The single most significant challenge before the Government, in the realm of taxation, is to arrest the increase in tax litigation, says Prashant Khatore, Tax Partner in Ernst & Young Pvt Ltd (http://bit.ly/F4TKhatoreP).
“As per the report of the Comptroller and Auditor General (CAG) of India, around Rs 2.2 lakh crore was locked up in appeals at various levels till the end of 2008-09. On an average, 48 per cent of tax demands remain uncollected and disputes account for 45 per cent of uncollected demands,” he adds, during the course of an interaction with Business Line, on the sidelines of a recent CII conference on international taxation.
Today, the tax compliance cost of Indian companies is huge, much of which goes into litigation, frets Prashant. He cautions that the greatest casualty of tax litigation is certainty in tax-related matters and taxpayer confidence. “In this era of globalisation, certainty in tax matters is one of the key considerations driving foreign investments. Though a certain degree of tax litigation may be inevitable, a mature tax system must have a robust, effective and speedy dispute resolution mechanism in place.” Our conversation continues over the email.
Excerpts from the interview.
What have been the factors behind the rise in tax litigation?
Though there are several reasons for the rise in tax litigation, the primary reason appears to be the lack of clarity in the language of the provisions to meet various situation and issues.
Another reason for protracted litigation is the existence of multiple appellate levels through which a disputed issue has to pass before attaining certainty. A tax dispute may take anywhere up to 20 years to attain certainty depending on the level to which it is escalated, and this is much beyond the international standards. Inadequate number of appellate benches exacerbates this problem.
Conflicting opinions from different appellate forums across the country also add to the uncertainty. Since the binding nature of a court decision is limited to its jurisdiction, save the apex court, tax disputes inviting conflicting decisions are prone to continuing litigation till the issue attains certainty.
Though it is within the powers of the Government to proactively amend the statute to bring it in sync with judicial interpretations, or the intention of the lawmaker, and thereby clarify the legal position and put to rest any pending and future litigation, it takes time to happen.
Mostly, litigation continues unabated. Worst, if the final outcome goes against the Revenue, the verdict is sought to be nullified by retrospectively amending the statute in the garb of bringing the provision in line with the legislative intention. This only results in a heightened sense of uncertainty, apart from huge litigation costs becoming sunk.
Wouldn’t alternative dispute resolution be of help?
Although alternative dispute redressal mechanisms exist, most tax disputes are dealt with under the traditional route, as the alternative mechanisms have not proved to be very successful on account of certain inherent limitations.
For instance, though the Authority for Advance Rulings (AAR) route has the benefit of speedy disposal of cases, and a ruling in advance lends certainty to the tax angle, the benefit can be availed of only by non-resident and public sector companies and the ruling is binding only on the applicant and the tax authority.
The Dispute Resolution Panel – set up with much expectation in 2009 to resolve transfer pricing cases and those relating to foreign companies – appears to be now riddled with independence issues along with the perception of being biased towards the Revenue, apart from also being limited as regards the eligibility criteria.
The scope and powers of the Settlement Commission, another dispute resolution body dealing with complex and protracted tax cases, have been substantially curtailed through amendments in recent years.
Yet another mechanism to resolve international tax disputes through the competent authorities of respective jurisdictions, viz. the Mutual Agreement Procedure, has resulted in very few takers because of factors including the absence of a time limitation, the general perception of competent authorities lacking adequate authority and conviction to negotiate and conclude issues, and the fact that the authorities concerned could agree to disagree.
What can be the possible measures to reduce litigation?
The first and the foremost measure to reduce litigation is to free the statute from ambiguities as far as possible. The language of the provisions should be simple, clear and specific. Clarification and guidance on ambiguous matters should come as a matter of routine as and when the issues come to light. Any legislative process should be thrown open for public feedback before the law is enacted, so that loose ends are identified and plugged right away.
A possible reduction in the number of appellate levels along with an increase in the number of appellate benches can go a long way in reducing the number of pending tax disputes and the time for disposal.
Another possible measure could be the constitution of specialised benches of appellate authorities to deal with specific subjects. Establishment of focused courts should enhance the quality of decisions thereby reducing litigation. Besides, the working of courts needs to be streamlined to facilitate speedy disposal of cases. Separate courts may be set up to deal with old cases which have accumulated over a period of time.
The CAG of India has recently suggested the setting up of a separate dispute settlement mechanism for small taxpayers, who constitute the majority of litigants (around 66 per cent). It is suggested that differentiating corporate tax disputes from smaller ones will help in faster disposal of pending cases and speedy release of locked-up funds.
A robust, speedy and fair dispute resolution system reflects a mature tax system. There is a case for making the existing alternative dispute resolution mechanisms more effective. The eligibility criteria for approaching dispute resolution bodies should be widened and more powers given to them to allow effective resolution.
For instance, the AAR route may be opened up for domestic transactions as well. All dispute resolution should be made time-bound. It is learnt that a re-jig of the Settlement Commission may happen in the coming Budget. A single body for dispute resolution across different taxpayers may be mulled.
Safe Harbour Rules for transfer pricing issues, envisaged in the tax law in 2009, should be notified at the earliest. Advance Pricing Arrangements may be enabled to provide certainty in transfer pricing and minimise disputes. These are envisaged under the Direct Taxes Code.
Although a tax not due cannot be levied on a subject and the right of appeal is an indispensable feature of any tax system, tax litigation strains the resources of both the Government and the taxpayer in terms of time and money. Therefore, tax litigation must be minimised. This would, however, require implementation of reforms not only in letter but also in spirit.