Taxpayer vs tax dept: Both sides need to make efforts to reduce litigation

The pending number of tax litigation across various fora has reached an alarming stage. According to the finance minister, the total number of direct tax litigation pending across various authorities like commissioner of income tax (appeals), income tax appellate tribunals, high courts, and the Supreme Court have reached an astonishing number of 483,000 and more importantly, the number of new cases getting added to this is showing no signs of declining. This not only leads to discontent among taxpayers but also significantly increases the burden and associated costs for the government. Moreover, the government’s abysmal record of success in such cases, which is less than 30 per cent, does not paint an encouraging picture.
 
The government is fully aware of the situation and has been striving to reduce the extent of tax litigation considerably. Over the last few years, the threshold for filing a tax appeal has increased manifold which has resulted in a reduction in the number of tax litigation. However, the issue is still far from resolved. Hence, the finance minister came up with a new tax litigation resolution scheme: Vivaad Se Vishwas (from dispute to trust).
 
According to this scheme, the taxpayer will be required to pay only the amount of the disputed taxes and there will be a complete waiver of interest and penalty if payments are made by March 31, 2020. For disputed penalty, interest and fee not connected with the disputed tax, the taxpayer will be required to pay only 25 per cent of the same for settling the dispute. In cases where the taxpayer avails of the scheme after March 31, but before June 30, the taxpayer will have to pay 110 per cent of the disputed tax and 30 per cent of penalty, interest and fee.
 
However, based on the review of the past tax amnesty schemes, it is extremely doubtful as to whether the government will be able to achieve its stated objective of reducing pending tax cases significantly. It will require a comprehensive overview of the reasons for so many pending tax cases and how best can they be settled without any significant loss to the exchequer. The following aspects may have to be examined:
 
There is a tendency of the taxpayer, as well as the tax administrators, to continue with litigation because neither side wants to give up. The tax administrators are also afraid that they will be hauled up by the Comptroller and Auditor General (CAG), in case they decide not to file an appeal based on the merits of their case.

The cases tend to become repetitive because if an adjustment is made for one year unless that addition has been ruled as illegal, the same addition is made year after year.
 
There is a huge shortage of infrastructure with the judiciary to deal with the ever-increasing pending tax cases.
 
There is lack of trust on taxpayers by the tax administrators and genuine bonafide statements provided by taxpayers are ignored.
 
There is lack of coordination among the tax administrators in relation to pending tax cases because most of the times, the arguing counsel are not briefed appropriately.
 
No ABC analysis of pending cases are done by the tax authorities, and hence, even important and strong cases are not dealt with the adequate importance they deserve.
 
Selection of arguing counsel also does not always happen on merits, etc.
 
On account of some of the aforementioned shortcomings, litigation does not always yield appropriate results for the tax administrators. They should be well advised to litigate cases only on merits and it should be incumbent on the government to support well-intentioned decisions taken by the tax authorities. However, it is inappropriate to blame the tax administrators fully for pending litigation because taxpayers may not always act in a bonafide manner and try to take advantage of any disputed position. Efforts should be made by both sides to identify the most feasible option before initiating any litigation.
 

Patnaik is Partner & head-taxation at Cyril Amarchand Mangaldas. He co-authored with Nikhil Agrawal, an associate with the firm