India is moving at a rapid pace on the path of economic growth, and its litigation landscape is keeping up. Over the years, taxpayers from different sectors have experienced various reactions on matters under litigation with the Indian Tax Authorities. However, this scenario could soon change as the government is making sincere efforts to bring in efficiency and speed in the disposal of matters under litigation.
The government is working towards a 'litigation-by exception' tax regime, and has taken some landmark steps towards reducing tax litigation. Two specific examples of this approach are the introduction of Limited Scrutiny Assessment (Revenue Audit) and a substantial modification in the criteria for the initiation of transfer pricing assessment.
Under a Limited Scrutiny Assessment, as the name suggests, the scope of the Tax Authorities' enquiry is limited to the 'reason for selection' of scrutiny and does not involve calling for extremely detailed information and making fishing enquiries about different items in the financial statements. During the first round of litigation under the Limited Scrutiny Assessment regime, it was disheartening to see that the Limited Scrutiny Assessments have remained 'Limited' in it's spirit.
Similarly, the criteria for initiating a transfer pricing assessment were revised with a specific focus on a risk based approach as against a blanket monetary threshold approach. Under the revised criteria, only those cases which have apparent transfer pricing risks (as identified by a computer system) or where transfer pricing adjustments of more than INR 100 million have been made in the past, will be selected for a transfer pricing scrutiny in isolation. In all other cases, transfer pricing scrutiny shall not be initiated. In such cases, the government, perhaps pre-empting the approach of the tax officers, has expressly prohibited the tax officers to look at transfer pricing matters even if the case is selected for a scrutiny assessment due to any other reason. Another encouraging trend is a substantial reduction in the number of cases being selected for scrutiny. The tax departments have also made suitable changes to the monetary limits below which appeals shall not be filed by the tax authorities. Further, the government has now proposed to reduce the time limit for completing scrutiny assessments to 12 months in a phased manner. This approach has not only reduced the taxpayers' burden particularly for those who are involved in assessment proceedings all round the year, thus entailing substantial time and costs, but this approach has also allowed the tax officials to conduct a more qualitative scrutiny of items of greater impact
The Advance Pricing Agreement (APA) programme introduced in 2012 has invoked a considerable positive response from taxpayers. The APA is considered to be an effective controversy management tool, which helps reduce time and monetary costs of litigation for taxpayers. The on-ground feedback from taxpayers and tax professionals is that the APA authorities are fair and transparent in their dealing and make an active effort to understand the business dynamics of the taxpayers. In the current financial year (with 2 months still to go), India has signed 53 APAs, which work out to more than 1 APA per week! Comparing this to global standards, the speed of completion of an APA in India is fascinating.
Prime Minister Modi's mantra of 'Good Governance' is also taking shape on the ground with a remarkable shift in the approach of the tax officials who are now more courteous and inclusive in their approach from the Tax Authorities. The tax officials are seen adopting more rational positions rather than following a singular approach of basing their acts on their predecessors. The Revenue Boards have also issued letters to their staff underlying the expectation of the government that the Tax Officers should be sensitive in discharging their duties based on the sound principles of law which can stand the scrutiny of a higher forum rather than passing pro-revenue and frivolous orders, to avoid unnecessary litigation. There has also been a relatively quick disposal of rectification and refund applications involving a substantially large amount.
The government has issued numerous circulars and answers to Frequently Asked Questions (FAQ) over the past few months to clarify interpretations of different provisions of the tax laws. FAQs were issued from time to time to clarify the application of the Income Declaration Schemes. The Place of Effective Management (POEM) regulations were also supported by detailed guiding principles with express clarification on the government's intentions. A similar approach was taken for the issuance of FAQs dealing with General Anti-Avoidance Rules (GAAR).
The government is trying increase the use of technology thereby reducing the touch-points between the taxpayer and tax authorities. Some cases in point are an introduction of the electronic assessment system by the Income-tax Department as a Pilot Project and 'Computerised Desk Audit' by the Maharashtra VAT department. Under these initiatives, the entire assessment proceeding is conducted electronically without having to make multiple rounds of the tax offices and demonstrates the changing outlook of tax administrators.
Another remarkable development, aided largely by a dynamic judiciary, is the speed of the disposal of cases before the appellate authorities. While litigation remains inevitable in any tax environment, the pace of the disposal of cases before the judicial forums also contributes towards providing the necessary guidance to the taxpayers and tax administrators. Contemporary issues such as marketing intangibles and advertising marketing and promotion spend, location savings, selection of tested party, etc. have reached the higher courts and we are expecting to see these issues nearing a settlement at least at judicial levels in the near future.
At the international forum, India is making rapid advancements in resolving tax disputes. Almost 100 plus Mutual Agreement Procedures (MAP) cases (42 cases on treaty interpretation issues and 66 cases on transfer pricing issues) were recently resolved between India and the USA. Similarly, the revised double taxation avoidance agreement (DTAA) between India and Singapore facilitates negotiation of Bilateral APA and also opens a window to resolve tax issues through MAP.
While there are numerous positives basis the developments in the last one year, certain old issues remain. The effectiveness of the Dispute Resolution Panel (DRP) remains a concern with many taxpayers viewing the DRP to be the 'faster route to the tribunal'. The pendency of cases before the first appellate authority (CIT (appeals)) and the time of disposal of appeals does not show signs of improvement. The cases relating to capital gains tax on the indirect transfer of shares issue led by Vodafone continue to remain open without any amicable resolution in sight. It almost seems to have become a point-of-no-return for the parties involved with Vodafone declining to apply under the settlement scheme initiated by the government.
While the government has clarified its intent of developing a stable tax regime, the results of many of the government's initiatives will require a mindset change on the part of the tax administrators and as well as taxpayers. If the mindset of the people in the tax environment keeps pace with the government's initiatives, the proverbial 'acche din' (good days) will not be far away. Ultimately, a responsive and fair tax administration encourages tax compliances far more than any incentives or penalties that the law may bring about!
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