India’s tax dispute resolution framework has evolved over the years but there is still a long way to go, says Mukesh Butani, managing partner at BMR Legal. In an interview ahead of the launch of his book titled Tax dispute resolution: Challenges and opportunities for India, Butani talks about the challenges faced by India in improving its tax administration and evolving alternative dispute resolution mechanisms.
How is the tax dispute resolution framework in India changing?
It is not that successive governments have done nothing to address the menace of tax disputes, but the question is how effective they have been. If we look at the functioning of three forums which are essential for tax dispute resolution before they reach courts—the dispute resolution panel, advance pricing and authority for advance ruling—you can chart the progress.
The dispute resolution panel did not succeed in initial years and it was only a partial success. You can blame it on administration, fault in execution and lack of bandwidth.
Advance pricing was brought in to address the menace of transfer pricing disputes. If India was early in its desire to have a transfer pricing law, it was late as far as the APA (advance pricing agreements) law is concerned. The overwhelming response to APA is not surprising. But the world will look at how quickly we can deliver on the APA. Progress has been slow. There is lack of capacity and it is still a learning process. Also, the success of an APA is contingent on bilateral APAs.
Third is the authority for advance ruling. The new government came and said we will set up additional benches. But the implementation of additional benches has not happened.
So the landscape for alternative dispute resolution is evolving and a lot needs to be done.
There are a lot of changes that are on the anvil like the changes in the arbitration law, the bankruptcy code and setting up of commercial courts to reduce the time taken in corporate litigation. How far will these steps help?
They will make a difference, no doubt about it. In business, a plan is a plan that is well executed. It is not just a document. A lot of changes are happening. But institutionalizing these changes takes a lot of effort.
Institutionalization reflects a resolve to execute a strategy but it also shakes up older institutions and thinking of people.
Let us take the example of NCLT (National Company Law Tribunal). We have been talking about a tribunal for a long time. But it has only happened recently. Even now company law reorganization has been kept outside of NCLT.
Similarly, bankruptcy code has to be operationalized. It will take its own time. Operationalizing commercial courts and moving all your disputes out will also take time. That is where the challenges lie as a nation.
Are the institutions there on the tax side as well?
The institutions are just not there. The Income Tax Appellate Tribunal (ITAT) is a 75-year-old institution. But it has challenges like infrastructure and manpower. We have a disproportionately few members to deal with the cases that are there. There are vacancies of judges, inadequate funds and lack of physical infrastructure. When the economy is growing, the cases are growing. Should you not increase the capacity of ITAT? There are also mindset changes that are holding us back from reforming the institution. You need innovative ideas and out-of-the-box thinking...
How many disputes arise due to the wording of the Income Tax Act? Will an overhaul of the Act reduce litigation to a big extent?
It is not the way the Income Tax Act is worded but it is the inadequate way in which the supporting rules are worded. The Income Tax Act was passed by Parliament but then we have income tax rules and CBDT (Central Board of Direct Taxes) circulars that support this legislation. The issues that we are dealing with today are very different from the pre-liberalization era in terms of spread and depth of sectors. The brick-and-mortar model has given way to various kinds of business like services and e-commerce, but the law has not kept pace. As a result, our Income Tax Act has been reduced to a law which is good only to interpret old-economy businesses.
Second, we haven’t carried out adequate reforms on the administrative side. The TARC (Tax Administration Reforms Commission) report is not recommending changes in the law but in the way the administration should be reformed.
But what about the attitude of the taxmen?
When I talked about changes in mindset, I meant that of tax administrators. There is a general divide between people who frame the policy and those who implement the policy on the ground. The governments, in their desire to collect a fair share of taxes, have framed fair and well-intended policies. But how this is implemented at the field level creates disillusionment. Unlike some countries like the US, we have the same set of officials at the field level and the policy level. The same set of officials also have to look at dispute resolution.
Will BEPS (Base Erosion and Profit Shifting) and GAAR (General Anti-Avoidance Rules) again test the stable and friendly taxation regime promised by the Indian government?
I don’t know what one means by the term friendly tax regime. It’s a term used as an alternative for tax terrorism. Both of these terms are not correct. The truth lies somewhere in the middle... We need to have consistency, clarity and certainty in the tax regime.
Do you think the government could have handled some of the legacy cases in a more definitive manner? Like doing away with the retrospective taxation of capital gains?
It is a blot that refuses to go. The fact that four years after the blot we have a mechanism to compute the tax and bury the dispute is good enough. The government could have done it but hasn’t done it. I have faith in the courts. Eventually this will get settled.