By TV Mohandas Pai and S. Krishnan
The Finance Minister in her Interim Budget Speech of 2024-25 proposed to withdraw outstanding direct tax demands up to Rs. 25,000 for the period up to financial year 2009-10 and up to Rs.10,000 for financial years 2010-11 to 2014-15. She said, “There are a large number of petty, non-verified, non-reconciled or disputed direct tax demands, many of them dating as far back as the year 1962, which continue to remain on the books, causing anxiety to honest taxpayers and hindering refunds of subsequent years.” The Finance Minister expects this to benefit about a crore taxpayers.
Following the Finance Minister’s announcement, the tax authority CBDT released an order to remit and extinguish the tax demands under the Income Tax Act, 1961, Wealth Tax Act, 1957 or Gift Tax Act, 1958. The outstanding demand comprises the basic tax under the relevant Acts and includes interest, penalty, fees, cess, or surcharge within the ceiling limit. However, the remission and extinguishment of outstanding tax demands are capped at Rupees one lakh per assessee, regardless of the total eligible amount across assessment years.
Revenue Secretary Mr. Sanjay Malhotra in a post-Budget briefing said it should not be seen as a “waiver” but instead as a “withdrawal and correction of entries.” He said the government is now remitting 1.1 crore tax demands which will cost “less than Rs 3,500 crore” adding that about 58 lakh demand entries are for the period up to FY 2009-10 and another 53 lakh entries pertain to the years from 2010-11 to 2014-15. “Many of these demands are very old, dating from 1962 when the Income-Tax Act was enacted and right now till very recently, till today…many of them are unreconciled because of systemic issues. We shifted all the tax records, centralised them in 2010-11. That’s why the cut-off has been taken at 2010-11 because previously the demands were decentralised. So, we are unable to verify many of them, causing disruption and hindrance in payment of refunds,” he said.
It appears that the decision will only consider outstanding cases. Taxpayers whose refunds have been adjusted against older tax demands may not get relief as this would involve re-opening of many cases. The impact of this one-time tax withdrawal would be limited since the outstanding demand includes interest, penalty, fees, cess, and surcharge which together may form a substantial part of the outstanding tax demand. According to IT department, taxpayers do not have to take any steps to get their tax demands withdrawn since the government will automatically extinguish such records. However, it is not clear on the recourse available to taxpayers whose eligible tax demands are not withdrawn.
According to the latest Receipt Budget 2024-25 released in February 2024, tax revenue raised but not realised is Rs. 19.27 lakh crs as at the end of Reporting Year 2022-23. Of this, the total amounts under dispute are Rs. 10.48 lakh crs. Amounts under dispute for less than 5 years are Rs. 9.71 lakh crs and Rs. 27,000 crs for over 10 years. It is reported that the income tax arrears as on March 31, 2023, was Rs. 24.51 lakh crs as against Rs. 22.98 lakh crore a year ago. Tax arrears are unpaid taxes by both corporations and individuals including demands in litigation or under dispute. Arrears increase when disputed demands get carried forward every year with interest and penalty.
Corporation tax under dispute as at the end of Reporting Year 2022-23 is Rs. 5.98 lakh crs, of which the amounts under dispute for less than 5 years are Rs. 5.63 lakh crs, which is 94% of the total amounts under dispute. The large quantum of pending tax disputes show that high pitch assessments continued over the past 5 years and litigation management has not been very effective over this period. This is despite the Finance Minister speaking of reducing repeated litigation between taxpayers and the income tax department in her 2022 Budget speech. The government should set a moratorium on high pitched corporate assessments for a period of at least 2 years till the pending disputes are settled.
The Demand & Collection Report prepared by the Income Tax Department (ITD) for the month of March of the respective FYs has analysed various factors such as no assets/inadequate assets for recovery, cases under liquidation/BIFR, assessees not traceable, demand stayed by Courts/ ITAT/ IT authorities, TDS/prepaid taxes mismatch etc. leading to an estimation of the demands difficult to recover. With the ITD unable to recover over 98% of the total arrears of demand, it is obvious that the pending litigation is untenable, resulting in taxpayer harassment, colossal waste of time, money and energy for litigants, the government and the judiciary.
The FM’s initiative to withdraw outstanding direct tax demands up to a defined amount up to FY 2014-15 is a welcome move considering the high pendency of appeals with CIT(A) and the amounts under dispute. However, the maximum amounts set for remission are inadequate and the capping of the total eligible waiver across assessment years was unnecessary. If the aggregate of all demands outstanding for a taxpayer exceeded Rupees one lakh, the withdrawal would be limited to eligible demands totalling to Rupees one lakh or less and the rest of the demands would continue. Instead of setting such low amounts for remission, the government should withdraw all such tax disputes if it is unable to settle tax disputes for a period exceeding 10 years up to say Rs. 5 lakhs.
The government must urgently step in to clean up the entire tax assessment system and broken-down appeal process specially for the corporate sector. The CBDT should focus on the resolution of the high number of pending appeals before various authorities. Administratively, the biggest roadblock is at the commissioner level. In terms of priority, the CBDT should fast track the settlement of appeals pending with CIT(A) where the pendency is very high. The CBDT could consider extending the Dispute Resolution Panel (DRP) process beyond cases involving transfer pricing, leading to a substantial number of disputes being resolved at the assessment level. A DRP means a collegium comprising of three Commissioners of Income-tax constituted by the CBDT and has a mandate to dispose of cases within nine months.
The CBDT should enhance the low monetary limits for filing appeals by the ITD to Rs. 1 cr before the ITATs, Rs. 5 crs before the HCs and Rs. 50 crs before the SC. The CBDT should also ensure that all appeals filed by the ITD before the higher authorities which is below the monetary limits is immediately withdrawn and the extra collected taxes are repaid immediately. These enhanced limits would prevent the tax officers from filing routine frivolous cases and enable the judicial authorities to focus on high value litigations. The ITD should target to complete all pending appeals within the next 1 year and release the inappropriately collected taxes to the taxpayers. In the case of appeals pending at higher levels, the ITD should target to settle all cases pending at the ITATs in the next 2 years and all cases pending with the Courts within the next 3 years.
India today needs a transparent tax assessment system which does not result in too much of litigation and a fast resolution process. The CBDT should publish on its home page a monthly report on the total number of appeals pending at the beginning of the month, disposed of during that month and the pending appeals at the month end along with the monetary value of appeals settled and the amount locked up at the end of the month. This would increase transparency and the public would be aware of the progress made.
The 2014 BJP election manifesto stated, “UPA Government has unleashed ‘tax terrorism’ and ‘uncertainty’, which not only creates anxiety amongst the business class and negatively impacts the investment climate, but also dents the image of the country. We will provide a non-adversarial and conducive tax environment, overhaul the dispute resolution mechanisms, rationalization and simplification of the tax regime which is currently repulsive for honest taxpayers.” This promise remains largely unfulfilled till now. The present government should ensure that the promise made 10 years ago is fulfilled now. Fiscal years 2024-26 should be declared as the year of tax resolution and focus should be on resolving great majority of tax disputes.
About Authors: TV Mohandas Pai is the Chairman, 3one4 Capital and S. Krishnan, Tax Consultant
Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com Reproducing this content without permission is prohibited.