As per the Receipts Budget 2021-22, the direct tax disputed amount as on 31st March 2020 stands at INR 8.8 lakh crores. While a majority (78.6%) of the cases are locked in litigation at Commissioner (Appeals) level, a huge amount is also locked at Income Tax Appellate Tribunal (ITAT), High Courts and the Hon’ble Supreme Court.
Along with the already introduced faceless assessment, an alternate settlement mechanism can be very effective at keeping disputes contained and would also be appreciated by the global investors.
Finance Act 2021 introduced a new Dispute Resolution Scheme (DRS) for resolving specified disputes in relation to specified taxpayers and New Dispute Resolution committee (DRC) to be set up to undertake dispute resolution in a faceless manner involving dynamic jurisdiction. The constitution of DRC and the overall scheme is yet to be notified. The scheme is available on a voluntary basis to taxpayers and is alternate to appeals mechanism. The proposal was in deference to industry representations for mediation as an alternate dispute resolution forum.
However, the scheme is limited to small taxpayers where the returned income is less than INR 50 lakhs, disputed addition is less than INR 10 lakhs and is not emanating from search and seizure proceedings or information gathered from foreign countries. The rationale for keeping out mid-sized and large-sized taxpayers outside the proposed scheme is unclear.
While it is stated that ‘specified order’ which can be resolved through DRC includes a draft order, it is not clear whether DRC can settle pending litigation cases satisfying the qualification criteria of returned income less than INR 50 lakhs and disputed addition less than INR 10 lakhs.
It would be worthwhile if the current threshold limits of returned income of INR 50 lakhs and disputed amount of INR 10 Lakhs is eliminated to cover mid-sized and large-sized taxpayers as well. The pilot project should be started with Transfer Pricing assessments which are largely factual in nature.
The DRC forum should incorporate global best practices on mediation or Alternate Dispute Resolution (ADR). The DRC should comprise of independent experts like retired members of Tribunal, professionals like lawyers and Chartered Accountants with at least 20 years of experience, retired Revenue officials of rank of CCIT and above, etc.
The forum may be given access at any stage of litigation upto Tribunal. The resolution may be made by an agreement between Tax Department and taxpayer with DRC being the confirming party and the taxpayer may be given option to exit the proceedings at any stage before signing the final agreement.
The fee should be kept at reasonable levels and borne by both the parties. The proceedings should be completed within a specific time frame and the time involved in DRC proceedings should be excluded from limitation period for regular appeal remedies or completion of assessment proceedings. The taxpayer may be permitted to refer specific issues for resolution instead of entire assessment/appeal.
All proceedings and information gained under resolution proceedings must be kept confidential and not admissible for any other year or any other proceedings under income tax or other laws. The resolution may be made final, enforceable and binding on both parties but not a binding precedent for any other taxpayer or the same taxpayer in future. Flexibility in payment of additional taxes in instalments over 6 to 8 months may be provided post resolution.
It needs to be clarified whether DRC can settle the pending litigation cases. The DRC must be constituted at the earliest with competent personnel and its performance must be monitored in terms of time-bound resolution of cases.
Further, to ensure the benefits of the scheme are widely available so as to attain the Government’s objective of reducing litigation, the benefit of this scheme should be made available to cases where the prosecution proceedings have merely been initiated as well as search and seizure cases.
All in all, the New Direct Tax Dispute Resolution Scheme seeks to resolve disputes at a very early stage and will be even more useful in resolution of disputes at a larger scale, with the changes suggested above.