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Tax Litigation In India

The business environment of a country needs not only creative economic policies to flourish but also efforts by the authorities in other related areas like taxation. India is one of the world’s fastest-growing economies and an attractive destination for investors. At the same time, it is home to a large number of tax disputes involving corporates as well. Major corporate players have entered the country to access its vibrant markets but they feel that the country’s taxation structure is complicated and the dispute resolution mechanism needs overhauling. Even though they may be filing timely corporate tax returns in India, they may be saddled with an issue requiring legal remedy. Engaging experts for representing for tax litigation in India is helpful but the pace at which cases move in Indian courts and tribunals results in financial losses for the companies.

Earlier this year, the government increased the threshold limit for filing appeals at tribunals or judicial courts. This was welcomed as a long-overdue relief measure which again brought the country’s tax disputes into focus. Let’s take a look at the issue and the new step which addresses the problem to some extent   

India’s Tax Dispute Resolution Mechanism

India has a multi-tiered structure for resolving tax disputes which starts with an appeal at the office of the Income Tax Commissioner. An issue arises when a taxpayer does not agree with the evaluation of his/her records conducted by the Assessing Officer of the Income Tax department. The Income Tax Act has provisions which help the person/entity to contest the assessment. As mentioned earlier, the first appeal can be made at the Commissioner’s office. In case, a favourable result is not obtained, the order passed by the Commissioner can be appealed against at the Income Tax Appellate Tribunal (ITAT). The order Issued by the ITAT can be contested at a high court of the country. The last forum where the high court order can be appealed against is the Supreme Court of India. The Income Tax department also takes the same approach in case its orders are overturned by any of the forums. The Central Board of Direct Taxes (CBDT) has specified a set of conditions along with monetary limits for filing appeals before the appellate tribunal as well as the courts of law.

There is another way for settling such issues in the form of the Dispute Resolution Panel (DRP). This body was created with the objective of resolving problems involving foreign companies in India. It handles cases related to transfer pricing disputes and also determines the tax liabilities of overseas entities operating in the country. The DRP works in a time-bound manner and has to pass an order within 9 months. The Income Tax Settlement Commission is another alternative dispute resolution body which handles complex cases.

The Problem: A Large Number Of Unresolved Tax Disputes

This multi-tier structure and the amount of time spent at each level has given rise to a large number of unresolved cases in the country. This is putting a strain not only on the finances of the corporations involved in them but also on the already overburdened judicial system of the nation. The petitioner has to incur financial losses by spending resources on hiring professionals for representing for tax litigation in India. At the same time, the government department also suffers because of decreased productivity as the human resources have to shoulder the additional responsibility of keeping track of various legal cases. At the appellate level itself, a tax issue may take up to 7 years to settle and an equal number of years if the case moves to judicial courts. According to some news reports, as of March 2017 tax disputes worth Rs 7.6 lakh crores were stuck at various levels in different appellate and judicial bodies.

The Solution: Increased  Monetary Threshold Limit For Appeals

The reduction in productivity, loss of money and the harm the litigations were causing to the country as an attractive business decision forced the government to think about possible solutions. One way was to overhaul the whole dispute resolution framework including the judicial courts to deal quickly with a huge number of cases. This was a resource-intensive and time-taking method which does not seem practical in present times. The government chose the next best alternative and raised the monetary threshold limits for appeals.

From Rs 10 lakhs, the limit was raised to Rs 20 lakhs for appeals in ITAT or CESTAT. The threshold figure for high courts was increased from Rs 20 lakhs to Rs 50 lakhs. The biggest rise was made in the limit for filing cases in the Supreme Court and the new amount is Rs 1 crore as compared to Rs 25 lakhs earlier. The move resulted in a reduction of 37% of total cases with 29,580 litigations being withdrawn from various forums. The CBDT withdrew 54% cases from the Supreme Court, 48% of cases from high courts and 34% from ITAT. The Central Board of Indirect taxes and Customs (CBIC) withdrew 16% cases from the CESTAT, 22% from high courts and 21% cases from the Supreme Court. This will release about Rs 5,600 crore from litigation which is a minuscule sum if compared to the total staggering Rs 7.6 lakh crore caught in litigation. Nevertheless it is a start in the right direction and hopefully eases pressure on taxpayers, government agencies as well as the judiciary.

Conclusion

The government by increasing the monetary threshold limit for filing appeals in tax litigations has signaled that it is serious for reducing the number of tax disputes in the country. In order to avoid hiring professionals for representing for tax litigation in India, corporations must make all efforts to understand their tax liabilities. 

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