The cost of undertaking tax compliance is a critical component for most companies operating in India, majority of which is attributable to litigation costs. A total of 87,862 appeals, involving indirect tax levied by the Central government, are pending with various appellate authorities as on March 31, 2011.
A certain degree of tax litigation is inevitable in any developing economy. However, a tax dispute in India may take up to 15-20 years to attain certainty, which is much beyond international standards. Multiplicity of appellate levels with restrictive binding jurisdiction of each level (apart from the Supreme Court) is a major factor contributing to the exorbitant time involved in settlement of tax disputes. Poorly crafted legal provisions leading to conflicting opinions by different appellate authorities cause duplicity of effort.
The finance ministry has recognised the need to curb the menace of litigation in India and has, accordingly, advised the CESTAT to ensure that orders are issued by benches on conclusion of arguments and, in complicated matters, orders should be issued within 30 days. This is a welcome move that can be further strengthened by implementing measures to free the statute from ambiguities as far as possible.
Certain dispute resolution authorities, such as Authority for Advance Rulings, Settlement Commission, etc (already in existence) can go a long way in lending clarity to various tax issues.
Authority for Advance
Rulings. The Authority for Advance Rulings (AAR) for Central Excise, Customs & Service Tax was set up in 1999 (extended to service tax in 2003) to give binding rulings, in advance, on central excise, customs and service tax matters pertaining to an investment venture in India.
Although the ambit of advance rulings, involving indirect taxes, and the eligibility of applicants has widened over the years, it has seemingly failed to prove to be an effective remedy vis-?-vis direct tax due to the following limitations:
n AAR involving indirect tax can be sought only on prescribed questions as against direct tax where no specific nature of questions has been prescribed;
n AAR involving indirect tax can be sought only for transactions proposed to be undertaken as against direct tax where advance ruling can be sought on any transaction.
What is required is to expand the ambit of AAR under indirect tax and include resident taxpayers as well as ongoing transactions to achieve the full potential of this mechanism and attract the same amount of enthusiasm from the industry as in the case of direct tax legislation.
Another such body is the Settlement Commission (SC), which provides a forum for the assessees to apply for settlement of their cases, on the basis of true and complete disclosure of their duty liability with the benefit of providing immunity from penalty, prosecution under the central excise and customs legislation.
The SC has proved to be an extremely progressive measure that has enabled companies to ensure quick disposal of issues without prolonging to the normal system of appellate authorities. However, in order to make the SC far more effective, it needs to be empowered with certain additional measures such as:
n Widen the power of the SC to include cases pertaining to service tax legislation; and
n Remove the limitation of approaching the SC only where the applicant has received a show cause notice and only for prescribed issues in order to include a wider range of applicants as in the case of direct tax where no such limitations have been prescribed.
Besides making the above-mentioned bodies more effective, there exists a need to introduce similar alternative mechanisms. For instance, the concept of National Tax Tribunal (NTT), which was envisaged in 2005 to expedite direct and indirect tax cases stuck at the various high courts, has been stalled indefinitely. Implementation of NTT and similar focused courts or specialised benches of the appellate authorities need to be fast-tracked to improve the level of appeals escalated to the Supreme Court and ensure quick delivery of justice. Alternatively, amnesty schemes, such as Dispute Resolution Scheme (implemented for a specified period in 2008 for cases below R25,000) for quick settlement of pending service tax cases, involving small amounts, can be made a regular feature in all indirect tax legislations with higher threshold limits so as to cover more of the pending cases.
The CAG had also suggested a similar mechanism for small taxpayers constituting the majority of litigants) to ensure quicker disposal of pending cases.
Certain other measures may include affixing personal accountability at each level for appeals filed by tax authorities; constitution of arbitration committees to discourage litigation and incentivise settlements over disputes; increased monetary ceilings for filing appeals before appellate tribunal and prescribed limitation period for disposal of appeals to be closely monitored.
Given the strain on resources, which the increased tax litigation causes for both the government and the taxpayers, it is critical for government to introduce some reforms in the upcoming Budget not only in letter but also in spirit.
(The writer is tax partner, Ernst & Young. Views expressed are personal)
