Experts Call for a Permanent Tax Settlement Mechanism to Resolve Backlog of Legal Tax Disputes
Resolve Backlog of Legal Tax Disputes Tax disputes in India have been a persistent issue for years, with numerous taxpayers finding themselves caught in a prolonged battle in the Income Tax Appellate Tribunal (ITAT), High Courts (HC), or even the Supreme Court (SC). Resolve Backlog of Legal Tax Disputes These disputes are often a result of differences in the interpretation of tax laws, which can lead to years of litigation, burdening both the taxpayers and the Indian judicial system. While the government has introduced special schemes like the Vivad Se Vishwas (VSV) and GST Section 128A Amnesty Scheme to resolve these disputes, experts argue that these schemes are only a temporary solution. A more sustainable approach, such as a permanent tax settlement mechanism, is urgently needed to clear the backlog of legal disputes.
The Problem: A Lengthy and Costly Dispute Resolution Process
Tax disputes in India often involve lengthy and expensive litigation processes. A taxpayer who wins a case in the Income Tax Appellate Tribunal (ITAT) may still face a prolonged wait for final resolution, as the case may be appealed to higher forums such as the High Court or Supreme Court. This delay in resolution ties up the taxpayer’s capital, adding to the uncertainty in business operations, while also draining resources from India’s already overburdened judicial system.
The introduction of temporary amnesty schemes like Vivad Se Vishwas has offered some relief, allowing taxpayers to settle pending disputes by paying a fraction of the due tax, along with immunity from penalties and prosecution. While these schemes have helped resolve a significant number of cases, they are time-bound and do not offer a permanent solution to the systemic problem of long-standing tax disputes. Once these schemes expire, taxpayers are left to navigate the lengthy litigation process in higher courts, often with no immediate resolution in sight.
Experts Weigh In: The Need for a Permanent Solution
In response to the growing backlog of tax disputes, experts have called for a permanent tax settlement mechanism that can provide a long-term solution to this problem. Resolve Backlog of Legal Tax Disputes According to the Deloitte Budget 2025 recommendations, rationalizing the assessment and appeal processes is essential. Deloitte emphasizes that in cases where taxpayers have already won at the ITAT level, the revenue authorities should not continue to make repetitive additions in subsequent assessments. Instead, these cases should be assessed on a “protective basis” until a final ruling is made in the higher courts. Resolve Backlog of Legal Tax Disputes This would prevent tax demands from being raised unnecessarily and reduce the overall burden on taxpayers.
Protective Assessments: A Step Toward Relief
Deloitte’s proposal for protective assessments aims to address the problem of repeated tax demands in cases where an issue has already been resolved in favor of the taxpayer at the ITAT level. As per the current system, even if the ITAT has ruled in favor of the taxpayer, the revenue authorities often continue to make similar additions in subsequent assessments, blocking the taxpayer’s working capital and inflating the “disputed demand” figures. By allowing protective assessments, tax authorities would avoid raising demands on disputed issues that have already been ruled in favor of the taxpayer, reducing the financial strain on businesses.
The Call for a Permanent Tax Settlement Mechanism
While Vivad Se Vishwas has been a valuable tool for resolving disputes, experts believe that a permanent tax settlement mechanism is needed to address the chronic problem of tax litigation in India. Gouri Puri, Partner at Shardul Amarchand Mangaldas & Co., advocates for such a mechanism, stating that it would help reduce the costs associated with tax administration and provide taxpayers with an efficient way to resolve disputes. Resolve Backlog of Legal Tax Disputes She compares the proposed scheme to similar mechanisms used in other countries, where taxpayers can settle disputes in a structured manner, without resorting to prolonged litigation.
According to Puri, many tax disputes arise due to gaps in legislation or competing interpretations of the law. A permanent tax settlement mechanism would offer a clear and effective route for resolving such disputes, without overburdening the judicial system. Resolve Backlog of Legal Tax Disputes It would also promote ease of doing business in India, making the tax landscape more predictable and investor-friendly.
Mediation or Settlement Schemes for Complex Cases
Not all tax disputes are straightforward, and some, especially those involving Double Taxation Avoidance Agreements (DTAA), are particularly complex. For instance, the recent Switzerland-India DTAA amendment has sparked legal disputes regarding the withdrawal of the Most Favoured Nation (MFN) clause for dividend income. Resolve Backlog of Legal Tax Disputes Cases like these involve intricate legal and factual issues, and Karishma Phatarphekar, Partner at Deloitte India, suggests that a mediation or specialized settlement scheme would be beneficial for resolving such cases. These schemes could provide a faster, more efficient alternative to lengthy litigation, especially for cases involving complex treaty interpretations.
Challenges with Permanent Settlement Mechanisms
Resolve Backlog of Legal Tax Disputes While a permanent settlement mechanism offers significant benefits, experts also caution that it could have unintended consequences. Gaurav Makhijani, Head of Tax at Roedl & Partner India, expresses concerns that such a scheme might lead to a culture of aggressive tax positions, with taxpayers hoping that any disputes can later be settled through the scheme. This could encourage taxpayers to take risks, knowing that they may be able to avail of the settlement scheme later, which could undermine the integrity of India’s tax regime.
Furthermore, Makhijani points out the issue of cases where taxpayers have already won at higher judicial levels, such as the Supreme Court, only to find the government introducing retrospective tax amendments to nullify favorable rulings. The introduction of the Taxation Laws (Amendment) Act of 2021, which annulled the retrospective applicability of the indirect transfer capital gains tax, is a prime example. Resolve Backlog of Legal Tax Disputes In such cases, the introduction of a permanent settlement scheme could create expectations of government intervention even in matters that have already attained finality through judicial rulings, potentially leading to further confusion and legal challenges.
Conclusion: A Balanced Approach Is Needed
The introduction of a permanent tax settlement mechanism would undoubtedly be a step forward in addressing the growing backlog of tax disputes in India. Resolve Backlog of Legal Tax Disputes Such a mechanism would provide Resolve Backlog of Legal Tax Disputes taxpayers with a more efficient and predictable route for resolving disputes, ultimately promoting ease of doing business and improving investor confidence. However, it is essential that any such scheme be carefully designed to avoid encouraging aggressive tax positions or undermining the integrity of the tax system.
While Vivad Se Vishwas and other amnesty schemes have proven helpful in the short term, experts agree that a more permanent solution is required to streamline tax dispute resolution in India. As the country moves forward into Budget 2025, it is crucial that policymakers consider these expert recommendations to ensure a more robust, transparent, and efficient tax system for the future.
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