Tax defaults in India surge 1000% in 10 years; disputes double

Tax defaults and tax disputes rising in India

India is witnessing a massive rise in tax defaults and consequent rise in litigation as the quantum of defaults has soared 1000 percent in the past eight years, data compiled by Moneycontrol from various Union Budgets shows.

As on FY23, tax notices demands amounting to Rs 9.08 lakh crore are unpaid for compared to Rs 80,003 crore in FY14. Of the Rs 9.08 lakh crore, notices accounting for Rs 4.23 lakh crore were sent less than two years ago,  Rs 2.13 lakh crore from notices sent between two and five years ago, while nearly Rs 1.43 lakh crore of taxes remain unpaid after 10 years.

Tax-related litigation, too, has seen a sharp increase during the period. The disputed amount more than doubled to Rs 12.2 lakh crore in FY23 from Rs 5.03 lakh crore in FY14, data shows.

Both these disclosures have been made by the government under the section revenue demands raised but not recovered.

Tax default is a scenario wherein the revenue department has raised a demand for tax but the payer has not paid. Further,  the tax department has no means to recover these amounts since the taxpayer has insufficient assets or is absconding.

“The rising issue of tax default and increased litigation is only the surface of the problem. When we dig deeper, one of the significant factors is the complexity and frequent changes in the law, which is creating more confusion and compliance challenges in businesses,” said Alay Razvi, Partner, Accord Juris. “For instance, small and medium enterprises (SMEs) do find it a struggle to keep up with these changes, which is one of the factors leading to unintentional defaults.”

Legal experts also say tax notices being sent to companies under Insolvency and Bankruptcy Code(IBC) are another major reason behind defaults. Rules provide a moratorium on all regulatory proceedings once a company is put into IBC. However, in the recent past, there have been many instances where such insolvent companies have received demand notices.

"The tax due pertaining to IBC companies are significant contributors to the outstanding tax dues figures. The revenue authorities have been lax in knocking off the tax demands pertaining to IBC companies as technically these demands can still be enforced against officers in default. However, the enforcement of such tax demands against the officers in default is a prolonged battle for revenue authorities," said Amit Singhania, founder Areete Law offices.

A bulk of the defaults are on the direct taxes side, with unpaid corporate tax demands to the tune  Rs 3.97 lakh crore, followed by the head ‘taxes on income other than corporate tax" with defaults to a tune of Rs 4.81 lakh crore.

This head includes disputes pertaining to capital gains and transfer pricing, say tax experts.

Tax litigation rising sharply

Another key trend the data throws up is the spike in tax litigation. There were tax disputes to the tune of Rs 12.21 lakh crore as on FY23 compared to Rs 5.03 lakh crore in FY14.

Even in terms of disputes, direct tax accounts for the lion’s share with Rs 6 lakh crore worth litigation in corporate tax matters  and another Rs 4.5 lakh crore of litigation under the "taxes on income other than corporate tax" head.

Disputes over Goods and Services Tax (GST) accounted for only Rs 2,317 crore. The number is expected to surge significantly next year given the slew of GST notices that have been sent to various companies in the past year, say tax experts. Disputes over customs, union excise and service tax accounted for Rs 22,077 crore, Rs 49,367 crore and Rs 99,939 crore, respectively.

“One of the key reasons for the increase in tax notices is the digitisation of data, which has advanced on multiple fronts. Firstly, the government has heavily focused on collecting tax returns online and processing them digitally. This enables immediate identification of inaccuracies by the taxpayer, prompting a notice for any discrepancies. Secondly, the government has begun collecting extensive data on income, expenditure, and purchases, which it then cross-references with declared income,” said Ankit Jain, partner, Ved Jain & Associates.