Budget 2023: Towards a dispute(less) future | The Financial Express

Budget 2023: Towards a dispute(less) future

An opportune time for the country to showcase that its tax policy measures are consistent with its growth and investment objectives, while ensuring unnecessary disputes do not arise in its journey to become the 3rd largest economy by the turn of this decade.

Budget 2023, Budget Expectations, Union Budget, tax disputes, direct tax, tax regime
Simplification of tax laws, one of the vowed objectives of the Government can act as a catalyst in reducing multiple disputes.

– By Naveen Aggarwal

Much like the digital transformation juggernaut, India’s tryst with dispute resolution lately has been the talk of the town. A conscious effort by the government to try its hands on different options with a view to stack up tax collections, but more importantly, remove uncertainty and costs associated with litigation for certain sections of the taxpayer community – all welcome moves. The faceless assessment and appeal schemes have been a game changer and while the process itself will take time to mature, there is no doubt that it has the potential to bring in the desired change. The government has progressively increased the threshold for the Revenue to file tax appeals, buried the ghost of the impact of retrospective amendments etc, all with the objective to reduce the burdening of Courts with tax disputes. 

While these are all steps in the right direction, the need is to go full throttle with a sound and sustainable dispute resolution mechanism that will boost investor confidence and reduce the time to achieve finality in tax disputes in the long run. Few areas that one can think of.

Exploring negotiated settlement / amnesty scheme

A lean settlement is any day better than a fat litigation. The success of the one-time direct tax dispute settlement scheme, VsV, reflects that. It echoes the sentiment of taxpayers – if the contours of settlement are fair, taxpayers would favor a settlement rather than being drawn into long drawn litigation, involving significant associated costs and uncertainty. A related aspect is the enabling of a negotiated settlement. Budget 2021 introduced Section 245MA which enabled small taxpayers to negotiate a settlement of any penalty through reduction in quantum thereof or complete waiver. Widening the ambit of this provision to cover large taxpayers as well as expanding the scope for tax demands arising beyond penalty can have significant impact in cutting off a fresh cycle of disputes.  

Re-looking the efficacy of existing provisions to avoid repetitive appeals

The scourge of repeated appeals on the same issue have burdened the courts with tax disputes. The government introduced section 158AB under the IT statute which enables the Revenue in deferring filing of repetitive appeals, based on pendency of similar issues before the Supreme Court or the High Court with the intent is to avoid repetitive appeals. However, while there is no formal data, these provisions are often not resorted to given inherent limitations which make them unattractive. The Budget can take a re-look at these provisions to make them more attractive for consideration by taxpayers.

Making alternative dispute resolution mainstream

Alternative dispute resolution mechanisms (ADRs) under the tax treaty framework have been a success, be it Mutual Agreement Procedure (MAP) or Advanced Pricing Agreements (APAs’). There is a need to revitalize ADRs under the domestic tax laws. While the Authority for Advance Ruling (AAR) has been abolished and replaced with Board of Advance Rulings (BAR), the process has not formally taken off. This Budget should clear the hurdles and introduce measures to improve the attractiveness of BAR, which can play a pivotal role in providing upfront certainty to non-residents planning to undertake a transaction in terms of taxation.

Addressing pendency at CIT(A) level

Commissioner of Income-tax (Appeals) [CIT(A)], being the first level appellate body, plays a key role in the dispute resolution life cycle. Unfortunately, the pendency of appeals before the CIT(A) has only grown despite the introduction of faceless appeals scheme. There is a need for prescribing statutory timelines for closing appeals to help add certainty and fast track the tax dispute resolution mechanism going forward. Also, relooking the framework of processing of tax returns by the CPC can also aid in reducing the appeals filed before CIT(A) and will ensure taxpayers don’t end up filing avoidable appeals to prevent a complete payment of tax demand, which otherwise is unsustainable.

Simplification of withholding tax regime

India has an elaborate regime for withholding of taxes upfront. While the mechanism is needed to ensure parity of collection of taxes as a transaction takes place, it has become inherently complex with multiple rates and application ranging from services, extending to goods and now being even extended to deemed benefits. Simplification of tax laws, one of the vowed objectives of the Government can act as a catalyst in reducing such disputes.

Respecting the principles of judicial discipline

Last but not the least, it might take decades for an issue to be settled by the Supreme Court in terms of interpretation of the law. Case in point, the judgement on the issue of taxability of cross-border software licensing. While it is within the Government or taxpayer’s purview to seek a review of a judgement, however, unless the verdict is reversed, it is critical that, as law of the land, lower authorities follow the law in letter and spirit. This will go a long way in restoring investor confidence and ensuring that taxpayers are not forced down the road of avoidable appeals.     

In summary, an opportune time for the country to showcase that its tax policy measures are consistent with its growth and investment objectives, while ensuring unnecessary disputes do not arise in its journey to become the 3rd largest economy by the turn of this decade.

(Naveen Aggarwal, Partner, Tax, KPMG. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com)

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First published on: 31-01-2023 at 19:06 IST