Missing tax reforms; sharp hike in cases stuck in appeals process
May, 16th 2016
Though the government has announced a slew of measures to make India’s tax system less taxing—quicker tax refunds are often cited as an instance of this happening—the finance ministry’s FY16 annual report makes it clear that this is far from happening. With a series of high-pitched transfer-pricing adjustments pushing direct tax disputes from a high Rs 410,000 crore in FY14 to Rs 497,900 crore in FY15, one of the action points of the tax department was to reduce these quickly; to ensure this happened, the government laid down rules which put limits for which decisions on resolving cases could be taken at various levels of appeal. At the very first level of appeal, that of the Commissioner (Appeals), the number of pending appeals was a whopping 215,000 in FY14, with Rs 287,400 crore locked up in these cases. As per the Central Board of Direct Taxes action-plan for the year, over 60% of these cases were to be resolved—that is, 1.3 lakh cases were to be resolved. What was managed, however, was only 73,700 and, with a lot more disputes piling up, by FY15, the number of pending cases had ballooned to 232,100 and the amount involved to Rs 383,800 crore. And while the data for FY16 is available till only October, unless there has been a dramatic change over the past few months, things have only got worse. According to the annual report, till October 2015, the number of pending appeals at the Commissioner (Appeals) level had shot up to over 281,000 and the amount locked in these appeals had ballooned to Rs 567,000 crore. The government has done well to start assessing officials on the basis of their track-record of assessments and handling of appeals, besides cracking down on the practice of putting up presumptive demands to avoid the CAG’s wrath, but unless this backlog is fixed, the exercise doesn’t amount to much.
Similarly, after the well-publicised success at resolving transfer-pricing disputes through Advance Pricing Agreements (APAs), the policy also said that any APA signed would be used to clear older cases of the same company, making it clear a breakthrough was near in dealing with this—between FY12 and FY15, Rs 223,000 crore was added back to the income of MNCs by way of transfer-pricing cases. Yet, of the 590 applications filed between FY13 and December 2015, only 32 could be turned into final agreements, of which just one was bilateral, involving the revenue department of the MNC’s home country also, while 8 were withdrawn. It is true that the number of fresh transfer-pricing cases have fallen over the past few years, and a MAP roadmap has been laid out for resolving transfer pricing cases of US firms operating in India, but as in the case of other disputes, the backlog needs to be cleared for investors to regain their faith in India’s tax system. And this doesn’t take into account the damage caused by the retrospective tax cases that remain unresolved so far.