Break the clutter

A more rigorous and efficient procedure is needed for assessing taxes and resolving disputes

Planning Commission Chairman Montek Singh Ahluwalia has rightly pointed out that the government needs a mechanism to solve the problem of tax disputes piling up in courts in recent times. A large number of firms, especially multinationals, have been asked to pay taxes that the tax department deems appropriate, as the firms seem to be avoiding tax while the rules do not explicitly state that these are cases where taxes must be paid. The question here is whether the firm is deliberately avoiding tax, or if the transaction undertaken by the firm is genuine it is deemed to have made profits on which it does not believe it has to pay tax. There is a grey area between tax evasion, not paying taxes by explicitly breaking the law, and tax planning or mitigating the tax burden by utilising schemes provided by the government. Avoidance refers to the exploitation of loopholes in the law to minimise the tax burden. While not strictly against the law, it is considered not to be in the "spirit of the law".

The current philosophy of the Indian tax department is to maximise tax collection. Assessing officers are given tax targets that they must achieve. This has led to several complaints about aggressive taxation by the assessing officers (AOs). The AOs are under considerable pressure as they could be brought under corruption investigations if they close a case, even if it lacks merit. As they are only held accountable for not referring cases and are not made answerable for referring frivolous ones, they take the safer option of always referring the case to a superior officer. This leads to a cluttered system.

To avoid this conflict of interest that arises between the incentives of the AO and the interests of the economy, there needs to be a rigorous multi-stage procedure for assessing taxes when there is a conflict between the AO (the first stage) and the company's view. The second stage should consist of an internal panel of the tax department. If this also rules that the company is avoiding taxes, the case should go to a panel that consists primarily of outside experts in the field who understand company accounts and businesses. The task of this panel should be to understand whether the case is that of the company clearly avoiding taxes, or otherwise. Only if the issue still remains unresolved must the case go to court. This would cut down the kind of delays we are seeing now. This is the framework being put in place in a number of other countries, most recently in the UK.

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