Rs 1.27 lakh cr of indirect taxes locked up in litigation?

The Comptroller and Auditor General of India (CAG) on August 23, 2013, had presented report no. 17 of 2013 - Union government (compliance audit) for the year ended March, 2012. The audit report highlights the performance of the ministry/department entrusted with the revenue receipts consisting of central excise and service tax.

The audit report has observed quite a few gaps in the operations and performance of the department concerned. The most highlighted figure in the report would be the total amount of tax receipts locked in tax litigation and exemptions. According to the report, a whopping Rs 3,23,037 crore consisting of Rs 1,95,590 crore on account of central excise exemptions and Rs 1,27,447 crore on account of tax receipts that are the subject matter of tax litigations are pending with different authorities for adjudication/final orders.

It is quite astonishing for the fact that the amount of tax foregone as exemptions under central excise is more than the annual tax receipts on account of central excise.

This article, however, intends to deliberate on the second part of the figure, the amount of money which is locked up in litigation. As on March 31, 2012, central excise duty to the tune of Rs 54,172 crore and service tax to the tune of Rs 73,275 crore was under litigation. The audit report points a twelve fold increase in service tax litigation over a period of five years from financial year 2008 to 2012.

The call book maintained by the department for cases that cannot be adjudicated for the reasons such as department has gone in appeal, injunction from courts, etc, reports over 30,000 central excise cases including over 20,000 cases which are pending for over one-year period and another 9,500 case pending under service tax.

It is an admitted fact on the part of Central Board of Excise and Customs (CBEC) and that of the finance ministry that as in March, 2012, there were over 100,000 pending cases pertaining to indirect taxes. Also the fact that the success rate of department in litigation over the same period at CESTAT level was only about 20 per cent and at the Supreme Court the record was worse at just under 10 per cent.

The low success rate of appeals reflects the poor quality of appeals, frivolous issues with very little merit being filed in the tribunals and courts. Many a time appeals are filed to avoid any possible repercussions to the concerned officer of not filing the appeal. On the other hand the results of adjudication at commissioner/ commissioner (appeals) level invariably go in favour of the department and assessee's appeals are routinely rejected.

It is worth mentioning here the recent central excise circular no. 967/01/2013 issued on January 1, 2013, to regulate the initiation of recovery proceedings where the stay appeal remains pending beyond 30 days of filing an appeal with the tribunal. The circular also specified the situations where the recovery could be initiated almost immediately and even before the expiry of statutory time period of 90 days from the date of issuance of order confirming the demand. This measure would have been justifiable one had the success rate of the department in tribunal and courts was of 90 per cent winning rather than losing. Some legal experts and trade associations even went on to label the circular as draconian in nature.

From the trade and industry perspective, this means that they have to deal with a tax department that will raise demands on every conceivable pretext, and they would have to go in appeal up to the tribunal for relief. Therefore, the amount that is supposedly locked up in litigation is, to the tune of 80 per cent at the tribunal level, going to be retained by the assessee due to the case not being very strong on the department's side.

It would be great if someone in the government took a policy decision that this is a waste of time on the government's part and a needless challenge on the part of industry, and must end now. This challenge is far from being unique to India. All countries have had to find a solution to the dilemma of focusing the efforts of their tax departments in an optimal manner. The answer that most have found is to have a target win percentage. Anyone who is significantly below the target range is considered to be taking on frivolous cases and will be adversely evaluated.

Eliminating unwarranted litigation would not only reduce the tax expenditure of the government, this would also provide the extra time and efforts to build-on and improve the quality of appeals in cases where they are strong on merits. By doing this the department could give itself a reasonable chance of success in courts.

The author is Leader, Indirect Tax Practice -PwC India pwctls.nd@in.pwc.com
Supported by Tajinder Singh