Tax dispute resolution in the Indian context hasn’t particularly been an encouraging experience. While a portion of this taint could be attributed to complexity of tax laws and efficiency levels of the administrative process, a material reason is delay in seeking resolution due to multiple layers of appeals, which currently is four.
As a new entrant in the tax profession, one would experience that the broad outcome of first appeals with the income-tax commissioner resulted in 80% of the IT officers’ order of assessment being reversed. Disappointedly, not even 20% of orders are overturned today. The reasons for such outcome is partly understandable and partly creation of our actions.
The authority of IT commissioners has been subsumed with the powers of the officers, thereby making the functioning of the commissioners akin to glorified officers. Either the IT commissioners are reluctant to take bold decisions or relegate the adjudicating function to the tax tribunal, despite being convinced on merits of the case in several instances.
What has lately complicated the outlook is multiplicity of high tax demand cases of large taxpayers and MNCs. Besides, in a high-stakes battle, neither the taxpayer nor the tax administrations are in a frame of mind to give up litigation. The institution of a dispute resolution panel (DRP), announced in Budget 2009, is a bold move and couldn’t have been timed better. It would undoubtedly facilitate creating a platform to avoid endlessly litigation and save precious time of our courts. As our law does not permit an out-of-court settlement, DRP makes it an even more compelling case for seeking dispute resolution.
Coverage & Scope
Firstly, DRP is optional and if an eligible taxpayer exercises the option, the DRP shall review cases involving transfer pricing (TP) and other disputes. However, the absence of TP dispute shall disentitle an Indian company to seek DRP intervention though foreign companies can subject all disputes to DRP.
Lately, the CBDT announced detailed rules articulating requirements to disclose facts, submission of additional evidence (a common cause of dispute), examination of witness, etc. More importantly, the DRP has to give its decision with a nine-month timeframe against which the tax administration cannot appeal.
Problems & Challenges: Some Suggestions
Metaphorically, the new-born baby of the revenue department would have its share of challenges on its way to organic evolution. The key challenges for DRP becoming an effective and efficient forum can be summed up as follows:
Independence: The fact that the collegium shall comprise three IT commissioners questions the independence of the panel as a member of DRP could be supervising, if not directly dealing with, the dispute. It is well accepted that large taxpayer assessments have inputs from the jurisdictional IT commissioner, and if the same commissioner is a member of the panel, how can his view be objective, particularly if he is also responsible for meeting the collection target? The cardinal judicial discipline that a judge cannot decide his own case should be adhered to; it would otherwise fail.
Consistency: The DRP shall have to achieve absolute consistency on principles of law coupled with seamless coordination across metros. It should endeavor to achieve its objectives set in a similar fashion as that of the National Tax Tribunal, which is proposed to replace the state high court.
Judicial Representation: The collegium besides IT commissioners should have envisaged a judicial or law officer; absence of judicial competencies could act as a handicap in dwelling deeper into principles of law.
Spirit and Coverage: It is imperative that the collegium operates in the spirit of an arbitration panel. An arbitrator’s job is not just to avoid court intervention but function with an objective to resolve (and not perpetuate) the dispute. Function to act as a mediator, of course within the boundaries of legislative framework, is critical if its scope is broadened to cover the role of the Settlement Commission. This would imply that the DRP can make recommendations to drop penalty proceedings even if it agrees with views of the administration.
In Conclusion, DRP as an alternate settlement mechanism has been welcomed by MNCs who either are reeling under our cumbersome, time-consuming and expensive tax litigation process or have heard about India’s reputation as a notorious tax jurisdiction.
DRP as a legislated forum prima facie appears to be more stable unlike patchy attempts made in the past (Voluntary Disclosure of Income Scheme of 1997 and Kar Vivadh Samadhan scheme of 1998). One clear advantage I see is curtailment of tax administration’s right to collect tax on high-pitched assessment, a practice widely prevalent.
And finally, tax payers would skip a layer of appeal that, in my view, had become redundant over the years. Let’s wait and see how we succeed in curtailing tax litigation.