By TV Mohandas Pai & S Krishnan

The CBDT chairman, at the beginning of this year, had, in an office memo, expressed concern over the low growth rate of gross direct tax collection compared to the required rate, thereby affecting achievement of budget estimates. The memo made particular mention of the growth in collection under Regular Assessment Tax (recovery from arrears and current demand) being extremely low (1.1%, compared to the 15.6% growth during the corresponding period the year before). The CBDT chairman directed income tax officials (ITOs) to enhance efforts to maximise collections with special efforts for Regular Assessment Tax. One of the suggested strategies is to complete regular assessments (not time-barred) in cases where demand is likely to be raised and collected during the current financial year itself. This memo provides sufficient ammunition to ITOs to unleash terror, as recently done with start-ups over angel taxation.

One of the major promises made by the BJP government when it came to power in 2014 was to stop tax terrorism. Finance minister Arun Jaitley , in the run up to the 2014 polls, had announced that tax terrorism is the biggest threat to India and he is going to stop it. The 2014 BJP election manifesto stated, “UPA 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, rationalisation and simplification of the tax regime that is currently repulsive for honest taxpayers”.

A review of the performance so far of the present government indicates that it has been unable to fulfil the election manifesto promises. Tax terrorism arises from high unrealistic target-setting, leading to high-pitch assessments, and considerable time consumed in settling appeals. In fact, tax disputes in India normally take about 15 to 20 years from the time an assessment is completed to the time the Supreme Court possibly takes a decision. While the present government has taken some steps to reduce tax terrorism, the on-ground impact has not been high.

In July 2018, the CBDT enhanced monetary limits for filing of appeals by the I-T (ITD) before the Income Tax Appellate Tribunals (Rs 20 lakh), high courts (Rs 50 lakh) and the SC (Rs 1 crore). These enhanced limits would prevent the tax officers from filing frivolous cases and enable the judiciary to focus on high value litigation. Even while these limits are per se very low to make a meaningful impact, the CBDT has recently indicated that about 24% of cases are still pending withdrawal from the ITATs and HCs as on January 15, 2019. It has urged its officers to withdraw all the pending appeals before the end of January. Even the CBDT writ does not seem to work!

The FM in his 2016 Budget speech stated, “Litigation is a scourge for a tax-friendly regime and creates an environment of distrust in addition to increasing the compliance cost of taxpayers and administrative costs for the government.” Sadly, the FM has made statements on this issue several times but has not taken effective steps to reform the system. There has been more talk than action and he has failed to protect citizens and businesses from a tax system that has run amok with a broken assessment system and delayed appeals. Parliament, too, has failed to protect honest taxpayers as they hardly debate the budget or tax terrorism except to make a political argument. Several committees, from the Kelkar committee to the Shome committee, have suggested solutions, but they have been given scant regard in undertaking reforms.

The ITD has initiated 88% of the litigation pending (as of March 2017) at the ITATs and the Supreme Court and 83% of those at the high courts. The success rate of the taxman, for both direct and indirect tax litigation at all levels, is under 30%. The taxman unambiguously loses 65% of his cases. Over a period of time, the taxman’s success rate has only been declining, while that of the assessees has been increasing. Taxsutra.com states that the success rate of the taxman in tax litigation has not improved during the calendar year 2018. About 70% of the direct tax cases reported for calendar year 2018 were settled in favour of assessees, and about 24% in favour of the department. These cases were settled by the Supreme Court, High Courts, ITATs and Authority for Advance Rulings. For transfer pricing cases reported by Taxsutra for the calendar year 2018, about 69% were settled in favour of assessees whereas only 9% were settled in favour of the department.

The large quantum of pending disputes shows that high-pitch assessment continues. Of the 1.37 lakh direct tax cases pending at various levels in end-March 2017, just 0.2% constituted nearly 56% of the total demand value; 66% of pending cases, each less than Rs 10 lakh in claim amount, added up to a mere 1.8% of the total locked-up value of pending cases. About 3.22 lakh appeals were pending with Commissioners of Income-Tax (Appeals), or CIT-A, at the end of March 2018, amounting to Rs 6.38 lakh crore, of which Rs 87,000 crore was stayed by ITATs/Courts. The highest number of appeals pending with CIT – A is 1.31 lakh for amounts less than Rs 10 lakh, while about 89,000 cases are pending for amounts between Rs 10 lakh and Rs 1 crore. The total number of pending appeals include 22,256 appeals that are more than five years old. The value of amounts involved have been rising sharply over time. The FM had promised that disputes would come down, but the facts indicate otherwise.

The rate of disposal of scrutiny assessments (at the primary level) and appeal cases (at the next level) is ludicrously low in India. The pendency rate of scrutiny assessments was 48% in FY15, 52% in FY16 and 56% in FY17. This is only increasing y-o-y. In the case of appeals, the situation is worse. The appeals pending with the Commissioner of Income Tax (CIT) is a whopping 71.1% in FY17. Such high pendency is mainly due to the taxman persisting with litigation despite high rates of failure at every stage of the appellate process. The average pendency at High Courts is particularly acute, at nearly 6 years per case. With low judicial capacity to quicken appeals, the situation will only get worse. To achieve the high unrealistic targets set for them, officers (mis)use the litigation mechanism to their advantage. They tell many assessees that they have a target, extract taxes, tell the latter to appeal and that they will get the refund in the appeal, but business suffers due to delays. There is no penalty on the ITD and its officers for needlessly pursuing appeals at higher levels, regardless of the outcome.

Tax evaders deftly manage the system even as every amendment to tax laws gives the tax officers more draconian powers to harass honest taxpayers. Look at the balance sheets of the top 30 ethical companies in India and you will see what they are suffering. This started in the UPA era and has continued in the NDA era and is a major failure of our political leadership! Yes, the NDA has gone after evaders with a vengeance, but tax litigation and disputes in value have only gone up!

One arrives at the inescapable conclusion that the NDA government has not been successful in keeping its promise of ending tax terrorism. On the ground, not much impact has been felt even though processes and technology seem to have improved. Tax disputes remain as high as before. When the NDA government came to power, the amount locked in tax dispute was Rs 4.67 lakh crore; it was at Rs 10.16 lakh crore in March 2018, an increase of about 2.2 times! If promises made in Parliament are not kept, the credibility and trust in government will suffer. It is time the FM kept his promise.

-Pai is chairman of Aarin Capital Partners and Krishnan is a tax consultant