India’s Tax Policy: Duplicitous Or Confused?
The Income Tax Department head office in Mumbai. (Photograph: BloombergQuint)

India’s Tax Policy: Duplicitous Or Confused?


Remember that famous Ajit joke. When the popular villain of Hindi cinema wants to punish someone, he tells his henchman: “Isko liquid oxygen me daal do. Liquid ise jeene nahi dega aur oxygen ise marne nahi dega”. An English translation will take the joy out of the joke, so let me just say it refers to applying two opposing forces to the victim, such that he stays alive in a zombie-like state.

Union Budget 2020 does just that to Indian taxpayers.

In the first part of her budget speech, Finance Minister Nirmala Sitharaman made an announcement that suggested India would do more to recognise taxpayers’ rights.

“Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind,” she said while announcing that a taxpayer charter would be included soon in the income tax law.

Several countries have taxpayer charters, but only a few have legislated them. In doing so, India will give legal backing to taxpayer rights.

“Any tax system requires trust between taxpayers and the administration. This will be possible only when taxpayer’s rights are clearly enumerated.” - Budget 2020

The chairman of the Central Board of Direct Taxes went a step further to describe the inclusion of such a charter in the law as a major pivot in his agency’s orientation.

“...from purely an enforcement agency, we are shifting our focus to being a service-oriented department,” Pramod Chandra Mody said in an interview to news agency PTI.

All this would warm any taxpayer’s heart...until we get to part B of the Finance Minister’s speech.

In which a new tax proposal (amendment to Section 254 of the Income Tax Act) requires that wherever the tax department raises a demand and the taxpayer appeals against it at the Income Tax Appellate Tribunal, the tribunal can grant a stay provided the taxpayer deposits 20 percent of the amount demanded. The Finance Bill, 2020 also proposes to limit any such stay granted by the ITAT to 365 days, even if the delay in disposing the appeal cannot be attributed to the taxpayer. This limitation is contrary to what courts have ruled so far, as explained by tax expert Mukesh Butani in a recent column.

Sore Loser

It is absurd that the tax department can make any claim, and to fight that the taxpayer must first cough up a fifth of the money demanded.

Yes, any claim.

Because, this is a tax department that loses a majority of all tax cases. Its success rate at the ITAT level is 27 percent, as pointed out by the Economic Survey 2017-18. It falls to 13 percent for High Court cases and then recovers to 27 percent at the Supreme Court level.

The department unambiguously loses 65 percent of its cases. Over a period of time, the success rate of the department has only been declining, while that of the assessees has been increasing.
Economic Survey 2017-18
Economic Survey 2017-18 Report
Economic Survey 2017-18 Report

That failure rate should cause the department even more embarrassment as 85 percent of all direct tax appeals are filed by the tax department.

Worse, 88 percent of all appeals at the ITAT are initiated by the department. That means, the department suffers a high failure rate even at the Commissioner of Income Tax (Appeals), or departmental level. That is, it loses most cases decided by its own commissioners.

In short, the department is the largest litigant and the largest loser.

Different levels of tax appeals - starting from the Assessing Officer to the Supreme Court. (Image: BloombergQuint)
Different levels of tax appeals - starting from the Assessing Officer to the Supreme Court. (Image: BloombergQuint)

Undermining The ITAT

Given that most of its tax demands are struck down by courts, is it fair that the government order taxpayers to pay 20 percent of the demand before they can fight it in court?

Some may argue that taxpayers anyways pay some amount of the demand before seeking a stay at CIT Appeals level or even at the high court or Supreme Court level, so what’s wrong with extending the same principle to the ITAT level?

  • Well, because at the CIT Appeals level, the tax officer has the discretion to decide whether such a payment must be made, and how much, before granting a stay. A few years ago, a departmental circular limited the payment to 20 percent of the demand.
  • Also, for certain tax cases, involving transfer pricing or foreign companies, there is recourse to seek the demand reviewed by a Dispute Resolution Panel, where no upfront payment is necessary.

The ITAT is the first independent, judicial determination of the tax dispute.

  • If the ITAT rules against the taxpayer and he seeks to litigate further, then maybe there can be justification for such a payment at the higher appeal level – to discourage taxpayers from endlessly litigating a losing case.

But, by imposing the same burden at the ITAT level, the government is undermining the tribunal’s authority. To be clear, the tribunal does not impose a stay on the tax demand in every case. It does so after careful consideration of the case, the taxpayer’s history of litigation, the jurisprudence on that issue...

And, by limiting the period of the stay to 365 days, despite several court decisions striking down such limits, the government is also interfering with the exercise of judicial discretion.

Several chartered accountants’ associations have together made a representation to the government to withdraw the proposed amendments to Section 254.

They argue that in case of high-pitched assessments, even payment of 20 percent of demand would severely impact businesses of the taxpayer as payment would entail huge cashflow getting blocked with tax department.

These amendments proposed in the bill seem to stem out of the need of the government to meet fiscal targets. However, we strongly believe that these would cause more harm than good in aligning to its own reformative agenda of making India the “most attractive destination for doing business”.   
Chartered Accountants Associations’ Representation 

Tactics Versus Strategy

Every January-March quarter, the tax department makes headlines for unfair amendments to the Finance Bill and aggressive demands, as it turns the screws on taxpayers to meet lofty revenue targets set by an unrealistic master.

The real problem in India is a small tax base, and in the absence of a clear strategy to expand that, the department resorts to such tactics to shore up its coffers. There’s also the issue of high judicial pendency and money locked up in litigation—Rs 9.32 lakh crore in 4.8 lakh cases—for which attempts are being made to clear through amnesty schemes like the latest one. But it bears reminding that 9 of 10 appeals filed are by the tax department itself. And it loses almost 7 of 10 cases.

So, despite its sustained failure at proving the legitimacy of its tax demands, the department now wants taxpayers to pay up before defending themselves against such claims.

And in the same breath, promises a taxpayer charter to protect rights.

This is either a department, and a government, very confused about what it wants or a one that is plain duplicitous. Or, it’s playing its own version of the Ajit joke on us.

PS: I discussed these issues in detail with veteran tax lawyer Mukesh Butani. He explains how this system of “pay up or shut up” came into being, how and why it has prospered, and whether it should be done away with, on Argument’s Sake—a show and podcast series on BloombergQuint.

Menaka Doshi is Managing Editor at BloombergQuint.

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