Tax certainty is the foundational principle of a conducive tax jurisdiction. Uncertainty is bound to arise in any tax jurisdiction – whether it be issues arising out of legislation, implementation or interpretation. But what makes a tax jurisdiction stand out as conducive to businesses in comparison to others is the efficiency and effectiveness of its dispute resolution mechanism. No business would be comfortable to invest huge amounts in a tax jurisdiction where 8-10 years is the average period for conclusion of a tax dispute. Clear tax policy and a non-adversarial tax administration is a pivotal factor for any country to be considered as a preferred tax jurisdiction. Therefore, the situation of tax litigation becomes relevant.
India, as we know, is infamous as a complex tax jurisdiction and for huge pendency of tax litigation. If we look at the statistics of the pending cases, the numbers have only increased over the years. In Direct Tax domain itself, the pendency of cases at various appellate levels has increased from 3.86 lacs cases as of 2016 (as per the CBDT Committee Report dated 05.09.2016 on Litigation Management) to 4.83 lacs cases as of 2020 (as per Finance Minister’s Speech on Union Budget 2020-2021). In the Indirect Tax domain, the Government claims that the ‘Sabka Vishwas Scheme’ has helped resolving around 1.9 lacs cases and reduced the litigation pendency by 60% but one cannot lose sight of the litigation generated from the scheme itself.
Pendency of cases is a quantitative aspect. It is equally important to test our progress qualitatively as a tax jurisdiction. While the Indian tax judiciary has contributed tremendously to the jurisprudence in the international tax discipline, but our tax judiciary is still plagued with futile and repetitive issues that makes it evident that we have not matured as a tax administration.
The Government’s vision towards rising the ranks on the Ease of Doing Business List and the resolve to foster a non-adversarial tax regime to attract more investment in the economy is not consistent with the adversarial mindset of the tax authorities on the implementation front and to some extent, even with the tax policies and legislation. This is also one of the reasons why several efforts of the Government, from time to time, towards reducing tax litigation and towards speedy disposal of pending litigation have failed. What India most crucially requires is a change in the mindset of its Tax Authorities. Courts have rightly and consistently pointed out that a tax litigation is not equivalent to a lis or dispute between two parties in a civil litigation. The tax authorities and the taxpayers are not adversaries in a civil litigation, rather tax litigation, including appeals, is merely an administrative act of adjusting the taxpayer’s tax liability. This difference ought to be understood and practiced in the right spirit by the tax authorities.
There are certain issues in both direct and indirect tax domains discussed below which are worth highlighting to understand where the Government and the tax authorities have failed us as a tax jurisdiction.
Failure on the Tax Policy Front
The goods and services tax (GST) regime which was introduced in India with effect from 01st July, 2017 with the objective to achieve simplification in the existing tax regime, widening of tax base, and most importantly, to mitigate the cascading effect of various indirect taxes by way of subsuming different kinds of indirect legislations. With the above introduction, it was promised by the Government of India that this is a one stepforward towards improving the ease of doing business in India. However, even after 3 years since implementation, GST in India still seems very far from achieving most of the stated objectives and its avowed promises to businesses.
Even the flexibility to undertake business activities freely within the boundaries of the country is not completely available under the GST regime on account of mandate to obtain separate registrations for operations in different States and treating the said registrations as distinct persons for the purposes of GST. While this may have been necessary to implement elimination of cascading effect of taxes, the legislature failed to comprehend that there may be business situations where a particular business entity might want to close operations in a particular State and shift its focus to their business in another State. To cater to this scenario, the extant provisions of law does not provide for a mechanism to transfer to input tax credit available to an entity registered in one State to another registration of the same entity in a different State. This leads to a situation where the input tax credit of one State is bound to lapse, despite there being a vested right in the said credit. In this regard, in a recent ruling by Andhra Pradesh Authority of Advance Ruling, it has been held that when a business of a company registered in one State is transferred as a ‘going concern’ to its registration in another State, the business will also be permitted to transfer the unutilized input tax credit as well. However, it still needs to be seen whether a similar position may be adopted where business decides to close its operations in a particular State, leaving aside the fact that the said ruling is itself prone to challenge in appeal by the Government.
