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In this podcast we discussed tax litigation, which is something that businesses, large organizations, tax experts and the government all want to tackle. In her Budget speech on 1 February, Finance Minister Nirmala Sitharaman proposed several changes that will modify the taxation for some sectors.
Podcast host Silloo Jangalwala, Associate Director, BMC speaks with Rajan Vora, Partner, India member firm of EY Global on the many changes that were announced and their respective tax implications.
Rajan Vora
Partner, India member firm of EY Global
Key takeaways
Budget 2023 proposed around 120 changes that are expected to have far-reaching impact, especially for segments, such as charitable trusts, GIFT City, etc.
Budget 2023 proposes appointment of 100 Joint Commissioners (Appeal) to facilitate speedy disposal of smaller matters.
Departments may be able to file objections against Dispute Resolution Panel (DRP) orders before the tribunal.
For the purpose of rationalization, Sections 194R and 28 may be changed. Freebies given as cash or kind will both be taxed as perquisite.
What is positive is that all the amendments have been made prospectively, i.e., from 1 April 2023, and are not retroactive or retrospective. A favorable amendment is the reduction of litigation for TDS credit, which was not available if TDS was paid after filing the return. This can now be rectified by applying within a two-year period after the receipt of certificates.
Rajan Vora
Partner, India member firm of EY Global
For your convenience, a full text transcript of this podcast is available.
Silloo: Welcome to the EY Podcast series on the Union Budget 2023. In this session, we will discuss tax litigation, which is something that businesses, large organizations, tax experts and the government all want to tackle. In her budget speech on the first of February, Finance Minister Nirmala Sitharaman proposed several changes that will have implications for the taxation of some sectors. Will the changes be confusing? Is there enough clarity? Hi everyone. I am Silloo, and to answer these and other questions I have with me today, Rajan Vora, who is a partner at India member firm of EY Global. Rajan has over four decades of experience in representing tax litigation matters before the Income Tax Appellate Tribunal and the Authority for Advance Rulings. Thank you very much Rajan, for joining us today.
Rajan: Hi, Silloo. Lovely to be here. I look forward to our interaction.
Silloo: Rajan, to begin with, when you see the Finance Bill, you realize that there have been many changes that will have major implications for tax demand in different sectors and transactions. Do you think these changes will actually increase the number of tax disputes in the short run?
Rajan: Very right, Silloo. Seeing the way the provisions have been brought out, subject to the final changes made while passing the Bill, the proposed amendments are getting mixed reactions. They could create more litigation in the short run or with the tax tribunals.
There are two major changes in respect to taxation for the investments made by non-residents, or gifts made to the non-residents who are not ordinary residents. It is going to create further difficulties in the short run. The positive side of this is that all the amendments have been made prospectively, i.e., from 1 April 2023, and are not retroactive or retrospective.
One more favorable amendment is the reduction of litigation in the case of TDS credit, which was not available if TDS was done after the payee filed the return. This has been amended to say it can be rectified if the application is made within a two-year period after the receipt of certificates.
Overall, my gut feeling is that litigation will continue to go up. Things have not been laid out clearly by the Finance Bill.
Silloo: Rajan, in your opinion, what are the other major clarifications in the budget that are a step toward reducing litigations in the future? Do you think these measures have an effect on the ongoing cases?
Ranjan: Yes, there are a few points that are useful, and a few points that are going to create more litigation. One positive sign is of joint commissioners. As of now, if you see CIT (Appeals) Commissioner of Income Tax (Appeals) in the last three years, there are not many disposals. As per the CAG report, there are 4.59 lakh cases pending cases before CIT (Appeals) against which only about 26,000 cases have been disposed.
So, there is a huge pendency and disposal is the lowest in the last five years. What they have proposed is appointment of 100 joint commissioners appeal so that smaller matters can go to them. In my opinion, this is not really the right way of solving this problem because there are many appeals already and they are not taking an action because of want of clear SOPs or guidelines. If guidelines are given, that in itself will be good enough to handle all the pending matters. Of course, adding more commissioners to resolve small matters is fine.
Another point is faceless appeals. These are not effective because they are not really faceless, they are virtual. They are supposed to happen through video conferencing, but that is not functioning effectively. It is virtually a monologue, i.e., I speak and they listen. They do not ask questions. The whole system has not been put into place. That is a point of worry.
Another aspect to be considered is the Authority for Advance Rulings, which was abolished two years back and a new authority, called the Board of Advance Rulings, has been brought in. But it has not started functioning due to lack of clarity or SOPs. There are about 350 cases, all big cases of international investors in India, that are pending.
There are two more amendments that could be disturbing. As we are aware, a Dispute Resolution Panel (DRP) was created a few years back in 2009. It was recommended that there should not be any appeal prescribed as a part of the purpose of going against the RBI orders and therefore it was removed. There were minor modifications in 2012 and now they are making a backdoor entry saying the department can file objections against the DRP orders before the tribunal. This is virtually saying that all the DRP orders, which are supposed to be final because of the three commissioners sitting in that panel, will virtually get adjudicated or litigated in the tribunal. Therefore, according to me, it is a step in the wrong direction.
Second point is there are two corrections for the purpose of rationalization. One is in Section 194R, which defines perquisites, and Section 28, which defines the perquisites and freebies to, say, doctors and to other people. They have now said that whether this is given in cash or in kind, both will get taxed as perquisite and therefore TDS has to be done. This is, in a sense, overruling the well-settled law by the Supreme Court in the Mahindra & Mahindra case.
These are the types of things that have probably not been brought to the notice of the Finance Minister and may have been put forth by the administrative team. There are around 120 changes and these are far-reaching changes. For instance, in charitable trusts. The amendments for GIFT City are also far-reaching.
Overall, according to me, the Finance Minister’s direction is that the taxes have to be reduced. But more layers may have been created and that will lead to more litigation. For example, the tax reduction for middle class is available only if you do not claim any exemption. That means there are two categories: one that wants to claim exemption, and one that does not want to claim. Even the reduction from 37% to 25% in the surcharge on incomes above INR2 crore of HNIs is available only if you do not claim any exemptions. In each case, are multiple layers are created for individuals, firms, or corporates.
Silloo: Thanks very much, Rajan. That was a very interesting and enlightened conversation. I am sure that our listeners have more clarity now and would have gained new insight along with lots of useful information. Thank you once again for sharing your time and invaluable thoughts with us.
Rajan: Thank you. It was my pleasure.
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