Tax litigation in India and its impact on Indian economy

Context:

• Income Tax Department is the biggest litigant but loses 85% of cases, according to the Economic Survey.

Tax litigation: an overview

• In March, 2017, there were approximately 1.37 lakh direct tax cases and 1.45 lakh indirect tax cases under consideration by the Income Tax Appellate Tribunal, high courts and Supreme Court.
• The indirect and direct tax stuck in litigation by the quarter ending March, 2017, amounted to nearly ₹58 lakh crore, over 4.7% of GDP.
• The Hon’ble Finance Minister, in the Budget Speech for 2016, mentioned that more than three lakh income tax cases are pending before the first level appellate authority with a disputed amount worth 5,05,000 crore.
• Even though the success rate of the tax department at all three levels of appeal-Appellate Tribunals, High Courts, and the Supreme Court is under 30 per cent for both direct and indirect tax litigation, it remains “undeterred” and “persists in pursuing litigation at every level of the judiciary hierarchy”, making it the largest litigants in India.
• The tax department is the largest litigant with almost 85% of direct tax cases arising out of its appeals. But the Survey pointed out that, “the Department unambiguously loses 65% of its cases”.

Highlights of the  Present Economic Survey :

• The Survey pointed out that the government’s persistence with litigation despite high rates of failure was increasing the workload of the judiciary and adding to delays and pendency of cases.
• The Survey found that more than Rs 52,000 core worth of government infrastructure projects has been stalled by various orders of the courts.
• The Survey also reflected on the tendency of the Supreme Court to eagerly entertain appeals directly from any court or tribunal in the form of Special Leave Petitions (SLPs).
• The rate at which the Supreme Court admits SLPs increased from about 25% in 2008 to almost 40% in 2016.
• The rising tendency to grant special leave has fundamentally altered the nature of the Court and created a high level of pendency, nearly 85% of which are SLP cases.
• The Survey also found that dedicated subject-matter courts could have “profound benefits” as seen in the apex court’s recent experiment with constituting an exclusive bench for taxation produced impressive results.

Issues that give rise to frivolous litigation:

• Officer’s inability to take a decision not to file an appeal.
• Fear of adverse administrative action.
• Lack of information/knowledge on judicial precedents.
• Indian taxation policy has large numbers of loop holes which has created number of impediments to economic growth of the nation.

Implications:

The government’s persistence with litigation despite high rates of failure leads to:

• Increasing the workload of the judiciary.
• Delays and pendency of cases.
• It leads to severe toll on the economy in terms of stalled projects, mounting legal costs, contested tax revenues, and reduced investment.
• Due to mismatch between the government’s intent and the verbal interpretation of the law, India still lacks transparency and administrative capability that is hampering the growth of industries.
• Delay in collection of potential tax revenue to the government, which ultimately impact investment in different sectors of the economy.

Implications on industry:

Issues faced by industries:

• Unpredictable taxation policy especially retrospective taxes .
• Lack of administrative support, efficiency and proactive approach as well as no proper grievance redressal mechanism.
• Taxation on intangibles such as intellectual property, advertising and branding exercises.
• Classification of income as royalties and fee for technical services
• Transfer pricing, concern regarding indirect transfers
• Slow process of dispute resolution

Regulating bodies:

Income Tax Appellate Tribunal (ITAT):

• India’s Income Tax Appellate Tribunal (ITAT)was set up on 25 January 1941, and it was the first experiment in tribunalization in the history of India.
• It is second appellate authority under the direct taxes and first independent forum in its appellate hierarchy.
• The orders passed by the ITAT can be subjected to appellate challenge, on substantial questions of law, before the respective High Court.
• It functions under the Department of Legal Affairs in the Ministry of Law and Justice, and is kept away from any kind of control by the Ministry of Finance.
• The Indian Income Tax Appellate Tribunal is considered to be a very successful experiment in tribunalization and is often cited to justify more steps in this direction.

How can ITAT’s performance be enhanced?

• Commonly suggested remedies include increasing the number of judges or the number of benches to deal with increased caseload.
• Additionally, solutions to delays in ITAT lie in prioritizing and scheduling the workload properly. Although ITAT is a specialized court, there are variations in the complexity and urgency of the cases that come before it. Therefore, it may be useful to frame rules on how different types of cases would be prioritized.
• Qualitative aspects of rulings, factors influencing them and most frequently litigated subject-matters will also be useful in deciding the policy strategy for improving India’s tax environment.

Central Board of Direct Taxes:

• The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963.
• The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes.
• The Central Board of Revenue as the apex body of the Department, charged with the administration of taxes, came into existence as a result of the Central Board of Revenue Act, 1924.
• Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964.
• This bifurcation was brought about by constitution of two Boards u/s 3 of the Central Board of Revenue Act, 1963.

Customs, Excise and Service Tax Appellate Tribunal:

• The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) was formerly known as Customs, Excise & Gold (Control) Appellate Tribunal (in short CEGAT), was constituted on the 11th October 1982.

How to revamp tax litigation in India?

A few suggestions to minimize tax litigation in India in brief are:

• Voluntary Tax Litigation Settlement: The settlement should be by way of negotiation between the parties within specified time.
• Levying cost for unsuccessful litigation: The law should provide for levy of cost against the appellant / respondent against whom decision has been rendered.
• Assessment in public interest: The Assessing Officer at the assessment stage ought to pursue the public interest in correct application of tax laws and not the collection interest of the tax administration.
• he ‘Direct Tax Dispute Resolution Scheme, 2016’ got operational from June 1 and seeks to address the issue of pending litigation before the first appellate mechanism in the Income Tax department — the Commissioner .

Way ahead:

• Policies and roadmap to settle and clear the backlog of tax litigation and provide a friendly tax regime facilitating the ease of doing business in India.
• The government’s attempt towards tax simplification and improving the tax litigation framework in India are noteworthy but still it needs more clarity and improvement.
• To provide a stable and predictable tax regime.
• The government also needs to work on improvising the current tax litigation process in India ensuring that the disagreement between the taxpayer and the tax department ends on legal issues at a faster track and dispute relating to factual aspects are closed at the Department level.
• It is essential to draw inspiration from tax practices / programmes followed in developed countries.
• Multi-pronged approach needs to be adopted to tackle the issue of “government litigation”, depending on the kind of litigation.
• Research support is essential considering the volume of litigation and the diversity of the issues involved.
• Strengthening Alternative Dispute Resolution Mechanisms.
• Adopt culture of formal interaction with judicial/appellate authorities

Conclusion:

• Indian tax administration and adjudication needs urgent reforms. A comprehensive performance analysis of ITAI is necessary. Also, more studies should be conducted to identify the exact institutional weaknesses in tax administration, improving which could help improve India’s abysmally low ranking on the “Paying Taxes” parameter in the Ease of Doing Business Index, and ensuring that citizens have access to an independent and impartial appeals mechanism.