By TV Mohandas Pai & S Krishnan
Prime Minister Narendra Modi launched the platform ‘Transparent Taxation—Honouring the Honest’ on August 13, 2020, comprising of faceless assessments, faceless appeals and a taxpayer’s charter. Faceless assessment and appeals aim to eliminate physical interface between taxpayers and tax authorities, thereby hopefully bringing in greater efficiency and transparency to the assessment and appeal process. This is a significant reform in the tax administration process, reducing tax officer’s discretion, tax terrorism, and scope for corruption and litigation.
It is well known that the Income Tax Department (ITD) is amongst the largest litigants in India. The Receipt Budget 2020-21 indicates that the amount of taxes on income which is under dispute was Rs 8 lakh crore at the end of 2018-19. This is 5.8 times the tax amount not under dispute (Rs 1.38 lakh crore)! About 60% of outstanding disputes have come up in 2017-18 and 2018-19, both in the NDA regime. Of this, the corporation tax amount under dispute at the end of 2018-19 was Rs 4.06 lakh crore—4.9 times the corporation tax amount not under dispute (Rs 0.83 lakh crore). This ratio was lower at 3.7 times at the end of 2013-14.
The quarterly trend of refunds provided by the CBDT indicates that a significant portion of corporation tax collected during the first quarter of a financial year is used to refund previous year’s excess collection. It was about 48% during the first quarter of 2018-19 and 39.8% and 48.7% during the first quarters of 2017-18 and 2016-17, respectively. The CAG indicates in its 2020 report that “the possible reason for this higher refund could be exaggerated demands raised by the department during the previous financial years to meet their revenue collection targets.”
When it comes to appeals, tax officers needlessly pursue these at higher levels, regardless of the outcome since there is no penalty on the ITD and its officers. Cases pending with the ITAT increased 2.4 times in 2018-19, to 92,205, compared to 37,572 cases in 2017-18. The total cases pending at higher levels (ITATs, high courts, the Supreme Court) increased to 1.35 lakh in 2018-19 compared to 0.82 lakh cases in 2017-18.
The CBDT has indicated that of the 31,325 appeals pending with the Commissioners of Income-tax (Appeals) for more than five years as on April 1, 2019, only 7,597 appeals have been disposed of till end-November 2019—a very poor reflection of tax administration. This indicates a pendency of over 75%. Any tax dispute in India normally takes 15-20 years from the time an assessment is completed to the time the Supreme Court possibly takes a decision. In some instances, even the Supreme Court decision is not effected urgently.
The large quantum of pending tax disputes show that high-pitch assessments indeed continue. The accompanying table shows the trend of tax arrears over the past five years ending 2018-19.
Demands difficult to recover have been increasing year after year, and accounted for 98.8% of the total arrears of demands in 2018-19, as against 98.2% in 2017-18. The net collectible demand decreased by Rs 5,566 crore to Rs 14,593 crore in 2018-19. It is a minuscule 1.2% in 2018-19 and has been less than 4% during these five years! This clearly indicates taxpayer harassment and a colossal waste of time, money and energy for litigants. And taxpayers are helpless in this regard.
Income-tax authorities indicate that the design of the faceless assessment system should reduce litigation since taxpayers will no longer be attached to a specific office or territory or jurisdiction for assessments. Instead, the National e-Assessment Centre (NeAC) will be the main gateway for communication between taxpayers and tax authorities.
Data analytics and artificial intelligence will be used to select cases for assessment and an automated allocation system will be used to assign e-assessment cases to a specific assessment unit in any one Regional e-Assessment Centre (ReAC). The assessment process will have multiple layers of review by different units including an automated examination tool, thereby reducing the scope for a tax officer’s discretion, resulting in a fair and reasonable order and consequently lower litigation.
All assessment orders will be passed by the NeAC except in cases assigned to central charges or to international tax charges. The ReAC is required to send the draft assessment order to the NeAC, which will examine the same according to a risk management strategy specified by the CBDT. The NeAC may finalise the assessment as per the draft assessment order or provide an opportunity to the taxpayer to respond in case a modification is proposed or assign the draft assessment order to a review unit in any one ReAC, through an automated allocation system.
The CBDT is known to set high tax collection targets for field officers, which forces them to be aggressive in collecting advance tax, issuing inappropriate assessment orders, leading to tax terrorism, or in pursing litigation at various forums. With the new faceless assessment and appeal system, this target-setting may become meaningless, reducing scope for taxpayer intimidation and litigation.
While the faceless assessment and appeal system will address the administration issues, the CBDT should focus on resolution of the high number of pending appeals before various authorities. The CBDT has indicated that 88% of appeals pending with Commissioner (Appeals) will be sent to the new faceless appeal process, which engages 85% of the current strength of Commissioners (Appeals).
In terms of priority, the CBDT should fast-track the settlement of appeals pending with Commissioners (Appeals) since the net collectible demand is expected to be a minuscule 1.2% in 2018-19. The ITD should target to complete all pending appeals within the next one year and release the inappropriately collected taxes to taxpayers.
In the case of appeals pending at higher levels, the ITD should target to settle all cases pending at ITATs in the next two years and all cases pending with the courts within the next three years. The CBDT should publish on its homepage on a monthly basis a report on the total number of appeals pending at the beginning of the month, disposed of during that month and the pending appeals at month-end along with the amount of appeals disposed of and the amount locked up at the end of the month.
This needs to be reviewed every month by the FM, just as the PM reviews infrastructure projects. This would increase transparency and the public would be aware of the progress. As recommended by Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome, on disposal of cases by HCs/SC and on judgments accepted by the ITD, the CBDT should make it a standard compulsory practice to withdraw appeals in any pending case involving the same issue within a maximum of two months. The ITD should be penalised for failing to do so.
The CBDT should enhance monetary limits for filing appeals by the ITD to Rs 1 crore before ITATs, Rs 5 crore before HCs and Rs 10 crore before the SC. The CBDT should also ensure that all appeals filed by the ITD before higher authorities (below the monetary limits) are immediately withdrawn and the collected taxes are repaid immediately. These enhanced limits would prevent tax officers from filing routine frivolous cases and enable judicial authorities to focus on high-value litigations.
Obtaining refunds is another challenge for a taxpayer after an appeal is settled. The tax officer faces no prescribed time limit for issuing the refund. A time period of 30 days should be set for refunds consequent to such orders, and if the refund is not paid within 30 days from the date of order, the ITD should pay double the interest rates for the period of delay. Tax officers should be appropriately penalised for the delay in 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.
While the faceless assessment and appeals is welcome and could prevent harassment, all pending appeals should be cleared urgently to give succour to taxpayers and clean up the entire system. Only then will the promise to eliminate tax terrorism by our former FM and to overhaul the dispute resolution mechanisms and provide a non-adversarial and conducive tax environment by the BJP in its 2014 manifesto, be effectuated.
Pai is chairman, Aarin Capital Partners, and Krishnan is a tax consultant