By TV Mohandas Pai & S Krishnan
Former finance minister Arun Jaitley stated in his 2016 Budget speech, “Litigation is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the taxpayers and administrative cost for the Government.” Possibly the biggest economic failure of the National Democratic Alliance (NDA) over the last 11 years is its inability to fulfil its promise of eliminating ‘tax terrorism’ and reducing disputes. On the contrary, tax terrorism and disputes have increased stupendously during this period. The minister of state for finance, Pankaj Chaudhary, provided data relating to income tax disputes across various appellate stages as shown in the accompanying table.
The amount locked up in litigation has significantly increased over the past 11 years despite enhancing the limits for appeals. This show that litigation management has failed miserably, and high pitch assessments indeed continue.
Unrealised tax demand nearly doubles in three years
Another concerning issue is the increase in the amount of tax demand raised but not realised (disputed and not disputed) which has nearly doubled from Rs 14.41 lakh crore in FY 21 to about Rs 28.59 lakh crore in FY24. Unrealised undisputed tax demand is Rs 15.23 lakh crore as of March 31, 2024. This has increased by about four times since 2020-21 and surprisingly higher than taxes under dispute for the first time during this period. The unrealised tax revenue every year is more than tax revenue collected for that year. Corporation tax demand not realised is rS 13.97 lakh crore as of FY24 whereas actual collection is Rs 9.11 lakh crore. Similarly, non-corporate tax demand not realised is Rs 14.62 lakh crore whereas actual collection is Rs 10.45 lakh crore for FY24.
The Standing Committee on Finance in its ninth report presented to the Lok Sabha on March 19, 2025 reveals the cumulative income-tax arrears up to February 14, 2025 is Rs 43 lakh crore. About two-thirds of the total outstanding demand is classified as Demand Difficult to Collect. When the Committee expressed concern over the huge arrears and desired to know the possible steps to address this, the Central Board of Direct Taxes chairman responded that the prime reason for litigation pendency at the first appellate level was increase in the number of fresh appeals instituted over the years and 40% shortage of manpower. He also indicated that “all demands in our registers are installed in a digital format now, there is a possibility that we can actually take these calls, otherwise, it was difficult.”
It’s time for the government to write off the unrealised tax revenue which is not under dispute and relieve the taxpayers from the unnecessary and unwarranted harassment and hardship. The new Income Tax Act, 2025 will come into effect from April 2026. The quantum of litigation is also likely to increase significantly in the future due to improper drafting of Income-tax Act, 2025.
Clearing appeals seen as urgent priority
Administratively, the biggest roadblock is at the first appellate level. The income tax department should increase their manpower and fast track the settlement of appeals pending with Commissioner of Income Tax (Appeals) or Joint Commissioner of Income Tax (Appeals). It should target to complete all pending appeals within a year and refund the inappropriately collected taxes. It should target to settle all cases pending at the Income Tax Appellate Tribunals in the next two years and all cases pending with the courts within the next three years.
The NDA’s former FM promised in 2014 to remove tax terrorism. Sadly, this promise has not been fulfilled even after 11 years and needs urgent focus by our Prime Minister. FY25, FY26, and FY27 should be declared as the year of tax resolution and entire focus should be on resolving great majority of tax disputes.
The authors are, respectively, chairman of Aarin Capital Partners and tax consultant