To reduce taxpayer grievances/litigation, the CBDT revised monetary limits for filing appeals in December 2015.
The 2014 BJP election manifesto stated, “We will provide a non-adversarial and conducive tax environment, overhaul the dispute resolution mechanisms, rationalize and simplify the tax regime which is currently repulsive for honest tax payers.” In the past four years of BJP governance at the Centre, none of these promises have been fulfilled. The tax environment continues to be adversarial, considering the increase in perverse assessments and the quantum of tax disputes. The dispute resolution mechanism is overburdened, considering the number of cases pending with the various quasi-judicial and judicial authorities, and the amount locked-up in litigation. The rate of disposal of scrutiny assessments (at the primary level) and appeal cases (at the next level) is ludicrously low in India.
Taxes under dispute can be termed as a non-performing asset of the government of India, considering that an average of 70% of the appeals at the Income-Tax Appellate Tribunals (ITATs), high courts and the Supreme Court are settled in favour of the taxpayers. Despite this, tax terrorism in the form of perverse assessments and meaningless litigation continues only because there is no penalty on the Income-Tax Department (ITD) and its officers for pursuing litigation and collecting a portion of the disputed taxes as a pre-deposit. Revenue target seems to be the sole criterion that is used to assess performance of assessing officers (AOs). Tax collection has become tax extortion for the corporate sector.
The government could end tax terrorism by considering the following:
High-pitch assessments are used by AOs to meet high unrealistic targets set by the political establishment instead of widening the taxpayer base. This eventually results in litigation. In July 2017, the Central Board of Direct Taxes (CBDT) increased the deposit amount for obtaining stay on the income-tax demand to 20% of the disputed amount by stating, “In view of the Board’s efforts to contain over pitched assessments through several measures resulting in fairer and more reasonable assessment orders, the standard rate of 15% of the disputed demand is found to be on the lower side. Accordingly. it has been decided that the standard rate be revised to 20% of the disputed demand, where the demand is contested before CIT(A).” Considering that high-pitch assessments are the order of the day, no deposit amount should be collected in case of appeals before CIT(A). Only if the appeal is lost should a pre-deposit be collected.
This would automatically reduce the quantum of perverse assessments as there is no scope for the income-tax officers to collect (disputed) taxes to meet targets and enhance scope for greater scrutiny at a subsequent level. Unnecessary litigation places a high burden on the taxpayer in terms of cost, effort and uncertainty. When an appeal is settled in favour of taxpayers at ITATs/HCs/SC, the ITD should reimburse the cost of litigation incurred by taxpayers as per a scale. To prevent the AOs from pursuing untenable litigation, they should be made accountable in litigations and appropriately penalised if the outcome of appeal is against tax authorities, especially from judgements of HCs/SC. As recommended by the Tax Administration Reform Commission (TARC), appeals to HCs/SC should only be on substantial questions of law. This change in administrative approach will significantly reduce litigations at all levels and prevent harassment.
After an appeal is settled, obtaining refunds is a challenging process. The AO has no prescribed time limit for issuing refunds. There is no parity in the interest rate charged on taxpayers for various kinds of delays/default and the ITD for delayed refunds. The rate of interest payable by the ITD should be increased to the same rate as payable by taxpayers, and if refund is not paid within pre-defined time limits, higher interest rates should be paid by the ITD for the period of delay, as recommended by Income Tax Simplification Committee headed by Justice RV Easwar. A large volume of litigation revolves around a few issues. It would be judicious for the CBDT to first list the most common issues litigated at various forums and summarise the judgments on these issues. Based on this, the I-T Act should be amended or the CBDT should provide its point of view clearly through circulars. As recommended by TARC, on disposal of cases by HCs/SC and on judgments accepted by the ITD, instructions should be issued to withdraw appeals in any pending case involving the same issue.
To reduce taxpayer grievances/litigation, the CBDT revised monetary limits for filing appeals in December 2015. The present limits for filing of appeals before the ITATs (Rs 10 lakh), HCs (Rs 20 lakh) and SC (Rs 25 lakh) is very low to make a meaningful impact in reducing pending cases or litigation. This should be increased by four to five times for HCs and a minimum of Rs 5 crore before the SC, and all appeals falling below this threshold should be immediately withdrawn. This will prevent the tax officers from filing routine frivolous cases, and enable the judicial authorities to focus on high value litigations. In the case of litigation at ITATs/HCs/SC, the government should commission special benches to resolve pending litigation within a defined time frame of two-three years. The CBDT in November 2015 announced the constitution of local committees as an institutional mechanism to quickly resolve taxpayers’ grievances.
The efficacy of working of these local committees is not publicly known. To increase transparency in working of local committees, the CBDT should publish on a monthly basis, the number of local committees formed, value of high-pitched assessments settled, etc. This will indicate progress made in this regard. The CBDT should adopt a policy that assessed taxpayers would not be subject to another assessment for the next three-five years unless they have a strong reason, recorded in writing, to subject the taxpayer to an earlier assessment. This will enable tax authorities to focus on enlarging the taxpayer population. The ITD should effectively use technology to increase the taxpayer base and collect unpaid income taxes.
Technology should be used to data mine information from other tax departments such as the GST and financial authorities to track tax evaders. For scrutiny assessments, the CPC should first assess data and only after a fit case is found, send it to AOs for scrutiny notice. Today, this is blindly picked up without first doing a data search. This will focus attention on cases needing scrutiny and stop harassment. The government should seriously take steps to stop tax terrorism by increasing taxpayer base, and collect more taxes from tax evaders. It’s time that the BJP and our FM fulfils some of the promises made in the 2014 BJP election manifesto regarding tax terrorism.
TV Mohandas Pai & S Krishnan
Pai is chairman, Aarin Capital and Krishnan is a tax consultant