Budget unleashes reforms in tax dispute resolution mechanism

Delivered on an extraordinary occasion which is bound to test the mettle of any Finance Minister – and thus both an onerous responsibility and an enviable opportunity – the declarations made in the Budget speech are steadfast and an earnest attempt to unleash a propelling momentum in wake of pandemic stricken economy which aspires to make India a forward looking nation. Substantial Changes, have been introduced in relation to Tax Dispute Resolution mechanism to impart greater efficiency, transparency and accountability by eliminating interface to the extent technologically feasible by optimizing utilization of resources and introducing dynamic jurisdiction.

A new scheme has been introduced for re-opening of closed assessments a vexed disputable subject. A review of tax disputes shall reveal that reopening would constitute a bulk of jurisdictional challenges in so far as tax officer’s is concerned. By reducing the time limit from 6 years to 3 years in most cases, the proposals seek to convey that belated enquiries were viewed as harassment. Furthermore, a process of ‘enquiry’ by officials has been introduced in place of the existing framework where the tax officials could reopen assessment only on basis of ‘reason to believe’ perceived by them, which led to extensive litigation. Further safeguards by way of the approval of principal chief commissioner is required. Finally, such cases are limited to instances where the officials are in possession of evidence thereby ruling out roving inquiries which has typically been the case. A welcome edition is the inspiration from indirect tax laws whereby ‘pre notice consultation’ mechanism has been incorporated and instead of commencing litigation, an opportunity is given to the taxpayer to explain its position instead of straight away initiating the reopening proceedings and now, the focus is now on tangible evidence in possession before an enquiry etc.

A new scheme for settlement has been introduced which shall look-into settlement of disputes by small and medium taxpayers having returned income of 50 Lakhs (or less) where the aggregate variation is 10 lakhs (or less). Further, the scheme shall authorize reduction and/or waiver of penalty and immunity from prosecution.

Pushing the drift to digital interface in tax to next level, now online hearing before Income Tax Appellate Tribunal are being made mandatory. This shall yield reduced cost of compliance for taxpayers, increasing transparency in disposal of appeals variety of options in terms of counsel, reduced cost of travel and many more advancements of digital interaction.

One would also expect that the change made in last year budget to disinvest the Tribunal from its power to grant unconditional stay would be rolled back. However, no such proposal appears to be in the text of Finance bill. We had hoped that such retrograde provision would have been omitted because it leaves an aggrieved taxpayer with no choice but to go to high court seeking stay of recovery despite having a good case and affirmation of the tribunal.

A new advance ruling mechanism has been introduced ‘Board for Advance ruling’ which shall be mend by senior tax officials. It shall address issues relating to pendency and provide a realistic assessment of how field officers should interprets the provision. Under the new mechanism an option of direct appeal is given to the taxpayer and tax official before the High court.

With respect to the scheme of Vivad Se Vishwas Scheme Act, 2020 the Finance Minister iterated the success of the scheme which was promulgated with the idea of disposing bulk direct tax appeals. This scheme has resulted in over 1,10,000 taxpayers availing the scheme and settling the tax dispute amount of INR 85,000 Crores. Unlike the success of Vivad Se Vishwas Act the Income Tax Settlement Commission (ITSC) was not found successful and in line with promoting honest taxpayers and accordingly be discontinued