India: The Tax Disputes And Litigation Review


The integrity and efficiency of any tax administration system hinges upon the creditability of its dispute resolution mechanism in the eyes of the taxpayers. For a developing economy such as India, where the courts and tribunals are over-burdened with disputes from every aspect of life, it becomes imperative to have an efficient and cost effective tax system for the assessment and payment of taxes so as to relieve taxpayers from the burden of vexatious tax litigations and endless disputes, and equally provide them with suitable avenues for dispute resolution.

With the intention of achieving that goal, the government, in its proposals for 2016, emphasised encouraging use of an e-assessment procedure to make tax assessment proceedings objective and less time consuming. The approach of the government is therefore to shift the economy towards a 'broad base, low rate' taxation regime. The emphasis on 'digital India' and a 'cashless economy' must, therefore, be seen in the same light.

Recent times have witnessed continuous efforts of the tax authorities as well as the government to improve the image of India's tax administration and tax collection, and moves are constantly being made along these lines. It is not an exaggeration to state that the Indian policy reforms are moving in a direction where India being viewed as an adversarial jurisdiction is removed over a relatively short period of time.

The chief concern of taxpayers, including multinational companies, that the tax authorities frequently adopt aggressive positions inconsistent with both international and domestic taxation norms and principles, has also been addressed by the current administration, and ensuring the ease of doing business remains the underlying objective of the government in all the policies it is formulating.

The grass-root problem of the prolonged continuation of tax disputes at various levels in India has not yet received the required attention of the policymakers. The main reason for tax litigation is a lack of clarity in the law that makes it susceptible to multiple interpretations. Further, the existence of multiple appellate levels through which a disputed issue has to pass before attaining certainty, and the existence of conflicting opinions from various appellate fora and authorities across the country, also contribute to delay and a multiplicity of proceedings. Another reason for the increasing number of tax disputes and litigation is an understaffed and inexperienced tax administration tackling the rapidly evolving tax laws and the issues arising thereunder.

The mechanical application of laws, arbitrary tax demands and protracted litigation coupled with the aggressive stance taken by the revenue department in the past has made India infamous for its adversarial approach, which drew criticism to such an extent that India was perceived as a non-tax friendly jurisdiction. However, the government has advocated the need for a non-adversarial tax regime, with the focus shifting towards enhancing efficiency by reducing the burden of compliance.

In addressing these concerns, a number of worthwhile measures have been undertaken to encourage a non-adversarial tax regime and to fuel growth. For example, several departmental office instructions have been issued with the overall aim of building capacity, improving the quality of assessments and encouraging the e-assessment procedure; and regarding the decision to not to pursue specific issues before the Apex body, etc., apart from the ratification of a mutual agreement procedure (MAP), and the entering into of unilateral or bilateral advance pricing arrangements (APAs) to bring clarity to the transfer pricing regime.

On the other hand, the stringent Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 has also been enacted with the objective of preventing income and assets from being illegitimately kept outside the purview of the Indian tax net. Going ahead with the idea of tapping black money within the country, the government first introduced an income disclosure scheme effective 1 June 2016, with an overall outflow of 45 per cent, including interest and penalties, to be paid on such undisclosed income, and 500 rupee and 1,000 rupee denomination banknotes were eventually withdrawn with effect from 9 November 2016. These steps are further seen in the light of the inclusion of unorganised sectors within the ambit of income, since a large segment of the country's economy works on a cash-based system, thereby evading tax assessment and payment. As a result, the government has also proposed another disclosure scheme for people to 'come clean' by paying 50 per cent of tax on junked currency deposited in banks post-demonetisation.

In terms of dispute resolution mechanisms, India already has in place an elaborate structure of dealing with tax disputes. The statute provides for a five-tier appellate hierarchy for resolving conflicts between the revenue department and taxpayers, of which the higher two in the hierarchy are only law-finding fora. In addition to this, certain alternate dispute resolution mechanisms are also provided for in certain specified cases, along with procedures for advance rulings and APAs.

Historically, in the pre-Constitution era, any interference by the high courts in revenue matters pertaining to the exercise of their original jurisdiction was prohibited. However, the revenue enactments had provisions whereby the jurisdiction of the high courts could be invoked for the limited purpose of the interpretation of statutes.

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* Aseem Chawla is a tax partner at Phoenix Legal. The author would like to acknowledge the contribution of Priyanka Mongia, a senior associate at Phoenix Legal, for her contribution to this chapter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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