An unequivocal movement towards reducing tax litigation and improving the effectiveness of tax administration

There is lot in fine print by way of amendments to several statutes including benami transactions and duty laws.

Fine print apart, there are clearly visible signs that the incumbent government means business. It has tried to ‘walk the talk’ for reducing tax litigation and improving tax administrative outlook, albeit, there may be differences on the proposed changes.

For ease of appreciation, the proposals in Budget 2020 regarding reforms on clarity and certainty of Indian taxation regime can be broadly put in two buckets, (a) Reducing tax litigation and (b) improving effectiveness of tax administration.

Reducing tax litigation

There are many changes introduced in this broad theme, some of the major ones are enlisted below:

1. a) Relief from vexatious litigation process

In the past, the Government has taken several measures to reduce tax litigations. In the last budget, Sabka Vishwas Scheme was legislated to resolve indirect taxes disputes under erstwhile Indirect tax laws. It resulted in settling over 1,89,000 cases which is reported as being more than half of the total indirect tax disputes. Certainly, no mean feat in this country where both taxpayers and the Government seem to litigate on almost any issue. Now to extend this trend to direct taxes, owing to 4,83,000 direct tax disputes pending before various forums, the lessons from IDT scheme are sought to be repeated.

However, the incentive offered is relatively less under the proposed scheme and a taxpayer would be required to pay the total tax amount disputed by the department, getting only waiver of interest and penalty, provided the payment is made by March 31, 2020. This is unlike up to 70 percent rebate on tax itself under IDT scheme.

It is expected to liquidate revenue in those cases where bonafide interpretation issues may exist and taxpayers wish to close their cases.  The most important point is that taxpayers in whose cases, appeals are pending at any level, can benefit from this scheme.

It is without doubt that the lesson which government may learn here will be deployed to motivate a similar though specific scheme for high pitched assessments including transfer pricing or international tax issues, which seems to be a chunk of disputes currently forcing the tax administration

1. b) Reducing the rate of TDS on fees for ‘technical services’ (other than professional services)

This has been a persistent issue between the taxpayer and the tax department. In fact, there are large number of litigations on the issue of short deduction of tax treating assessee in default where the assessee deducts tax under section 194C (payment to contractors) , while the tax officers claim that tax should have been deducted under section 194J (payment for technical service) of the Act.  Therefore, to reduce litigation, Budget 20202 has proposed to reduce rate for TDS in section 194J in case of fees for technical services (other than professional services) to two per cent from existing ten per cent.  However, the TDS rate in other cases under section 194J would remain same at ten per cent.

Improving effectiveness of tax administration

1. a) Taxpayers charter

The taxpayer’s charter always seemed to exist but were in effect never enforced in its true spirit. Any tax system requires trust between taxpayers and the administration. This will be possible only when taxpayer’s rights are clearly enumerated and seen to be implemented.

Towards this end, and with an objective of enhancing the efficiency of the delivery system of the Income Tax Department, Budget 2020 proposes to amend the provisions of the Income Tax Act to mandate the CBDT to adopt a Taxpayers’ Charter. Once enacted, the details of the contents of the charter shall be notified. What is more crucial will be whether and how the CBDT will enforce these guidelines and how far taxpayer will really save themselves from harassment and actions taken against errant tax officials.

1. b) Faceless appeals

Budget 2020 proposes to amend the Income Tax Act so as to enable faceless appeal and faceless penalty provisions extending from faceless assessment. In order to impart greater efficiency, transparency and accountability to the assessment process under the Act a new e-assessment scheme has already been introduced.

With the advent of the  such scheme, most of the functions/ processes under the Act, including of filing of return, processing of returns, issuance of refunds or demand notices and assessment, which required human interface between the taxpayer and the Income-tax Department, are now in the electronic mode. This is a result of efforts by the Department to harness the power of technology in reforming the system.

The filing of appeals before Commissioner (Appeals) has already been enabled in an electronic mode. This extension will further enhance technological interface and also reduce avenue for corruption. To ensure that the reforms initiated by the Department to eliminate human interface from the system reach the next level, it was imperative that an e-appeal scheme be launched on the lines of e-assessment scheme. Logically, this should later be expanded to Dispute Resolution Panel (consisting of a collegium of three Commissioners).

In summary, there is lot in fine print by way of amendments to several statutes including benami transactions and duty laws. We reckon this year’s Budget was focused to bring certainty on taxation regime with tax administrative reforms keeping in mind the transparency agenda and increased digitisation of transactions.

Mukesh Butani is Managing Partner BMR Legal. Views are personal