Budget 2016: Road map for shunning tax litigation need of the hour

Published: February 26, 2016 12:14:12 AM

Taxpayers and tax administrators are anxiously looking at the response of Indian government to the BEPS (Base Erosion and Profit Shifting) action plans of OECD

As our finance minister is gearing up for presenting the Budget later this month, the corporate world, both Indian and multinational, will be eagerly looking forward to key reforms around tax regulations.

Looking at the year gone by, the current government was able to portray its clear intentions of reducing the obstacles and providing certainty in the area of tax, in their efforts to improve India position on ease of doing business index.

Quick resolution of MAT related issues of FIIs, its decision not to further contest the Bombay HC decision in the case of Vodafone, introduction of range and multiple year data concepts in transfer pricing law are to name a few.

Further, setting up of committees such as Eswar’s committee also makes it clear that the government is determined to reform the archaic and unwarranted laws.  These steps should certainly boost the confidence of Indian corporates in general, and more particularly the MNCs in doing business in India.

Taxpayers and tax administrators are anxiously looking at the response of Indian government to the BEPS (Base Erosion and Profit Shifting) action plans of OECD.  While OECD is aiming at increased transparency and fair system of levying of and distribution of taxes by various countries, introduction of any legislative changes for adapting these in India requires addressing the gaps in redressal of disputes mechanism provided in the Indian tax laws.  It is imperative for the government to ensure that the steps are taken in a measured manner, and the fine print does not undermine the philosophy followed by the government so far.

A few areas that should be addressed in the Budget are discussed in the next paragraphs.

Introduction of appropriate mechanism for quick redressal of disputes — the biggest challenge for taxpayers is resolving the tax disputes, which may take a decade or two before finally resolved.

Currently there is no mechanism to settle these disputes without litigating before courts.  Therefore, it is important to pave way for a legislative framework wherein the taxpayers and the tax administrators can resolve their differences of opinions arising during the assessments through amicable negotiations and nip possible litigation at bud.

A quick analysis of the statistics relating to pendency of tax disputes before various courts and the final outcomes from such disputes will provide emphatic evidence for the dire need for this framework. Such a framework would save the government and the taxpayers a significant amount of time and money. One of the possible ways of introducing this framework is to empower the Dispute Resolution Panels (DRP — a collegium of three senior tax administrators of commissioner rank) to negotiate and settle the potential disputes without having them go through the ordeal of appeals at various levels.

There should be adequate safeguards to protect the administrators acting in good faith and they should not be fettered with the hassles of scrutinising their decisions from mere revenue loss perspective. It is important to have such mechanism in place at the earliest, as there may be increase in of differences in opinions post any legislative changes adapting the BEPS action plans.

Even the adoption and implementation of BEPS action plans related legislative changes should be rolled out in a phased manner after consultation with all the stakeholders. On a couple of routine matters in the area of transfer pricing, it would be ideal to do away with requirements such as filing of accountant’s certificate covering international transactions, and also doing away with mandatory documentation requirement for taxpayers opting for safe harbor rules.

Further, revisiting the safe harbor rules to align the prescribed margins to closer to commercial realities would result in significant reduction of litigation.

By Vishweshwar Mudigonda

The author is Partner, Deloitte Haskins & Sells LLP

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