The Government’s Tax Disputes

Removing the retrospective tax, while a good step, is not enough to solve the tax disputes problem

The retrospective tax provision that the late Pranab Mukherjee had introduced as a clause buried in the fine print during while presenting the Union Budget in 2012-13 as Finance Minister in UPA II is finally being repealed. It was long overdue. Prime Minister Narendra Modi called it “fixing mistakes of the past”. He was making a virtue out of a necessity – India had lost two high profile international arbitration disputes and in one of these, the company – Cairn Energy – was threatening to take charge of Indian government properties abroad. If the government had wanted to remove the retrospective provision earlier, it could have done so much earlier rather than continuing with the disputes even after the verdicts went against it.

The government calculates it will have to refund roughly Rs 8,100 crore collected using the retrospective tax provision so far. It would need to forego other demands it had made under the retrospective tax clause as well. According to a statement it made in Parliament, it had sought Rs 1.1 lakh crore from 17 entities under this legislation though it managed to get money only from Cairn Energy so far. (About Rs 7900 crore of the Rs 8100 crore it plans to refund is to Cairn). Now it hopes that Cairn will take the money and drop the cases it has filed in global courts and arbitration centres though the energy giant is showing no signs of being pacified so easily.

The government is making some moves to reduce needless tax disputes that clog up tribunal and court time, but yield very little money. According to reports, the Vivad Se Vishwaas scheme introduced to settle direct tax disputes for amounts lower than Rs 5 crore in 2020 has so far yielded Rs 53,684 crore already from 1.3 lakh declarations involving Rs 99,756 crore. The last date of the scheme has also been extended to August end, so it can hope to get even more.

Meanwhile, revenue secretary Tarun Bajaj assured a gathering of businessmen at the CII function that they could in future count on a stable, predictable tax regime and would not get calls from the IT department asking them for more advance taxes.

These are good moves but they still address a small portion of the problem. A SBI Research Report in January this year calculated that at the end of FY19 the total amount under dispute was around Rs 9.5 lakh crore with Rs 4.05 lakh crore under corporation tax, Rs. 3.97 lakh crore stuck under income tax other than corporation tax, and another Rs 1.54 lakh crore under taxes on commodities and services.

Many of these go on for years. Some of them are counter productive – with the cost of litigation incurred by the government higher than the money involved. Some lead to public embarrassment at international stage like the Cairn and Vodafone case. According to a Organisation of Economic Cooperation and Development (OECD) report that came out a few years ago, the Indian government’s win rate for tax disputes was a measly 11.5%, the lowest among the 34 countries it had data on. (The average was 64%).

The prolonged litigation is bad for the government as well as businesses and the adds pressure on the legal system.

What can be done? Apart from various schemes that the government launches or is planning to launch, it could start by putting together a good committee of senior corporate tax lawyers and consultants to go through the tax laws and see how to remove ambiguity in clauses that leads to disputes. Too many disputes crop up because of poor and hasty drafting of laws. Second, it could use technology to sort out which pending litigation it is most likely to win and withdraw from the others. Artificial Intelligence could come in handy here. Finally it could train its tax officials better so that they initiate only cases in future which involve both big money as well as has a better chance of winning.