Arresting rise in tax litigation

The single most significant challenge before the Government, in the realm of taxation, is to arrest the increase in tax litigation, says Mr 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 Mr Prashant. He cautions that the greatest casualty of tax litigation is certainty in tax-related matters and taxpayer confidence. conversation continues over the e-mail. 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.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.

The Authority for Advance Rulings (AAR) route has the benefit of speedy disposal and a ruling in advance lends certainty to the tax angle, but 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 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 and 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.

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.

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.

Safe Harbour Rules for transfer pricing issues, envisaged in the tax law in 2009, should be notified at the earliest.

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