After the National Democratic Alliance (NDA) government came to power in May 2014, the finance minister (FM) has repeatedly promised to end “tax terrorism”. This was a major campaign promise, too. He had promised to create a policy environment which is predictable, fair and transparent, to embark on rationalisation and simplification of the tax regime, to make it non-adversarial and conducive to investment, enterprise and growth.
Sadly, after two and a half years, not much has been done fundamentally to end tax terrorism at the field level particularly for the corporate sector: target driven high-pitched assessments continue. The tax arrears due, including the demand not fallen due, as on March 31, 2016, has increased by 38%, to R9.30 lakh crore from R6.75 lakh crore as on March 31, 2014. We have a broken assessment and appeals system which often takes 20 years to resolve at the SC! In such a scenario, citizens have no hope of a quick resolution of disputes, arguably the worst system amongst the top-20 major economies globally. The recent amendments to the Income-Tax laws, Benami Act and Black Money Act providing more powers to the tax administration, maybe needed to fight black money, instil fear of continued harassment in the absence of a quick robust appeal system.
Tax terrorism continues unabated in transfer pricing (TP) assessments. The cumulative value of TP adjustments is about Rs 2.7 lakh crore till FY15, and the trend continues. India has the highest number of TP litigations in the world. Different judicial authorities like tribunals and High Courts (HC) provide contradicting opinions on similar matters resulting in confusion and uncertainty till the issue is finally resolved by a binding judgment of the SC. It is impractical to expect the SC to deliver a binding judgment on every litigation. Even after the SC judgment is pronounced, it takes considerable time for the tax department to implement orders favouring taxpayers. The transfer pricing officers (TPOs) continue to adopt aggressive positions, leading to protracted litigation and uncollected tax arrears. This ecosystem has created a high risk perception about India among global investors.
The government introduced the Advance Pricing Agreement (APA) regime in 2012, to provide a risk-mitigated, tax certain regime. It is true that over the past two years, the Central Board of Direct Taxes (CBDT) has accelerated the process of concluding APAs by signing 56 in the current financial year, higher than the 55 concluded in FY16. The accelerated progress of the APA conclusion demonstrates the government’s ability to discuss a fair methodology with the tax payer and its intent to foster a non-adversarial tax regime. It should leverage this experience in extending an alternate non-judicial settlement process to reduce the quantum of pending TP disputes also.
The assessing officers (AOs) use the assessment procedure as a tool for high revenue collection instead of evaluating compliance. Due to unrealistic revenue targets given to AOs, their approach is revenue-centric and not judicial-centric, resulting in high-pitched assessments and consequent futile litigation. In addition, there is no adverse consequence on the AO if the order is set aside with strictures or an appeal is filed without merit. The responsibility of AOs ends with issuing an assessment order and they have no accountability in appeal matters. The high quantum of disputed assessments in India is a result of this imperious attitude. The HCs have repeatedly made scathing observations about the merit of the appeals filed and the quality of representation by the tax department, but no officer seems to be impacted by this.
You May Also Want To Watch:
Admitting the tendency of AOs to frame high-pitched and unreasonable assessment orders resulting in taxpayer grievances, CBDT in November 2015, announced the constitution of local committees as an institutional mechanism to quickly resolve such taxpayers’ grievances. There is no information about the number of local committees formed till date or the number and the value of high–pitched assessments settled by them. A settlement of tax disputes through a process of negotiation, prevalent in most countries, should also be implemented in India through the local committees. To enable that, the CBDT should provide the local committees with adequate powers to resolve high-pitched assessments.
The focus of the tax authorities is more on the selection of the taxpayer for scrutiny and less on the process of conducting assessment. Taxpayers fulfilling certain pre–defined criteria are automatically selected for assessments. Taxpayers having an addition in an earlier assessment year in excess of R10 lakh or cases involving TP addition in excess of R10 crore, regardless of whether it is confirmed in appeal or is pending before an appellate authority, are subject to compulsory scrutiny every year. This compulsory assessment parameter presumes the taxpayer to be a compulsive defaulter which may not be true. It further reduces the focus of audit on other actual tax defaulters and undermines the effect of the risk-based assessment, necessitating an evaluation of the entire approach.