Unnecessary Blocking of Capital
Under the direct tax domain, the most common dispute between the tax authorities and the taxpayers is on the possession of the disputed tax demand. Supreme Court, High Court and even Departmental Circulars have consistently maintained the legal position that where an addition/disallowance is covered in the favour of the taxpayer by the appellate orders in taxpayer’s own case or by the decisions of jurisdictional High Court or Supreme Court, the tax authorities ought not to recover such demand. Despite clear legal position, it is a recurring issue for the taxpayers where stay applications are rejected, coercive recovery is made and even legally entitled refunds for other assessment years are adjusted against such irrecoverable demand. When such kind of recovery becomes regular, year after year, in both the domains – direct and indirect tax, the businesses are drained of their limited pool of working capital and the impact is such that in many cases, the businesses have to fall back upon their foreign parent entity.
If we specifically discuss about the GST regime, although one of the stated and primary objectives was to eliminate cascading effect of taxes, there have been several artificial restrictions around availment of input tax credit, despite the input expenditure being arguably in relation to one’s business. Further, the credit of input taxes are being provisionally allowed, and notices are being issued to the businesses on account of mis-match on the portals. Despite the businesses make payment of taxes to their suppliers, the credit is being denied on account of failure on the part of the suppliers to report such supplies on the GST portal. While the purpose of implementation of such matching criteria under GST can be fathomed, it also needs to be appreciated that the businesses have almost negligible control over their suppliers who work independently, and the mismatch may be on account of several factors beyond their real control. The availability of their free capital to the businesses is severely hampered on this account.
Further relevant to highlight is the consistent position of our country that domestic taxes should not be exported out of country. However, in many scenarios, even in cases of export of goods and services which are zero-rated supplies under the GST regime, the businesses are not able to claim refund of taxes which form part of the said supplies. This is on account of creation of notional place of supplies to eliminate a particular transaction from the category of ‘export’ despite earning foreign exchange on the transaction. Apart from this, a further restriction to seek refund on export has been imposed by way of recent amendment made to Rule 89(4) of the CGST Rules to provide for a notional value to the ‘turnover of zero-rated supply of goods’.
Futile and Long Drawn Litigation Approach of the Government
The litigation cost incurred by businesses in India are also considerably high. As per the litigation trend in courts, it appears that the Government is adamant to pursue several litigations pertaining to transitional credit. Despite a settle position in law that credit is a vested right, there are several restrictions imposed on its transition, including restriction to transition cesses, imposition of timelines to transition, restriction to make multiple revisions. The Government, in this regard, has placed itself into an unnecessary conundrum. Credit, after all, is tax paid to the government and in line with the stated principles of elimination of cascading effect of taxes, credit should not be denied. The position adopted by the Government dilutes the stated objectives of GST and is increasing litigation for businesses. Even in respect of the amnesty scheme introduced for settling the legacy disputes under erstwhile indirect tax laws, the executive function of the Government has been rejecting the declarations filed by the businesses on several technical and procedural grounds. In some cases pending before High Courts, the designated committee have rejected to allow the adjustment of predeposits made in pursuant to the interim orders of the Tribunal despite a express sanction under the Scheme, or rejected on the grounds of non-filing of separate declarations for multiple SCNs covered in a single pending appeal before the Tribunal. Such a position has unnecessarily taken away the very purpose of amnesty i.e., to reduce litigation. The said trend shows the mindset of the Government to deviate from the clearly stated objective of putting an end to lengthy litigation and on the contrary, is adding to the burden of High Courts which are already crumbling under heavy pendency.
