Breaking India’s tax litigation gridlock

Consider this. Of the Central Board of Direct Taxes’ (CBDT) total tax demand of about ₹42.3 trillion in financial year 2023-24, about 74%, or ₹31.4 trillion, was under dispute, as per the parliamentary standing committee’s report in December.

The largest pendency in litigation lies at the first appellate level—the Commissioner of Income Tax (Appeals). In FY 2018-19, about 335,000 disputes were awaiting disposal by the CIT(A).  This increased to nearly 550,000 cases in FY 2023-24, as per the CBDT Central Action Plan 2024. 

The CIT(A) disposed of more than 110,000 cases in FY 2023-24, only to be swamped by over 140,000 new appeals instituted during the year. In FY 2021-22, disputes over tax demands amounting to over ₹14 trillion were stuck at the CIT(A).

The numbers clearly bring out the urgency for focused measures, combined with capacity building of the tax department, to reduce and avoid tax disputes.

Also read | How the upcoming budget can reduce pending tax appeals, ease financial burden on small taxpayers

Breaking the logjam

To address the pendency at the CIT(A), the government created 100 posts of Joint Commissioner (Appeals) and raised the appeal disposal targets to a minimum 600 cases for 2024-25. While these are helpful, given the large number of cases, more needs to be done for time-bound disposals.

Appellate matters are complex. Under the faceless appeals format, greater technical and administrative support to CIT(A)/JCIT(A) may be needed in the absence of physical interaction by taxpayers, to deal with the complex issues involved. 

Prioritisation is crucial to break the logjam. For example, cases involving high-pitched assessments, high tax demands, additions to income exceeding ₹50 lakh, and appeals more than five years old, should be prioritised.

Australia, Canada, South Africa and the US have mechanisms for disputes to be resolved without the need for litigation by engaging early with taxpayers. Private rulings, mediation and settlement of cases are some of the measures that have contributed to reducing disputes. 

A settlement mechanism allows tax authorities to reach settlements with taxpayers by considering factors such as provable facts, expected interpretation by a court considering decided cases, and the cost versus the benefit of continuing a dispute. 

In 2023-24, the Australian Taxation Office settled 29 cases with 67 public and multinational businesses, securing around $1.8 billion of tax revenue. Overall, around 85% of litigation cases with ATO are resolved by agreement with the taxpayer. Of the balance cases that proceed to a hearing, about three-quarters of litigation cases go in favour of the ATO.

Also read | Can a 30% flat deduction bring taxpayers back to long-term investments, insurance?

Time-bound mediation 

The Indian tax department’s success rate at all three levels of appeal (appellate tribunals, high courts, and the Supreme Court) for direct tax litigation has been on the lower side. 

Historically, the tax department’s petition rate has been high, but it has taken constructive steps such as enhancing the monetary thresholds of the tax effect on matters below which an appeal cannot be filed by the department.

India could consider a time-bound mediation mechanism in the income tax law, with an independent body of experts as the mediator that would focus on encouraging fair, final and binding settlement within a reasonable period to ensure certainty. 

Even the Supreme Court has observed that mediation, including in taxation, can be an effective remedy for disputes.

Other tax avoidance mechanisms must also be reviewed for their effectiveness. 

Safe harbour rules can be made more attractive by rationalising the high margins. For instance, the high margins of 17-18% for information technology and IT-enabled services can be reduced. Removing the current cap of ₹200 crore revenue for eligibility for safe harbours will allow even larger companies to avail the benefit. An attractive option of safe harbours can also reduce the burden on advance pricing agreements (APA).

Also read | Budget 2025 wishlist: Parity between debt and equity taxation

Alternative mechanisms

The APA mechanism, which has brought greater tax certainty, needs to be strengthened so that it can reduce the increasing pendency of cases (more than 850 as on 31 March, as per the APA Annual Report, 2023-24). Providing a fast-track mechanism for renewals, accelerating the process for routine services cases, and additional staffing for APAs with greater permanence to ensure continuity, can preclude undue delays.

The government notified the e-Dispute Resolution Scheme in 2022 as an alternative to regular appellate proceedings, to help smaller taxpayers get immunity from prosecution and waiver/reduction in penalty, after the payments of taxes. 

The scope of the e-Dispute Resolution Committee can be expanded to bigger taxpayers by removing the cap of returned income of ₹50 lakh and additions of ₹10 lakh.

Business and the government can both gain from an improved tax environment. At a time when global dynamics offer a unique opportunity to attract investments, greater certainty in India’s tax environment and lower scope for tax disputes can help tip the scale in the country’s favour.

Sameer Gupta is national tax leader and Shalini Mathur is director, tax and economic policy group, at EY India