FM may try this route to settle tax disputes
Finance minister Arun Jaitley’s statement, that the government will try and resolve existing tax disputes within ‘the next few days itself’, suggests many high-profile cases such as Vodafone and Cairn may be referred to the AP Shah panel. Indeed, in an interview to FE some weeks ago, Shah had indicated that some tax dispute cases could be referred to his panel. While it is to be hoped the panel will show the same clarity it did in the FII-MAT case—and will say the taxes arising from the 2012 retrospective tax amendment should be scrapped—the finance minister will still have his hands full as the income tax Act will have to be amended if the cases are to be dismissed. And that is something Jaitley has been loath to do on the grounds that this would open the government to the charge of being pro-corporate. Indeed, having taken that line, Jaitley’s best bet was to hasten the process of arbitration, but this has not happened either—while the government has at least appointed its arbitrator in the Vodafone case, it has not done so in the Cairn case. Of course, were the Shah panel to opine against the retro-tax, Jaitley’s case will be that much stronger.
Resolving the cases relating to the Rs 2.64 lakh crore additions to the incomes of MNCs since FY06, of course, will be easier since these can be done by the income tax (I-T) department. The I-T department has entered into an agreement with US authorities to solve transfer pricing disputes with about 200 US IT/ITeS firms, and this could be used as a template for other disputes. The finance minister also needs to fix—on a permanent basis—the taxman’s adventurism. As the parliamentary Standing Committee on Finance said of the ever-increasing tax arrears—Rs 6.75 lakh crore in direct taxes and Rs 1.5 lakh crore in indirect taxes—“(this) raises serious questions over the quality of assessment itself, which results in tax demands failing judicial scrutiny”. One way to do this is to evaluate, as the department is said to be doing, the taxman’s record in augmenting revenues—by, say, linking various databases to catch non-filers or those declaring incorrect incomes—and to link the filing of tax assessments with their actual success/failure; once the taxman knows frivolous litigation will be penalised, and tax augmentation rewarded, his approach will change.