR UK panel also stipulates that applications filed with it need to be disposed of within 60 days. A similar system needs to be incorporated as a part of the current AAR mechanism to make it worthwhile and successful.

Further, high-value, specified domestic transactions undertaken between resident assesses should also be brought within the ambit of advance rulings.

There are several complex corporate re-organisations and arrangements which necessarily involve an interplay of tax with other allied laws such as the corporate law, local stamp duty laws and so on, which require clarity and certainty before such transactions are put through.

What is the logic of ensuring “certainty” for non-residents while keeping residents on tenterhooks with respect to such complex transactions?

The need of the hour is to strengthen the process and provide the necessary level playing field in the matter of advance rulings.

The Tax Administration Reform Commission (TARC) has recommended the re-organisation of the current administration of tax regimes by suggesting the merger of the Central Board for Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) into a single tax administration body.

Tightening administration Also, it is time independent members with proven capabilities and experience in running large organisations became part of CBDT or CBEC; such persons can provide the much needed wisdom and support to the revenue authorities.

The report has also mentioned the irrational revenue target fixed by the department as the major reason for tax litigation. This, coupled with lack of customer focus, has reduced the relationship between the revenue department and the assessee to an adversarial one, rather than one of co-operation.

Building a partnership model between tax gatherer and tax payer is the only way to reduce the quantum and scale of litigation.

As the Prime Minister has rightly pointed out time and again — nation-building can be achieved only when all the nearly 125 crore Indians work seamlessly together.

The current environment requires renewed focus on building business on the basis of trust, mutual confidence and global competition.

Any tax system has to support business rather than being an impediment to its growth.

The ideal system of taxation was summed up by French politician in the days of Louis XIV, Jean-Baptiste Colbert, who said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”

The writer is tax partner at EY. The views are personal