Another futile litigation is on the taxpayer’s struggle to obtain its legally entitled refunds after getting an addition deleted in appeal. In case a tax addition is deleted in appeal, the authority is mandated as per law to give effect to the appellate order and issue the resulting refunds to the taxpayer. This is a clear statutory mandate but despite such mandate, there is a regular litigation against the inaction of the tax authorities in not giving effect to appellate orders and issuing consequential refunds. The tax authorities have acted perversely to the extent where on one hand they do not give effect to the appellate orders, due to which a demand is reflected instead of refunds, and on the other hand, the authorities adjust the same non-existent demand with refunds determined for the taxpayer in other assessment years. Such litigation friendly tax administration creates a highly discouraging business environment.
Biased and Unilateral Approach of the Executive Function
The administration of GST regime by the executive has also been biased in favour of the revenue ever since its introduction. In this scenario, while the law has been entirely transformed, the executive has always been against the businesses, which is leading to a situation which is not conducive to do business in the country. For illustration purposes, it may be worthy to refer to the anti-profiteering law under the GST regime which has been administered in a manner contrary to a long line of judgments where it was held that there should be sufficient guidelines within the law for its administration, more so when such legal regime entails civil consequences, and in the absence thereof, the said law would itself fail. Despite there being complete absence of any mechanism prescribed under the law for computation of profiteering, the authorities have been acting whimsically in computing profiteering amounts against businesses, leading to complete arbitrariness in the claims made against the businesses. With the long periods of anti-profiteering investigations preferred by the authorities, the businesses have been forced to keep their sale prices constant despite an actual verifiable increase in their cost. Further, the executive has been adamant to impose further levies on the businesses under the garb of anti-profiteering provisions despite a demonstrable transfer of benefits accruing to the business on account of GST implementation or on account of reduction in rate of taxes under the GST regime. The said implementation is arguably a clear violation of the fundamental rights to do business as enshrined in the Indian Constitution and is also contrary to the freedom to earn profits from one’s business, which stands severely curtailed.
Failing Alternative Dispute Mechanism under the Income Tax Act
Finance Act 2009 introduced an alternative dispute resolution mechanism under the Income Tax Act for foreign companies and transfer pricing assessments in order to facilitate expeditious disposal of disputes on a fast track basis. Under the alternate route, Appellate Commissioner level was replaced by the Dispute Resolution Panel (DRP) which is constituted by a collegium of three Commissioners of Income Tax. In order to further align the DRP route with the Government’s intent to minimise litigation, further amendment was made vide Finance Act 2016 to prohibit the tax department from filing appeals against the assessment orders passed in pursuance of the DRP directions.
If the ground reality be witnessed, taxpayers expect relief from DRP only in case the disputed addition is favourably decided by appellate orders in taxpayer’s own case for other assessment years and such appellate order has attained finality. If such appellate order has further been appealed by the department, a relief cannot be expected even in that situation. A major reason is that the DRP does not recognises itself as a quasi-judicial appellate body and considers itself not bound by the principle of judicial precedents. With the Revenue’s right to appeal against DRP directions being taken away, further decline was witnessed in taxpayer favouring DRP directions in order to keep the issues alive in appeal. Surprisingly, DRP has even mentioned this as a reason for not giving relief in some of its directions.
This was not the case with the Appellate Commissioner route, not to this extent at least. If a favourable order is obtained by the taxpayer before the appellate commissioner, major litigation can be reduced at the tribunal level because the Revenue would not be able to appeal in many cases wherein the tax effect is less than INR 50 lacs, as per the existing CBDT Circular. On the other hand, under the DRP route, with higher number of unfavourable DRP directions, taxpayers’ appeals are bound to travel to the tribunal where the average pendency period is much higher than at the Appellate Commissioner level.
Launched as a speedier remedy, DRP has instead become merely an extension of assessment proceedings. The only apparent benefit to a taxpayer is that it reaches the Tribunal stage faster than earlier, but that benefit is insignificant because the time advantage, when compared to the time taken in disposal of appeals before Appellate Commissioners, is very minimal.