The tax authorities conduct the assessment process assuming most taxpayers to be dishonest while majority of the taxpayers are compliant and do not desire to litigate. The tone and content of the letters issued to taxpayers is intimidating. Taxpayers are treated shabbily and are made to wait outside offices, asked unnecessary and irrelevant questions repeatedly, officers take leave suddenly, get transferred leaving half finished work or just sit on an order after completing hearings. There is no respect or courtesy for the taxpayer but a feudal, extortion-based attitude. Taxpayers and consultants are very scared to stand up or protest as they fear retaliation. This is not new, but has been prevalent over last 20 years. The behavioural response of the AOs towards taxpayers should undergo a significant change. The AOs should view assessment as a process to confirm compliance rather than a mechanism to collect additional taxes. The CBDT should adopt a policy that assessed taxpayers would not be subject to another assessment for the next three to five years unless they have a strong reason to subject the taxpayer to an earlier assessment. This will enable the tax authorities to enlarge the taxpayer population to assessment process.
As a part of its initiative to reduce taxpayer grievances and litigation, the CBDT issued a circular last year revising the monetary limits for filing appeals by the department. The current monetary limit is R10 lakh before an Appellate Tribunal, R20 lakh before a HC and R25 lakhs before the SC. These revised limits have been made applicable retrospectively to pending appeals as well. However, these thresholds are very low to make a meaningful impact in reducing pending cases or litigation.
The finance ministry recently announced that tax refunds issued during till December 2016 is 30.5% higher, a commendable feat. The government has hastened the process of providing refunds to taxpayers. This was largely possible due to e-filing of returns, e-verification and internet banking. The tax department has fast tracked payment of pending refunds below R50,000 for FY13 and FY14 in all non-scrutiny cases. The time taken to process income tax returns and issue refunds has reduced significantly in the past two years due to e-filing and verification of returns, but not much for the corporate sector.
A similar initiative should be carried out to reduce the number of pending assessments and tax litigation. The appeal and dispute resolution process is very slow and time-consuming, and expensive for the taxpayer. Corporate taxpayers carry a considerable burden of an uncertain tax position, giving huge contingent liabilities, and the tax administration is unable to fully collect the tax dues. The pending rate of disposal of scrutiny assessments (at the primary level) and appeal cases (at the next level) is ludicrously high in India. About 10.30 lakh scrutiny assessments were due for disposal in FY15, a pendency rate of 47.8% which is similar to 48.1% in FY13.
In the case of appeals, the situation is worse. The number of appeals due for disposal in FY15 are 74,000, similar to the number in FY14. However, the pendency rate is a whopping 75.8%, higher than 71% in FY14. The amount locked up in appeals in FY15 is R3.84 lakh crore compared to R2.87 lakh crore in FY14. The amount locked up in appeal cases with CIT was higher than the revenue deficit in FY15! The amount locked up at higher levels increased to R1.9 lakh crore (77,448 cases) as on March 31, 2015 compared to R1.8 lakh crore (76,922 cases) as on March 31, 2014. In litigation at all levels, the success rate for tax administration is substantially lower at 20-30% confirming that the quality of assessments is very poor.
A large volume of litigation revolves around a few issues. It would be judicious for the CBDT to first list the most common issues litigated at various judicial forums and summarise the judgements on these issues. Based on the summary, the I-T Act should be amended or the CBDT should provide its point of view clearly through circulars. Pending litigations should be withdrawn accordingly. The tax department should engage taxpayers in the process of policy formulation and implementation which will help in drafting a less dispute-prone legislation.
The FM should conduct surgical strikes against tax terrorism and introduce non-adversarial and conducive environment to investment, enterprise and growth. To enable that, the FM could implement the following on an urgent basis through budget 2017.
The entire focus of the I-T department should be to complete all pending assessments within a defined time frame of two to three years. No new scrutiny assessments should be initiated till all pending assessments are completed.
In the case of litigation, the government should ask for commissioning special benches to resolve the pending litigation within a defined time frame of two to three years.
To prevent the AOs from pursuing untenable litigation, they should be made accountable in litigations and appropriately penalised if the outcome of the appeal is against the tax authorities. In addition, a panel of tax counsel jointly with the AOs should evaluate the efficacy of pursuing litigation before an appeal is filed. Appeals to HCs and the SC should be filed only on a substantial question of law. This change in administrative approach will significantly reduce the number of litigations at all levels and prevent taxpayer harassment.
To increase transparency of the working of local committees to resolve high pitched assessments, the CBDT should publish on a monthly basis, the number of local committees formed and the value of high pitched assessments settled by them, to highlight the progress.
The monetary limits for filing appeals by the tax department should be increased substantially, by at least three to four times over the present limit. This will prevent the tax officers from filing routine frivolous cases and enable the judicial authorities to focus on high value litigations.
Keeping the promise made to citizens by the FM is imperative to restore trust in the government. 2019 is the election year when the NDA will have to answer voters. If they miss deep reforms in FY18 they will be unable to redeem their promise.
TV Mohandas Pai is chairman, while S Krishnan is a consultant, Aarin Capital Partners. Views are personal