Tax Litigation Reinvented!

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Thousands and thousands of crores of rupees are locked up in tax disputes. Finally this budget has found a key - not 1 but 3 to unlock that money. CNBC-TV18's Isha Dalal finds out why some tax lawyers may have to look for a new profession.

Finance Minister, Pranab Mukherjee had announced that in order to improve the investment climate in the country, we need to facilitate the resolution of tax disputes.

As the House applauded, so did India INC and tax experts across the country. In his Budget, the finance minister Pranab Mukherjee proposed three measures to help reduce tax litigation in India, a dispute resolution panel at the Income Tax Department for all foreign companies and for transfer pricing disputes.

This panel will be manned by three senior Income Tax Commissioners selected by the Central Board of Direct Taxes and is expected to start work on October 1, 2009.

Under the current appeals process, an assessing officer's order can be appealed at the Commissioner of Income Tax, and thereafter, the Income Tax Appellate Tribunal. A process that can sometimes take a couple of years and that requires the taxpayer to pay some portion of the disputed tax amount upfront.

With a Dispute Resolution Panel in place, the Assessing Officer must first issue a draft order, which can be appealed at this panel.

The benefits:

No upfront payment by the taxpayer

Sudhir Kapadia, Partner, E&Y said, "While there is a draft order, I don't have to pay the disputed tax demand. So there is a very real benefit in terms of cash flow."  Secondly, quicker resolution as the panel has to decide within a limited time period.

HP Ranina, Senior Advocate, Supreme Court

Within 9 months, this panel will give its own directions after hearing and giving an opportunity to both the assessing officer and the foreign company. Finally, the 3 member collegium will reduce the chances of a biased decision!

Sudhir Kapadia added, "What happens in practice is, speaking from a revenue's perspective, it is difficult for one person to take a bold view that will be seen as favoring the taxpayer. So more likely than not, disputes taken to the commissioner appeals tend to favor the revenue's position because one person will be kind of in the radar-whereas if it's a collegium, handpicked by the tax department themselves, the chances of having a more balanced approach is far greater."

But if the taxpayer disagrees with the dispute resolution panel's decision he has to appeal to the Income Tax Appellate Tribunal, then the High Court and then move the Supreme Court. Experts say that process should be shortened.

HP Ranina said, "For questions of fact, let the foreign company go to the tribunal. But where an issue of law is involved, let it go to the High Court or to the National Law Tribunal as and where it is set up. That will cut short the period of litigation."

The Finance Minister's second proposal puts in place safe harbor rules: Pranab Mukherjee: To reduce the impact of the judgmental error in determining the transfer price in international transactions."

A safe harbour rule says if a transfer pricing assessment is within a certain band of the tax paid, then this tax amount will not be contested. This should help cut down transfer pricing litigation, which often takes 3-4 years to resolve.

Commenting on the same Sudhir Kapadia said, "Today the process is very involved. Lot of subjectivity, lot of disputes, there are at least 10 cases in which the tribunal had to intervene and give rulings on so far. This is what can be eliminated in more than 90% of the cases if the government comes out with a sensible safe harbor provision.

Now for the Finance Minister's third proposal.

Pranab Mukherjee : "I intend to merge the two authorities for advance rulings for direct and indirect taxes."

That simply means that companies can now obtain advance rulings from the same bench.

But that's not very helpful. Currently companies shy away from advance rulings altogether-that's because advance rulings are binding and can be appealed only via writ petitions in a High Court.

HP Ranina said, "People are reluctant to go to the AAR. My suggestion would be to make this effective, provide one appeal directly to Supreme Court. The reason why I am suggesting the Supreme Court is that the chairman of the AAR is a retired Supreme Court judge. So it is more appropriate to go on an appeal directly to the Supreme Court. And if that is done, the AAR will become a very effective instrument to cut down litigation."

Altogether these three small moves will make a big difference as corporate taxpayers will get more certainty, speedy resolution and less litigation

Sudhir Kapadia added, "You may hopefully eliminate 60-70% of the disputes which could have arisen."

HP Ranina further said, "The hope is, the expectation is that they will be fair, understanding and objective and you will get a better order than what you are getting today."

Better orders in the future, but what about the thousands of unresolved disputes? Well a way to clear that backlog was found back in 2005 when the government passed the National Tax Tribunal Act. Under this Act, taxpayers can appeal at specialized tax tribunals instead of appealing at the High Court after going through the Income Tax Department's appellate process. This mechanism has yet to be operationalized. But experts are hopeful that these tribunals-whenever thye're set up-along with the Finance Minister's new proposals for dispute resolution, will go a long way in truly expediting tax litigation.