The income-tax Act was legislated almost six decades back, making it archaic over a period of time. There has been a plethora of amendments to the Act over the last several years, thereby making it a complex piece of legislation. This has led to several interpretation issues, resulting in protracted litigation between taxpayers and tax authorities.
Additionally, there are a significant number of cases involving an amount of around 10 lakh crores, according to a report by the Standing Committee on Finance of Lok Sabha, which are stuck in direct tax litigation across different appellate forums and courts. It takes around 10 to 15 years to resolve tax disputes in India.
Considering the gravity of the situation, it would be worthwhile for the finance minister to come up with a dispute resolution scheme, on the lines as ‘Sabka Vishwas - (Legacy Dispute Resolution) Scheme’ in relation to indirect taxes, to bring past disputes to an end. This step could also help the government, bridge the fiscal deficit gap and monetise a part of the amount stuck up in tax litigation.
We have an advance ruling mechanism in India which is a great initiative to enable MNCs to get certainty on their tax position in India. While the law states that advance ruling should be issued by the AAR (Authority of Advanced Rulings) within six months, in practice it is taking more than five to six years to obtain the ruling.
Administrative measures should be taken to ensure that advance rulings are issued within the time prescribed in law.
The Indian Advance Pricing Agreement (APA) programme has been a great success story and has matured over the years since its commencement in July 2012. However, it appears that currently there are more than 750 APA cases pending for disposal.
Further, the time generally taken to dispose APAs is more than three years. One of the reasons for the delay is on account of shortage of human resource, which is leading to more time being taken to dispose of cases. Hence the government should look at strengthening the APA programme by providing it with adequate resources.
India has introduced the General Anti Avoidance Rules (GAAR) with effect from FY17-18 that empower the Indian tax authorities to effectively deal with arrangements that are designed with the main purpose of obtaining tax benefits. In a case where GAAR is proposed to be invoked, the matter is first referred to an Approving Panel which comprises a high court judge, a senior member of the Indian Revenue Service and an academician or scholar. Only if the Approving Panel is satisfied that it is a fit case for invocation of GAAR, can the tax officer invoke GAAR in the case of a taxpayer. Further, there is a de-minimis threshold of tax benefit of 3 crores for invoking GAAR.
As an outcome of the OECD BEPS project, multilateral instrument (MLI) was introduced to prevent base erosion and profit shifting. Article 7 of MLI deals with the concept of principal purpose Test (PPT) which is applicable where one of the principal purposes of an arrangement was to obtain tax treaty benefits. As in the case of GAAR, it should be provided in law that in all cases where the Tax Administration proposes to invoke PPT to deny tax treaty benefits, the matter should be referred to an Approving Panel, for its decision on the matter. Further, a deminimis threshold should be introduced in the case of PPT as well. It would also be important to clarify regarding the interplay between “grandfathering under GAAR / Tax Treaties” vis-à-vis applicability of PPT. In absence thereof, these aspects are likely to lead to protracted litigation.
All eyes are now on the proposed new direct tax code (DTC). A task force was constituted in November 2017 to undertake a complete overhaul of the Income Tax Act with a view to simplify it and harmonise it with the economic needs of the country. The task force submitted its report in September 2019 and the government is currently in the process of examining the recommendations of the task force. With this, the wait for a complete revamp of the Indian direct tax system is inching towards its climax. The broad thrust of DTC is to simplify the architecture of tax law, use information technology extensively and incorporate global best practices therein, with a view to make it easier to understand and implement, thereby resulting in curtailing litigation and make it more predictable.
Hope the finance minister lives up to the above expectations in the Budget.
- authored with help of Ravish Kotadia, Chartered Accountant
(A version of this article appeared in The Economics Times on Jan 21, 2020)