Need new laws for real-time tax dispute resolution

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November 26, 2020 6:45 AM

If relief given via mediation is to be questioned later, as is likely, no taxman is going to embrace the FM’s new plan

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After coming out with the Vivad Se Vishwas scheme to try and resolve a large number of direct tax disputes, finance minister Nirmala Sitharaman told a CII audience that she was looking at creating a mechanism where, on a real-time basis, there can be a process of mediation to ensure tax differences don’t become tax disputes. That is a laudable objective and, should it work, it will go a long way in improving India’s image in the eyes of investors, both local as well as foreign. Achieving what the finance minister wants will require not just a very different mindset on the part of the taxman, and for the direct tax Board to be a lot more proactive, it will probably need legislative changes as well.

In the last five years, for which data is available, to put this in perspective, disputed direct tax claims have risen 2 times (from Rs 4.1 lakh crore in FY14 to Rs 8 lakh crore in FY19) while actual direct tax collections have risen 1.8 times (from Rs 6.3 lakh crore to Rs 11.4 lakh crore). And keep in mind that, with the taxman losing a lot more cases in the tribunals and courts, a large share of the disputed tax claims are probably not kosher. Worse, for all the talk of trying to make sure the taxman is non-adversarial, the disputed tax amounts are growing every year. In FY19, around 60% of the disputed direct taxes were of 1-2 year vintage.

Fixing this requires two things. One, there needs to be some penalty against taxmen who make arbitrary demands. Two, and more important, the tax Board needs to examine tax demands—where the tax implications are large—and to scrap them if they appear unreasonable and to issue necessary clarifications to field officials. Had the Board done this in the case of the MAT tax on FIIs that resulted from the demand notice by one taxman, for instance, the then finance minister Arun Jaitley would not have had to refer the matter to an expert panel—the panel felt the tax was uncalled for—and then withdraw it.

The government will probably also need to ensure the mediation panel has enough legal cover to do its job. One of the reasons why the taxman appeals most cases even after losing them at various levels is the fear that the CAG will pass strictures or, worse, that the CBI can come knocking on his/her door and allege favouritism. If the group does not get this cover—the Prevention of Corruption Act has been amended several times, but it is not clear if the protection is absolute—it is unlikely tax officials manning the panel or even the independent experts in it would be willing to take a risk. Keep in mind that, even after a global arbitration panel—which had one member nominated by the government of India—gave an award in favour of Vodafone Plc, the government is unwilling to accept it for fear that it will be accused of letting Vodafone off lightly; if the government is hesitant to take a call, how are tax officials or a mediation panel going to take that call?

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