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An enduring solution to tax disputes
March, 18th 2016

Protracted unproductive disputes — both under the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT) — continue to dog tax administration in India. In his Budget speech, the finance minister mentioned reducing litigation and providing certainty in taxation as one of the key thrust areas of tax reform and listed out a number of measures.

The minister reiterated there shall be no retrospective taxation. Dispute resolution schemes (DRS) for direct and indirect taxes were announced, under which the taxpayers can settle cases pending before commissioner (appeals) on payment of disputed tax, interest and reduced penalty.

Some other measures that reduce discretion and specify time limits for decisions were also announced. This comes on top of certain measures, such as increasing monetary limits for appeals and withdrawal of cases involving issues on which final judicial pronouncements, which were announced earlier.

Good steps, but…

While these steps are to be welcomed as they signal the government’s positive intent, the question is how successful they will be in ridding the tax administration of the scourge of unnecessary and costly disputes that pose a reputational risk not only to the tax administration but to the country.

It has to be said that they fail to address the fundamental supply side problem, namely the poor quality of notices and irrational adjudication/assessment orders at the original level as evidenced by the poor success rates of the two departments in Tribunals and Courts. Given this poor quality, the chance of success of the dispute settlement schemes is at best doubtful. It may be added that on the indirect tax side, under the existing provisions of law, the assessees already have an opportunity to save on penalty if they pay the amount of tax/duty and interest either suo motu or within 30 days of the notice or the original order.

If they haven’t availed of this at that stage it is hard to imagine that they would do so when they are in appeal. Perhaps, the DRS will attract only those assessees who feel their chances of success are diminished by reason of some decision of a higher forum that may have been received during the pendency of the appeal.

Further, these schemes apply only to cases at the first appellate level. It is mentioned that there are about 3 lakh pending cases involving ?5.5 lakh crore at this level. The data available for FY 2014-15 indicates that, excluding the Commissioners (Appeals), between CBEC and CBDT there were over 1.7 lakh cases involving a revenue of over ?3.8 lakh crore pending the Tribunal, High Court and Supreme Court level . Over the years these numbers have seen little improvement.

The DRS, even with its dubious prospect of success, does not address these cases. Further, DRS appears one-sided. It does nothing to facilitate disposals of those cases where the taxpayers are potentially entitled to refunds, or where the losses have come down but there is no tax demand. This approach is yet another manifestation of revenue bias in administration.

As long a large number of ill-conceived disputes continue to stream into the appellate mechanism, the efforts of the two Boards will amount to nothing more than running to stay in place.

One major reason for the current unhappy situation lies in the extremely risk averse mentality that is manifested at all levels in the administration.

Take some risks

A glaring example of this is the proposed increase in the normal period of limitation for customs/central excise and service tax from the existing one year and eighteen months to two years and thirty months respectively.

This is nothing but a deplorable transfer of the administration’s risk to the taxpayers. It cannot but fuel a further growth in show cause notices and further enhance uncertainty for the taxpayers. It is also to be noted that the parity that existed earlier between demands and refunds has not been maintained — another sign of taxpayer unfriendly approach.

Experience shows the key factors that lead to an almost uncontrolled proliferation of disputes are:

a) A pronounced revenue bias due to the revenue maximising approach that is encouraged by the obsession with revenue targets;

b) Extreme risk aversion on the part of officers due to a perceived fear of vigilance, however ill-founded it may be;

c) An almost complete absence of accountability for poor decisions, so long as they are pro-revenue;

d) A lack of required business knowledge and competencies among officers, especially in relation to complex issues and in the background of a rapidly changing business landscape;

e) The propensity at the senior levels to file appeals against most of the pro-taxpayer decisions at the lower levels, which besides contributing to infructuous and costly litigation, discourages officers passing fair and judicious orders; and finally

f) A general reluctance on the part of the Boards to step in and clarify technical issues at the very onset of an ill-conceived proceeding.

Examples abound of poor decisions. In some egregious cases, the appellate tribunals have been compelled to pass severe strictures and impose financial penalties on the adjudicators for blatant disregard of law and judicial precedents. Such instances have thoroughly discredited the tax departments in the eyes of the taxpayers and made them pessimistic about getting fair and just treatment at the hands of the officers.

Go holistic

The CBEC and CBDT can get a handle on the problem only if they move from a reactive approach to dispute resolution to a more holistic and multi-pronged dispute management strategy encompassing not merely efficient dispute resolution but also measures aimed at dispute prevention.

This is the essence of the recommendations of the Tax Administration Reform Commission (TARC) in Chapter V of its first report. And that is possible only if, as recommended by the TARC, a separate functional vertical for dispute management is created with its own accountability framework in terms of performance targets and measures that give due weightage to quality as well.

In fact the TARC has given, in Chapter IV of its report, an illustrative example of how a distinctly improved performance in dispute management could be achieved.

None of this is possible unless there is change in the basic approach of the administration and the current largely adversarial and distrustful mentality of tax administrators is abandoned. It is necessary for the administration to recognise the dispute management function for what it is, namely a vital limb of taxpayer services.

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