DTC panel seeks to curb tax litigation; charitable trusts may face the heat

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India’s direct taxes code (DTC) is likely to introduce a mechanism to reduce litigation in the country and bring it in line with the best practices internationally.

However, charitable trusts may face the heat because the task force developing the DTC is planning to tighten exemptions to them, following developments such as withdrawing tax exemptions from the Sir Dorabji Tata Trust.

A senior government official privy to the development said these were two key areas that would see overhaul but would not affect revenue collection.

The finance ministry had appointed a task force on the DTC after there were disagreements among members in an earlier panel. The task force is expected to submit its report to the finance ministry on February 28.

According to sources, the task force, which is re-writing direct tax laws, is planning to have a fast-track settlement, an alternative way to settle disputes in line with those in many developed countries. This provides the assessee the option to withdraw the appeal in the middle of the proceedings.

Sources said there were deliberations on the possibility of introducing a voluntary tax litigation settlement for cases pending at the Commissioner Income-Tax (appeals) and appellate tribunals. It may specify the time to avail the facility and give leeway on penalty and prosecution. 

Besides, they are considering the introduction of the provision to take tax disputes with Indian companies for tax arbitration, which is equivalent to other court judgments. The procedure of arbitration completes in just six months. Typically, a case pending at appeals and tribunals takes two-five years to conclude.

Meanwhile, the draft DTC may recommend assessing the feasibility of creating a separate Bench of the Income Tax Appellate Tribunal (ITAT) for international taxation issues. This Bench may be set up where international tax rows are high.

“The committee has studied global trends and best practices adopted by developed nations to deal with disputed cases. It is observed that developed nations have much lower tax litigation than India,” said another official familiar with the draft.

Hence, the mechanism should ensure most of the disagreement between the taxpayer and the tax department will end at the department level, especially those which are based on the factual aspect, he explained.

Other measures that could be part of the new mechanism include increasing the monetary limit for filing appeals, making the dispute resolution scheme lucrative, encouraging the use of the National Judicial Reference System (NJRS) by counsels and launching educational programmes and campaigns about departmental guidelines on best judicial practices. As of March, 2017, tax disputes worth Rs 7.6 trillion were stuck in tribunals, high courts and the Supreme Court, he said.  

The tax department had of late hiked the threshold for filing appeals in tribunals to Rs 2 million, while for high courts and the Supreme Court it has been raised to Rs 5 million and Rs 10 million, respectively.  The measure was expected to reduce litigation by Rs 5,600 crore.  

Sources said the new tax code would tighten norms for allowing contribution by a trust that is exempt to another exempt entity. It may also propose keeping tabs on charitable trusts if they go for fresh registration and seek exemption with a modification in objectives. 

The proposal may tweak the condition to seek exemption and also the withdrawal of exemption if the trust fails to carry out its objectives. Other than these, the DTC may propose enhancing intrusive powers to cover trustees under the survey operation.