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Settling tax disputes
January, 18th 2016

While the government has consistently said it wants to resolve legacy tax disputes such as with Vodafone and Cairn through discussion—the ideal would be to scrap the retrospective tax law but finance minister Arun Jaitley is loath to do so—the problem is that there is no provision under the Income Tax Act which allows this. Which is why, the Tax Administration Reform Commission (TARC) had recommended a pre-dispute mechanism for resolving tax cases as well as a formal taxpayer dispute resolution centre (TDRC).

There are, of course, several dispute resolution mechanisms available under the tax law even today, but these take too long and are usually ineffective. Which is why, the number of cases pending at various levels were a staggering 2.67 lakh at the end of FY13—1,99,390 with the CIT (Appeals), 31,015 at the ITAT level, 31,230 with the High Courts and 5,808 cases in the Supreme Court. How time-consuming this is can be gauged from a Ficci study that found even passing a simple order by an assessing officer takes 1-2 years, a case at the CIT (appeals) level normally takes 3-4 years for resolution but could go on for up to 6-8 years, the ITAT takes 2-3 years or even longer while cases take 3-5 years at the high court level (they can, though, last 8-10 years on occasion) and another 4-7 years at the Supreme Court—since, due to the process of appeals, much of this happens sequentially, the torture for assessees is apparent.

As for alternate dispute resolution mechanisms like the Authority for Advance Ruling (AAR), Settlement Commission and Dispute Resolution Panel (DRP), as the TARC points out, they are both weak and limited in scope. Only non-resident taxpayers and specified categories of resident taxpayers can approach AAR and its rulings can be challenged in the High Court; the Settlement Commission can only take up those cases which are pending at the assessing officer level and have not reached the appeal stage (this is also just a once-in-a-lifetime opportunity for taxpayers), and the DRP is seen as just an extension of the assessment mechanism.
Finance minister Jaitley would do well to create a separate dispute resolution vertical in the CBDT with a strong pre-dispute consultation mechanism, a 3-member independent commissioners’ panel to decide on cases, strict adherence to a time-bound resolution process in the ADRs, and a capable TDRC.

But, the real clincher could be the amendment of the present tax legislation to incorporate internationally-accepted best practices of alternate dispute resolution, such as arbitration, conciliation, mediation, negotiation, that could be utilised before a tax demand is raised and will not be subject to any further appeal by any of the parties.

 
 
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