The situation on both direct and indirect taxes on dispute resolution is alarming. Taxpayers in general, and especially international investors, often ask the time-frame for dispute resolution and one very often has to give the embarrassing answer probably never. Let us look at the ground reality: it takes 4-5 years from the end of the financial year (direct taxes) and 1-2 years after the relevant year (indirect taxes). The commissioner (appeals) could take between 1-3 years, the tribunal between 2-4 years, the High Court between 3-5 years and the Supreme Court between 4-7 years; the minimum, therefore, would be about 15 years (and probably 20-25 years). The problem becomes extremely acute when there are repetitive matters, which causes significant uncertainty and cash flow issues.
There are several existing dispute resolution mechanisms, but most do not work adequately. Current resolution mechanisms (direct taxes) include the Authority for Advance Ruling (AAR), Settlement Commission, Advance Pricing Arrangement (APA), Mutual Agreement Procedure (MAP) and Dispute Resolution Panel (DRP).
In the last few years, significant delays and conflicting decisions have diluted the attractiveness of the AAR as an ADR forum. Also, the AAR is accessible only to non-resident taxpayers, PSUs and certain resident taxpayers having transactions with non-residents. Also, there is only one bench of the AAR and that is in Delhi. In this context, the TARC has recommended that the AAR mechanism should be accessible to all corporates on proposed transactions in direct and indirect taxes, and that several more benches of the AAR should be constituted.
There is also reference to adherence to the time-frame for passing orders; one might add (although not mentioned by the TARC) that even the time-frame of six months is too long in the current context and the advance part of the AAR would itself become a question mark. As such, the period should be reduced to 3 monthsit should be possible if there are several benches of the AAR and the processes are streamlined.
Also, the constitution of the AAR should factor in international tax knowledge and experience, given that the nature of disputes which are before the AAR usually involve complex cross-border tax issues and require meaningful cross-border tax knowledge.
Amongst the major initiatives that have been taken over the years, the APA has clearly begun well and is working well. There is an extremely positive feel about the receptivity, business understanding and the mindset of the APA authorities. The TARC has not said much about it but, as readers might be aware, 5 APAs have already been concluded and another 400-plus are in the pipeline. While the TARC has not mentioned regarding the need to broad-base and deepen the bandwidth of the APA team, one would venture to add this as an important point. Several APAs could be grouped into separate baskets. One does hope that a large number of APAs will be cleared in this financial year and this will further strengthen the image of the APA as a meaningful ADR mechanism.
The TARC has suggested arbitration and conciliation as ADR mechanisms; of course, the legislation would be required to be amended to incorporate these mechanisms (the Constitution provides an effective ADR in Article 39A). This is how arbitration and conciliation have been described in the TARC: Arbitration is an adjudicatory process where a decision is reached by a neutral third party arbitrator(s). In the arbitration process, the arbitrator has flexibility. Also, once a dispute is referred to arbitration, it is normally not referred back to the court by the parties involved, unless the process fails. The arbitration award is binding on the two parties and is enforceable as a decree delivered by a court. Conciliation, another ADR mechanism, is non-adjudicatory in nature. The parties can attempt conciliation on the invitation of one of the parties but if the matter is settled through conciliation, the settlement agreement would have the same status and effect as if it were an arbitral award and be enforceable as a decree of the court.
The TARC states the difference between the two process is that, in conciliation, the taxpayer and the taxpayer administration agree on the terms of settlement, whereas in arbitration the two parties would have almost no involvement in the process and the decision of the arbitrator is more akin to a judicial process.
While the concept is good, there are some significant issues here. As the TARC itself has acknowledged, the mindset of tax authorities is a serious problem. As an extension of this point, the issue is who will be the conciliators and arbitrators and, in practice, the architecture of this forum can determine its success or failure. Also, meaningfully setting up such processes and making them function smoothly is a challenge.
One would tend to divide the ADR processes into 2 basketssuggestions made for better working of those which are existing (AAR, APA, the Settlement Commission and the DRP) and new ones (arbitration and conciliation). The overall architecture needs to be evolved. Further, the need for strengthening existing dispute resolution mechanisms, and putting time-frames, is crucial.
Tax disputes have become a significant irritant for the business community in general. One anxiously awaits the Budget as to what it brings in the context of dispute management, either as a result of the TARC recommendations or otherwise, unlike several other recommendations of the TARC which are long-term in nature. Some of the dispute management recommendations could perhaps be addressed in the Budget, or at least a roadmap could be laid out.
The author is senior tax partner, PwC India