We need innovative solutions to address tax litigation

Last week witnessed the passage of the Direct Tax Vivad se Vishwas Bill even as it faced criticism from the Opposition, particularly in the Rajya Sabha. The Bill was lamented, underscoring the unjust bargain meted out to honest taxpayers in view of the indulgence shown to those whose conduct was vitiated by moral turpitude.

With Presidential assent to the Bill, a presumption of constitutionality is attached to it being the law of the land. Eligible taxpayers will undertake cost-benefit analysis with respect to pending disputes, submit declarations to close litigation and foreclose the possibility of further attendant proceedings.

This scheme has been characterised as a logical culmination of the attainments from a similar scheme introduced in 2019 for indirect tax laws. Tax disputes worth nearly Rs 2 trillion were settled under that scheme, indicating taxpayers view, an ad-hoc dispute settlement scheme, as an immediate measure to foreclose litigation. There is a need to hyphenate this linkage and also a necessity to obviate the moral hazards sought to be appended to the present scheme. Unlike the scheme for indirect tax where the dispute could be settled by payment of as less as 30 per cent of dues, there is a requirement to pay the entire tax under this scheme (unless the appeal is at the instance of the Revenue, in which case the amount is 50 per cent) which by itself is sufficient to rule out the scheme’s characterisation as an “amnesty” scheme. Take, for illustration, cases relating to disallowance of expenditure on account of failure to deduct appropriate tax. In such cases, it is possible that the taxpayer who received the income has paid tax on the entire income and thus there is no loss of revenue to the exchequer. Nonetheless, even in such cases, disallowance is effectuated and penalty proceedings are initiated against the defaulting deductor. In these cases, where the deductor comes forward to pay the entire tax amount, one cannot describe it as an amnesty in any form.

In this rigmarole, one must, however, not miss the larger picture wherein the scheme is only a piece in the jigsaw puzzle. The past decade has witnessed specific measures by the government to dilute what is perceived as the “menace” of tax litigation. To list a few, a comprehensive National Litigation Policy was promulgated to rein in the compulsory-litigation mindset; progressively monetary limits for revenue appeals were enhanced, etc. In many cases, adverse decisions were accepted by the department with a resolve not to file further appeals. For instance, in January 2015, the Union Cabinet approved a decision of the Bombay High Court involving significant transfer pricing disputes with MNCs. Such course-correction measures were unheard of. Despite these, tax-litigation has been on the rise. As the finance minister described, the present scheme is another such measure to proactively close “vexatious” litigation.

There is an overwhelming need to keep the spirit of resolution alive with innovative measures. As a next step, the forward-looking recommendations of the expert committee on the Direct Tax Code, such as mediation in tax-disputes, must be considered in the fiscal laws. Additionally, strenuous attempts to add vigour in alternative dispute resolution institutions, such as the Authority for Advance Ruling and the Dispute Resolution Panel is the need of the hour. The policy-framers will do well to review the pending disputes and segregate those issues which witness maximum litigation so as to evolve intelligent issue-specific solutions, either by legislative amendment or through procedural relaxations, as the case may be.

The biggest change required, however, is the mind-set. The practice of routine filing of appeals against all orders adjudged prejudicial to the Revenue simply needs to stop. The government needs to introduce a new review mechanism, which does not permit the egos of field-officers to drive the decisions and ensure that only disputes where a substantial question of law is involved are canvassed before the courts. Perhaps, greater accountability needs to be affixed on officials recommending filing of frivolous appeals. Alternatively, the Central Board of Direct Taxes (CBDT) may constitute an internal review board, akin to a filtering mechanism, which will be responsible to vet all proposals for filing appeals before the high courts and the Supreme Court. A single body (at the board level) will ensure consistency across taxpayers, evolution of trends regarding appeal proposals, and a review mechanism, besides attaining the objective of mitigating rising disputes. If one can draw an analogy from the approval panels constituted for General Anti-avoidance Rule (GAAR) and for retrospective application of indirect transfer provisions, it is evident that the presence of such empowered panels makes tax officials implement their actions in a diligent manner instead of passing routine orders.

One must recall the solemn assurance given by the Union government before the Supreme Court, to save the ignominy of the 1997 Voluntary Disclosure of Income Scheme (VDIS) being quashed inter alia on grounds of propriety, that in future no such scheme would be introduced. Let this scheme be the last, and instead innovative solutions be implemented to address tax litigation. Given the speed with which the CBDT has rushed FAQ’s and their willingness to clarify the scheme, including the recent extension of the benefits up to June 30, 2020, it is an opportunity tax-payers should not miss.

The writer is managing partner, BMR Legal and views are personal.