Direct Tax Code may help bring change in mindset of taxpayers, authorities

The report by the panel on the Direct Tax Code, currently under the consideration of the government, is believed to have suggested several measures to reduce tax litigation. The recommendations by the panel are yet to be made public. However, the efficacy of three likely measures in this regard is being hotly discussed in the tax fraternity. These are:  Simplifying statutory tax provisions; the presence of an alternative mechanism for mediation and negotiated settlement of tax disputes; and setting up of a litigation management unit in the tax department.

Almost all experts tend to agree that measures to curb tax litigation would be effective only if one recognises the elephant in the room: The targets given to the tax authorities for revenue collection.

“Many of the cases should not have started at all. The root cause for litigation is unrealistic revenue targets for tax officers. They start raising demands to meet their targets,” says senior advocate Arvind Datar.

Dinesh Kanabar, CEO, Dhruva Advisors, agrees. “There is a serious need to relook at the target system,” he says.

The finance minister, too, tacitly seems to recognise the issue. On several public platforms, she has reiterated the need for the tax authorities having a change in their mindset and approach to taxpayers.

Experts welcome any move to simplify tax provisions but they highlight the need for consistency of tax interpretation. “One of the key reasons that we have rampant tax litigation is the fact that tax laws and tax treaties can be interpreted by each tax official differently,” says Kanabar.

A way forward could be to set up a central unit that provides the official view on the interpretation of tax laws and treaties so that there is uniformity of interpretation, he suggests.

 Experts point out that jurisdictions such as the United States and Australia have been able to effectively manage tax litigation by regularly updating and clarifying the interpretation of the laws by way of circulars/manuals.

Efforts to develop an alternative mechanism for settlement of tax disputes, including mediation, have not had too much success. Datar is sceptical of the government’s track record in mediation. “If any loss to the government is seen as an act of corruption, how will mediation work?” he asks.

According to S R Patnaik, partner and head-taxation at Cyril Amarchand Mangaldas, in order for such approaches to be successful, it is important for both taxpayers and tax administrators to get out of their deep-rooted adversarial positions and take a conciliatory approach.

Experts say to make dispute resolution effective, there is a need for a robust database of jurisprudence, and proper training to tax officers, chartered accountants and other professionals empanelled to ensure a proper, effective and impartial approach to settling litigation.

“The business perspective of the transactions should also be given due cognizance while arriving at a settlement,” says Arijit Chakravarty, senior principal, direct tax litigation at Advaita Legal.

Most experts feel setting up  a litigation management unit in the tax department is a workable proposition. For litigation management, countries like the US, Australia and the UK have made effective use of private ruling mechanisms similar to the Authority for Advance Ruling, experts point out.

However, a measure of accountability needs to be also introduced to keep a check on wanton litigation by errant few, adds Chakravarty.
Most experts welcome the increase in monetary thresholds for filing of appeals by the tax department. They agree this will play a significant role in reducing the pendency of tax litigation. For instance, as a result of enhancement of the threshold limit in 2018, about 8,300 appeals in high courts and about 7,700 appeals before tribunals were reportedly withdrawn.

The Direct Tax Code may initiate the much-needed change in the mindset of taxpayers and tax officers.

“The claims for indirect and direct tax stuck in litigation (Appellate Tribunal and higher) by the quarter ending March 2017, amounted to nearly (Rs ) 7.58 lakh crore, over 4.7 % of GDP”   — Economic Survey 2017-18

What experts want
  • Make most tax assessments and procedural requirements electronic
  • Simplify statutory tax provisions to avoid ambiguity or susceptibility to multiple interpretations
  • Set up a central unit to provide official view on the interpretation of tax laws and treaties for uniformity of interpretation
  • Periodically release internal manuals, which contain the revenue department’s interpretation of the provisions keeping in mind court rulings
  • Put measures in place for quick disposal of appeals
  • There is a need to re-look at the targets given to tax authorities for revenue collection
  • Bring in a measure of accountability to keep a check on wanton litigation by errant few
  • Develop alternative mechanism for settlement of tax disputes
  •  For mediation and arbitration to succeed both taxpayer and tax administrator have to adopt a conciliatory approach

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