Curbing tax litigation is vital
Partner and National Leader (International Tax Services), EY
The 2014 general elections heralded “a vote for hope, ambition and aspiration” as India sought to shrug off its recent past of dismal economic performance, declining growth, high inflation and slackening in investments. With aspirations to regain its vigor, India was seeking a strong government to provide economic and political stability.
Many believe that the new government, which has risen to power with a thumping majority—a historic achievement in its own standing—would prove to be the catalyst, enabling economic growth for the country. With such responsibility, the new government is largely expected to take the initiative ahead through its budget and policy reforms in the first few months. The surge in the stock market indices and the strengthening of the currency are harbingers of the expectations that the market and the populace harbors.
Among the key components requiring urgent attention is tax policy reforms. The past few years have seen the tax policy being a subject of unilateral legislative actions, primarily to bridge the fiscal gaps without much regard for the voice of the industry, businesses and investors. So much so that policy inaction, retrospective amendments, high pitched and prolonged litigation, ineffective dispute resolution mechanics and minimalistic tax incentives for economic development and fresh investment have come to be termed as ‘tax terrorism’. And it is impacting, maybe not the first time but surely in the most severest of ways, the confidence of industry and investors.
Amongst the many things that form the core of the new government’s pre-poll manifesto, tax policy and related initiatives are the centerpiece. The possible tax policy initiatives culled from the manifesto comprise the following promises: (1) providing a non-adversarial and conducive tax environment; (2) rationalizing and simplifying tax regime; (3) overhauling dispute resolution mechanisms; (4) bringing consensus with states on GST; and (5) incentivizing research and development with a focus on indigenization of technology and innovation. It does not take much introspection to recognize that all of the above touch the most sensitive nerves of the discord prevailing in the current tax law and its administration. India’s reputation on tax policy front is probably at its lowest, contributed by frequent retrospective amendments negating the importance of the grinding litigation. These retrospective amendments need to be addressed suitably to restore the confidence of the investor community.
It is rather a misfortune that we have a significantly arduous and uncertain litigation process as also the absence of a speedy and efficacious dispute resolution framework. To make it worse, tax litigation has become a norm rather than an exception, contributed to by aggressively high-pitched tax assessments, many-a-times based on questionable interpretations in transfer-pricing audits, levy of capital gains on indirect transfers and denial of treaty benefits, etc. The government should take steps to address such concerns by tackling the same at source, i.e. by aligning tax policies and its implementation by authorities through the issuance of internal guidelines on contentious issues, thereby ushering consistency in interpretation and application. On the administrative front, the government should discourage only revenue-collection-based targets for officers and broad base performance parameters including quality of assessment orders and sustainability in appellate forums, etc. The cost of refunds should be traced back to officers such that it acts as a restraint on indiscriminate tax collection. There should be a systematic mechanism to collate, track, monitor and redress delays in matters of rectification, appeals, issuance of certificates, etc.
One of the areas embarked upon in right earnest by the government was the Dispute Resolution Panel (DRP). However, there has been a miscarriage of intent in its implementation. The DRP framework should be overhauled, empowering it to settle cases/minimize escalations. The DRP should be made an independent (distinct from the administration) and a permanent (not an ‘additional duty’ of some senior officials) body. Its performance should be regularly evaluated to ensure accountability and improvement. The scope of DRP should also be extended beyond global tax and transfer-pricing matters. Right of further appeal by the revenue should be curtailed in the spirit of resolution.
Similarly, the scope and ambit of the Authority for Advance Rulings (AAR) both in the area of direct and indirect tax should be expanded, thus improving the prophylactic measures available to taxpayers. There is a case to increase the number of benches and extend them beyond Delhi to improve the reach as well as make it more cost-effective.
The goods and services tax (GST), India’s ambitious indirect tax reform which could boost the country’s economy, will likely replace existing state and central levies with a uniform tax, raising revenue collection while cutting business transaction costs. The GST has so far faced resistance from various states, who fear a loss of their fiscal powers. However, given the majority and the resultant bargaining power enjoyed by the government, prioritizing the implementation of the GST is regarded as a must.
One of the taxation reforms considered by the new government in its manifesto was the simplification of tax regime. Direct tax law, considered cumbersome and complicated by many, needs attention in this aspect. The direct taxes code (DTC), which was proposed and drafted with the intent to simplify the direct tax laws, despite extensive deliberation between industry and policymakers, has been delayed for various reasons. Hastening the discussions to a fruitful end would be a valuable step towards this objective. The report of the Tax Administration Reforms Commission set up under the chairmanship of Parthasarathi Shome would also throw up an immense wealth of inputs/suggestions gathered from the extensive discussions and consultation across the length and breadth of the country.
Revenue collection should be justified and rightful, and not at the stake of undermining the taxpayer’s confidence. A righteous taxation regime would lead India to the path of economic growth and achieving such a regime should be a realistic target. The new government has portrayed its intent towards these thoughts through its manifesto. What remains is due action.