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 to seek stay of demand till further proceedings are over.
Where the demand is paid, but no tax/or lower tax is found payable in appellate proceedings, the tax department will issue a refund along with interest up to the date of refund. On the other hand, if the demand is not paid and the case is decided against the taxpayer, he will be required to pay tax along with interest from the date of original demand till the date of actual payment of tax.
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 taxpayer remains uncertain about his real tax liability for many years.
If the foreign company pays the disputed demand, it will get a refund along with interest in case of success in appellate proceedings. But, in the process, the foreign company will remain involved in litigation in India for all these years. This is practically not possible particularly in cases where foreign company goes back from India after completing its work in India. There is, therefore, no derth of cases when the refunds due to foreign companies remain unclaimed.
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.
Taking cognisance of the situation in India, a memorandum of understanding was signed between India and the UK under Article 27 of their tax treaty, which was notified by Instruction No.3/2004 (dated 19 March, 2004). The effect of the MoU is that the furnishing of the bank guarantee should be treated as sufficient arrangement to qualify for exercising discretion by the assessing officer for extension of time limit for payment of taxes.
It is high time that Government of India should make similar arrangements with other countries as well. Pending such bilateral agreements, the Central Board of Direct Taxes may take suo motu steps and issue instructions to the departmental officers to accept bank guarantee against disputed tax demand.
Now that the Budget 2007 is only a few days away, it will be impractical to recommend any change in the law, but the 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 robust economy this year, when the direct and indirect tax collections are reported to have registered a growth of 37.6 per cent at Rs.2,32,171 crore in April-December 2006. Direct tax collections alone have shot up by 39.7 per cent to Rs1,61,777 crore till February 15 this fiscal.