Getting the taxman to introspect is a good idea
Given the huge number of pending cases and income tax department’s poor record of winning them, the Central Board of Direct Taxes (CBDT) has done well by acting on the Tax Administration Reforms Commission (TARC) recommendations on dispute resolution. Setting up a 6-member panel to assess the efficacy of the dispute resolution mechanism is a good idea given there are around 2 lakh cases pending at the Commissioner of Income Tax appeals level and another 31,000 at the appellate tribunals; there are another 31,000 cases in various high courts and 5,800 in the Supreme Court. Around R4 lakh crore of tax disputes can be unlocked if the taxman is able to find a solution to this problem.
There are two aspects to what the panel has to do. One, to look at existing dispute resolution processes and see how they can be bettered. The income tax settlement commission has its obvious shortcomings given that it takes 12 to 32 months, according to a CAG report quoted in TARC’s report, to admit applications; partly because the number of benches are limited to just four. There are additional hurdles in that the full amount of tax and interest has to be paid before filing an application, the matter cannot be heard by the commission if it is pending before any bench/tribunal. The Budget’s attempt to use advance price agreements (APAs) to decide on even older cases is no doubt a progressive idea, but how do you get it to work where, as in the case of the Indo-US Mutual Agreement Procedure (MAP), no agreement is being reached with the taxman on acceptable profitability levels—APAs, in any case, by their very nature, are restrictive since a fresh APA has to be negotiated any time the firm goes into a new line of business.
Which is why, apart from looking at how to create more effective dispute resolution methods, the panel plans to examine 200 corporate and non-corporate orders from 8 cities including the four metros to see where the orders have gone wrong. If incorrect orders are not sent out, the scope of litigation itself reduces—given the tax man won just 12% of cases in the Supreme Court in FY13, 21% in the High Court and 20% in the appellate tribunal, not indulging in needless litigation will also save a lot of time and money. The panel’s examination of data will, for instance, provide another assessment of what the TARC has said, that orders often tend to be sub-standard—an internal review of orders is surely the best way to reduce litigation and tax dispute. Another issue raised by TARC is that the Central Board of Excise and Customs (CBEC) has, for instance, issued circulars saying that ‘protective demands’ be raised in cases where audit objections have been raised in the past. Indeed, the finance ministry would do well to accept the TARC recommendation that the revenue collection function of the taxman be separated from the dispute management one—if the same officials are in charge of both tax collections as well as dispute handling, this prevents enough preventive checks from being put in place.