India Tax Payer - Forum

Posted: 03-02-2015

We received a letter asking for a feedback from us on the new committee constituted to reduce tax litigations. Our feedback and suggestions sent to the department is given below. We welcome your comments as replies.

Ref: 2014-15/45

Date: 1 February 2015

Ms S Ushha

Income Tax Officer

HQ (Judicial), CHENNAI.

Madam,

We thank you for your letter dated 13 Jan 2015 where you had invited us to give suggestions / feedback on the committee to reduce litigations concerning taxpayers, causes thereof and possible remedial measures.

In this regard, we give below the following points for your consideration:

1.     We welcome the formation of the committee to look into these issues.

2.     The litigation issues arise primarily in the operation of the Tax Department. In order to solve the issues, the committee should ideally have representation from the Tax Payers. How can a committee of Commissioners solve the problems of the Tax Payers? Unless the problems are addressed, compliance of tax laws will continue to be forced and not voluntary, resulting in more litigation.

3.     We strongly recommend inclusion of Tax Payers in the committee without which this will be one more committee that will head to no where.

4.     Statistics indicates (Economic Intelligence Bulletins, Dec 2013, Aug 2014, Dec 2014) the Income Tax department wins not more than 20% of the cases filed by them in the court against the citizens of the country and less than 10% in value terms.

5.     This essentially, indicates that there are more frivolous cases filed than real ones. Though, 10%, no doubt, is a huge sum.

6.     Let us consider the Excise Audit 2000, a process update implemented by Indirect Taxes department. In case of Central Excise and Services Department, in order to usher in a proactive process, an EA-2000 procedure for audit was laid down to reduce litigation in the year 2000. This was made in line with the procedures followed by the Canadian Revenue Agency and it was supposed to be a proactive system.

7.     Let me give you the statistics of the Canadian Department of Taxes and that of our indirect taxes department to understand the benefits of the implementation there and here. After the implementation of the Audit our litigation grew by 250% in the first year out of which more than 95% of the cases filed were decided against the department. Subsequent, year-on-year increase was lower, of course, but the number of cases failing in the courts continued to be around the same.

8.     Of course, the revenue rose substantially after the introduction of the EA 2000 scheme, resulting in better implementation (?) of the law.

9.     Let us take a look at the implementation of a similar audit in Canada. More than 1/3 of the cases were abandoned or accepted by the assesse; 1/3 came for a settlement and only 1/3rd of cases adjudication were done in the equivalent period, which essentially means more than 80% of the cases succeeded in Canada while the opposite was true in India. We need to also look at how the work is done in a proactive manner. The proactive assessment conducted works and helps the taxpayer BEFORE the tax is paid and NOT AFTER the tax is paid. Normally, after the tax is paid no further dispute is raised!

10.  Number of tax related cases heard in Canadian Supreme Court between 1920 and 2003 (83 years) is 356. Kindly compare this with ours. (Ref: Canadian Tax Litigation website: http://www.canadiantaxlitigation.com/tag/tax-cases).

11.  Litigation can be substantially reduced if such a procedure is adopted by the Tax Department. We would look for a TRUE proactive tax system; unlike the EA 2000 in India, which was supposed to be Proactive, but in reality it is Reactive.

12.  Methods to Reduce Litigation:

a.     Proactive system may be evolved. Ideally, this should be done using multiple level of consultants / accountants approved by the department who would help the department to get the right tax amount. To this extent, the department should train and certify those consultants to work in tandem with the assessees. Returns once filed and tax accepted should normally, not be questioned.

b.     Second methodology: Every case that is lost by the department in the court, the department should compensate the assessee for the trouble he/she suffers. As a matter of rule, no court ever penalizes the department for troubling the assessee unnecessarily. This should be changed and it should be made a rule to compensate the assessee in all those cases where the department lost the case. This way, the department would question the rationale behind filing a case if they would lose financially.

c.     Thirdly, we would recommend implementation of a secondary verification / vetting of show cause notices before they are served. Vetting is being done by the local Vigilance department, whose impact is almost nil. Instead, Direct Taxes should have the vetting done by a panel at every zone, comprised of officers from the tax department and local Tax Payers, in equal measure. The panel may be nominated every three years. Only if there is a Tax Payer representation, appropriate vetting will happen. If the panel has only department staff, it will not give any results.

d.     Finally, no excess tax should ever be collected. If the taxpayer proves that an excess tax has been collected or is being aimed at, particularly, through litigation, then the concerned official should be severely penalized. He plus the department should pay double the amount as compensation to the taxpayer since this is primarily, taking the taxpayer for a ride.

Including Tax Payers in the committees and panels would only bring more trust on the Department, resulting in greater tax compliance.

We hope, these suggestions and thoughts from our end would help in harmonizing tax collections and better Taxpayer relations.

Best regards

For India Tax Payer

R Shantha Kumar

President.