Cutting down on tax-related litigation: An uphill task for the CBDT

In an attempt to curb the ongoing crisis of pending litigation, the Central Board of Direct Taxes (CBDT) has over the past one year or so focused on simplifying tax assessments and reducing pendency of cases. However, the board needs to keep clarifying its position to bring in more transparency in tax administration.

Ever since the economic reforms of the 1990s, India's tax regime has often come under scrutiny, both within the nation, and beyond. Allegations of illogical schemes and draconian laws have on many an occasion marred investor confidence and led to collective concerns over business certainty in the country.

Examples, such as the Vodafone and Cairn retrospective tax disputes, which are still being challenged in various international forums, have fueled widespread apprehension regarding the nation's approach to taxation.

The issue has been brought to the table once again in the recent two-day Rajasva Gyan Sangam conference between Prime Minister Narendra Modi and top tax officials. The Prime Minister stressed the necessity for large-scale reform of the present system in an attempt to bridge the current trust deficit regarding Indian taxation. The situation has, in fact, been high on the government's list of priorities for some time now, culminating in the formation of the Income Tax Simplification Committee in 2015.

The CBDT has in recent years attempted a two-pronged approach to improve the situation. The board has made concerted efforts to ease administrative hassles by issuing clarifications to aid in assessments, as well as offered dispute-resolution mechanisms to reduce existing levels of litigation.

"There is a refreshing change in the approach of the government and the CBDT. The attempt to reduce litigation, both existing and for the future, seems very real," said Pranav Sayta, direct tax partner, Ernst & Young India.

Unfortunately, India has also long been ranked among the top three countries for transfer pricing disputes, with more than 4,000 cases pending in various courts and dispute resolution bodies. To remedy this situation, the CBDT initiated the advance pricing agreements (APA) mechanism in 2012. The APA mechanism allows the government to enter into agreements with Indian units of multinational companies to declare transactions with their overseas parents in advance in order to achieve certainty and avoid the potential for disputes in the future.

Additionally, the mutual agreement procedure (MAP) framework adopted by the government since 2014 has also provided an alternative for international taxpayers to avoid long-drawn litigation and has till date helped in resolving more than 180 disputes involving over Rs 5,000 crore. The MAP framework allows foreign information technology and consultancy firms such as IBM, Dell and Google to significantly reduce their tax liabilities and harmonise the complex provisions of double taxation avoidance treaties with domestic assessment laws.

"These are all welcome steps towards becoming a more taxpayer-friendly administrator. The board, however, still has a long way to go in establishing confidence in foreign investors," said S Sriram, principal associate, direct taxes, Lakshmikumaran & Sridharan.

The Direct Tax Dispute Resolution Scheme 2016 (DTDRS) is yet another recent example of the CBDT's efforts in reducing litigation. The scheme has proposed a seven-month window from June 1, 2016, till December 31, 2016, to reduce over 300,000 cases currently pending before appellate authorities or being subject to arbitration, conciliation or mediation proceedings. There is a particular focus on disputes related to retrospective amendments and conflicts related to bilateral investment treaties. Under the DTDRS, eligible litigants can put an end to existing adversarial proceedings by making the necessary payments in accordance with the scheme.

"The introduction of the dispute resolution scheme is a step in the right direction. However, the scheme still has certain ambiguities which should be clarified soon, given its limited period of applicability," said Vishal Anand, direct tax partner, PricewaterhouseCoopers India.

All these attempts by the CBDT will indeed go a long way in rectifying some of the longstanding problems regarding direct taxation in the country.
RECENT MOVES BY THE CBDT TO CURB LITIGATION

• Circulars clarifying positions of law to aid assessing officers
   
• Instructions to withdraw departmental appeals on areas clarified by relevant circulars
   
• Extension of Advance Price Agreement mechanism to multiparty agreements and inter-country arrangements
   
• Furtherance of Mutual Agreement Procedure framework to other countries