Avoid collection of disputed demands

The income tax rates in India are among the lowest in developing countries. The advantage is however, inundated by the complexity of tax laws multiplied by bureaucratic hurdles.

A situation often arises when the income-tax department raises a demand of tax from a foreign enterprise but the foreign enterprise does not agree with the department and decides to contest the case before higher authorities. In such a situation, the option is either to pay the disputed demand or obtain a stay till appellate proceedings are over.

The above situation, which on the surface, appears to be simple and logical, in fact, gets highly complicated when applied in practical parlance. In India, completion of tax assessments, including appellate proceedings, usually takes 3 to 5 years up to the tribunal stage and another 10 to 15 years if the matter goes to high court and Supreme Court. Therefore, on one hand, the impact of interest becomes manifold compared to the principal amount of tax, and on the other hand, the tax payer remains uncertain about his real tax liability for many years.

Indian tax authorities are well known for making high-pitched assessments and also for collecting excessive tax by coercive means. The tax officials are extremely keen to increase their tax collections to meet or improve upon their budget targets. Foreign companies which are not used to face such situations are often forced to pay even highly disputed tax demands.

If the foreign company pays the disputed demand, then, upon success in appellate proceedings, it will get a refund along with interest. But, in the process, the foreign company will remain involved in litigation in India for all these years. This creates practical difficulties, particularly in those cases where the foreign company goes back from India after completing its work here. There is, therefore, no dearth of cases when the refunds due to foreign companies remain unclaimed.

Now that the Budget 2008 is only a few days away, it will be impractical to recommend any change in the law, but the Hon'ble Finance Minister can certainly unshackle the hands of tax officials from budgetary constraints with clear instructions to avoid collection of disputed demands. This should hardly impact the net government revenue in view of a robust economy this year when the direct tax collections are reported to have registered a remarkable growth.

As per the Press Release dated 18 January 2008, the net tax collections during the period April to January 15 stood at Rs 2,17,149 crores, up from Rs 1,52,993 crores during the same period last fiscal, registering a growth of 41.93 per cent. Corporate Tax registered a growth of 37.22 per cent at Rs 1,32,948 crores, up from Rs 96,883 crores during the previous fiscal, while Personal Income Tax (including FBT, STT and BCTT) grew by 50.15 per cent at Rs 83,897 crores, up from Rs 55,874 crores. Growth in Securities Transaction Tax (STT) was 78.19 per cent at Rs 6,793 crores as against Rs 3,812 crores and Fringe Benefit Tax (FBT) was 64.79 per cent at Rs 5,121 crores as against Rs 3,108 crores. Banking Cash Transaction Tax (BCTT) grew by 15.26 per cent and stood at Rs 423 crores against Rs 367 crores.

Under the circumstances, the government should not, in fact, hesitate to pass on the benefit of higher collection of tax to the tax-payers by way of providing more incentives to encourage economic growth. Should that not be acceptable straightaway, at least stop collecting disputed taxes, and hasten-up the process of issuing refunds for the amounts due to tax-payers.