Hasty approach in introducing new taxes creates uncertainty, attracts litigation and hinders investment
Further relevant to highlight is the hasty approach of the Government in introducing the Equalisation Levy for taxing the digital economy. It is not denied that the digital economy in-effect is failing the existing nexus/ business connection rules in the domestic income tax law and the permanent establishment (‘PE’) rules in the bilateral tax treaties thereby avoiding imposition of tax on income in the source countries. The need to tax the digital economy is legitimate. However, taking unilateral tax positions on the untapped income and denying existing treaty benefits will adversely affect the digital economy.
OECD/G-20 countries had recommended in their report that measures like ‘Equalisation Levy’ may be introduced in domestic laws but subject to existing tax treaty obligations. The levy is clearly a short-term measure to compensate for the Government’s inability to impose tax on the digital economy as per the existing income tax provisions. But keeping the levy outside the purview of the Income Tax Act amounts to an indirect violation of the existing tax treaty obligations. Following are some of the conceivable adverse consequences on the digital economy which has the potential to attract huge litigation as well as investment attrition in the sector:
- Denial of treaty benefits to the foreign taxpayers which will lead to double taxation on the same income in India as well as their resident country
- Seeks to tax even extra-territorial transactions wherein both the e-commerce operator and the user of the services could be non-residents but the user either subscribes to the services or procures the services even once using an Indian IP address;
- Absence of clarity on the computation the tax base for the levy;
In addition to the above, the widened scope of the levy has been introduced during the Covid-19 Pandemic when the businesses are already bleeding. It was practically impossible for the taxpayers to even comply with certain preliminary requirements of obtaining a PAN and an Indian Bank Account due to the restricted functioning of the Embassies and the Government Departments. Despite this situation and the constant requests from the Industry for extension, the date for deposit of first instalment of the levy, i.e., July 7 was not extended by the Government. The taxpayers are bound to be noncompliant and knock the doors of the Courts to avoid any adverse implications due to delay.
Concluding Remarks
A cumulative impact of the above issues, inter alia, on the businesses is to take a direct hit at the decision to continue such business operations in India. While India has one of the largest pool of readily available and cheap resources for facilitating business activities, there is no real sense of ease of doing business in India, as compared to several other jurisdictions including Singapore, which has a stateof-the-art infrastructure coupled with transparent regulations, rule-following and market-based economy. The mention of Singapore is very relevant today because India is consistently losing out to Singapore on major investments. Majority multinationals today prefer Singapore for setting up their holding companies. Even Indian Start-ups are setting up their headquarters in Singapore.
If we compare the direct tax regime, the highest corporate tax rate goes up to 30% in India which reaches merely 17% in Singapore. The tax on capital gains and dividend income is Nil in Singapore. This itself makes Singapore the most conducive tax jurisdiction for setting up holding companies and owning IP and other intangibles.
If we compare the indirect tax regime, while India has chosen to implement a varied rate of taxation coupled with an online compliance system, with tax rates going as high as 28%, Singapore chose to implement a similar online compliance system with a unified taxing regime fixed at 7%.
While cost of compliance and tax rates are important factors for making Singapore a tax efficient jurisdiction, even in terms of political and economic stabilities, rule of law, global integration, Singapore stands well above India.
Therefore, a major overhaul is required in the Government’s approach to achieve the position of a conducive tax jurisdiction and a preferred investment destination for multinationals. Hon’ble CJI Shri S.A. Bobde, at the 79th foundation day celebrations of Income Tax Appellate Tribunal, while referring to the ancient tax laws in India, said the following which is relevant to this issue: “Tax should be collected from people like honey bee draws nectar from flowers without harming it”. This line says a lot about the role of the Government and the tax administration and the approach it should adopt of ensuring facilitation of conducive environment for business and not destruction of the same.
Kamal Sawhney is a Partner at PDS Legal. He is an Arguing Counsel before the Supreme Court of India and High Courts.
