Initiative to curb tax litigation is well begun, but not even half done

The government’s initiative to examine ways of curbing litigation and study the best international practices could not have come soon enough. With more than Rs 6 trillion locked in income tax disputes as of the end of 2017-18, amounting to about 3.7 per cent of GDP for the year, it is important that measures for avoiding tax disputes are put in place at the earliest.   

Within the last four years, the amount locked in income tax disputes has risen by 25 per cent from Rs 4.98 trillion in 2014-15 to Rs 6.23 trillion in 2017-18.  For personal income tax, the government’s efforts to reduce litigation have yielded positive results as is visible from a 26 per cent decrease in the disputed amount from 2016-17 to 2017-18.  However, the disputed amount for corporate income tax (CIT) increased by 81 per cent from Rs 2.2 trillion in FY15 to Rs 3.99 trillion in FY18. The CIT disputed amount as a proportion to the total income tax disputes has increased from 44 per cent to 64 per cent in the last four years. Most international jurisdictions have mechanisms to manage litigation such that even where disputes do arise, the majority are resolved without the need for litigation. Private rulings and settlement of cases after considering the hazards of litigation are some of the measures that have contributed to reducing disputes in other countries.  

Private ruling, generally available to all taxpayers, is binding advice on how a tax law applies to the taxpayer in relation to a specific scheme or circumstance.  Many countries, including Australia, Canada, New Zealand, South Africa, the UK, the US and Indonesia, offer a private ruling mechanism to taxpayers. For instance, the Australian tax office allows any taxpayer to apply for a private ruling for both existing and future transactions. The rulings consider and express the commissioner’s view, in a time-bound manner, on how the relevant law or administrative practice applies to a specific factual scenario. The composition of the team making the ruling is usually determined by the size of the taxpayer, the technical complexity of the ruling, or significance otherwise of the ruling. Where required, the team consists of subject matter experts.  In case a negative ruling is likely, the taxpayer may be given an opportunity to withdraw the application.

Similarly, settlement of cases is considered an important element of tax administration in many countries. The mechanism allows tax authorities to reach settlements with taxpayers by considering factors such as provable facts, the expected interpretation by the court in the light of decided cases and the cost versus the benefits of continuing the dispute. For instance, South Africa Revenue Service (SARS), while recognising that its basic governing principle is to assess and collect taxes and not forgo any such taxes, acknowledges that the strictness and rigidity of this principle be tempered where it would be to the best advantage of the state. SARS may settle a dispute after considering issues such as whether the settlement will be fair and equitable to both parties, the best use of SARS’ resources and the cost of litigation versus the prospects of success in the court.  

These considerations become significant for India considering that the tax department’s success rate at all three levels of appeal (appellate tribunals, high courts and the Supreme Court) for direct and indirect tax litigation is under 30 per cent.  

The mechanism of the Authority for Advance Rulings in India, with more than 400 cases pending resolution, has had limited success in reducing litigation due to various structural and administrative reasons. Putting in place a time-bound private ruling mechanism, with subject experts, for responding to taxpayers’ questions would help resolve many issues that impact them. 

Another measure could be to empower the dispute resolution panels to negotiate and reach a settlement with taxpayers, allowing them to pay a certain percentage of tax, excluding interest and penalty. Detailed guidelines may be prescribed for determining whether a case would be fit for settlement to resolve a dispute. The taxpayer should be given the option to accept or withdraw from the settlement. In case he accepts a settlement, it shall be binding on the taxpayer and tax office with no right of appeal. The assessee shall withdraw all pending litigation and the penalty shall be waived. 

The government and businesses have a shared interest in minimising disputes. Measures such as the above, combined with capacity building of the tax department, can nip litigation in the bud, unlock revenues for the government and improve taxpayers’ confidence in tax administration.   
 

The writer is director, tax and economic policy group, EY India. Views expressed are personal