Indian taxpayers: Budget has to fix Indian taxpayers’ nagging dispute management issue for real – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/policy/budget-has-to-fix-indian-taxpayers-nagging-dispute-management-issue-for-real/articleshow/96808764.cms

Synopsis

Union Budget 2023: The multiple initiatives announced clearly reflect the government’s intent to address the malaise. However, on-the-ground experience shows that the implementation of these initiatives needs greater attention for them to be more effective. With 5.6% of India’s GDP amounting to about INR10.6 trillion stuck in income tax disputes at the end of FY 2020-21, there is an urgent need to improve the mechanisms for avoiding and solving tax disputes.

CBDT issues SOP for faceless assessment to cut tax litigation, clear doubts

India’s tax landscape has witnessed significant reforms in the last five years. One area, however, that remains a pain for both taxpayers and tax authorities is disputes management. With 5.6% of India’s GDP amounting to about INR10.6 trillion stuck in income tax disputes at the end of FY 2020-21, there is an urgent need to improve the mechanisms for avoiding and solving tax disputes.

The government recognises the need to reduce litigation and has taken many positive initiatives towards this end. The Sabka Vishvas Scheme for indirect taxes (2019) resulted in settling over 1,89,000 cases and the Vivad se Vishvas Scheme (2020) encouraged over 1,29,000 taxpayers to settle tax disputes of more than INR 980 billion. (Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know)
The faceless assessment scheme (2019) was introduced to facilitate the expeditious disposal of cases in a transparent and efficient manner, and as per functional specialisation. The last two budgets also brought in a faceless Dispute Resolution Scheme (DRS) for small taxpayers and a Board for Advance Rulings (BAR) to replace the Authority for Advance Rulings (AAR) to ensure faster disposal of cases.

The multiple initiatives announced clearly reflect the government’s intent to address the malaise. However, on-the-ground experience shows that the implementation of these initiatives needs greater attention for them to be more effective.

The government notified three BAR benches in September 2021. Due to a lack of procedural clarity, these benches are not yet functional, causing immense uncertainty for the 350+ cases pending before the erstwhile AAR. Even if a taxpayer wants to withdraw their application from AAR, it has no recourse. BAR should be made functional at the earliest with adequate member-strength right from inception. BAR members should have an independent, unbiased mindset while examining the applications.

Taxpayers have an apprehension that since BAR is led by departmental officers, it may be difficult for them to take an independent view as has been the experience under Dispute Resolution Panels. Also, the right to appeal given to both taxpayers and the department means that conclusive decisions may not be possible in most cases. On-boarding external experts such as retired Supreme Court / High Court judges, retired President of ITAT, senior advocates or experienced chartered accountants as members of BAR could allay such concerns.

The DRS, notified in April 2022, is limited to small taxpayers with taxable income up to INR5 million and disputed income up to INR1 million. The scheme can be extended to mid and large-sized taxpayers with transfer pricing cases as the pilot project. DRS should include experienced independent experts and permit taxpayers to refer specific issues for resolution instead of the entire assessment/appeal. The resolution may be made final, enforceable, and binding on both parties but not a binding precedent for any other taxpayer or for other years.

The Advance Pricing Agreements programme, once very effective in providing tax certainty, is experiencing high pendency of cases. More than 760 APA cases were pending resolution as of December 2019. The Department must be lauded for its conscious efforts to reduce the pendency and conclude 62 and 31 APAs in FY22 and FY21 respectively. However, given APAs’ popularity, about 100-120 fresh applications get added every year.

The government must focus on the capacity building of APA teams with appropriate numbers and subject matter expertise. The pressure on APAs can be eased by making other dispute prevention mechanisms like safe harbour rules more attractive to taxpayers. For instance, the current 17% to 24% margins for the IT/BPO/KPO sector are very high and should be made reasonable.

Faceless assessments, after the initial hiccups, have smoothened considerably. Compared to the earlier assessments, now the queries raised by assessing officers are more focused with fewer instances of roving enquiries. The orders issued are speaking orders that consider the assessees’ point of view too. Virtual assessments also save time and effort for taxpayers. To further improve the process, taxpayers should be given sufficient time (at least 7-10 days) to respond to show cause notices. The timeline for the completion of faceless assessments is nine months.

Experience is that cases are picked up for scrutiny closer to the end of the timeline, creating unnecessary pressure on taxpayers to respond. To avoid this, assessments must be concluded regularly throughout the year. Further, active two-way communication is important in a VC format where tax officials freely share their views or ask relevant questions instead of only the taxpayer presenting his views.

Taxpayers are currently facing inordinate delays in getting a decision on their appeals from the Commissioner of Income Tax (Appeals). As of FY 2020-21, about 4.6 lakh cases were pending at the CIT(Appeal) level, constituting more than 80% of total income tax disputes. Since then, very few cases have been disposed-off. With the transition to faceless appeals, authorities must be directed to pass the necessary orders on a time-bound basis and reduce pendency.

In today’s complex tax system, there will always be tax disputes over the way in which facts and the law interact. However, the scenario is far from healthy when the magnitude of disputes is so large. Activating the mechanisms to reduce disputes would improve the business environment and growth in the tax pie for the government. It must be accorded priority.

(The author is a Senior Director for Tax Economic & Policy Group at EY India. The views expressed are personal)

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