Angel tax row: There will be no end to tax disputes unless simpler regime is put in place

The row over the tax demand on two startups, TravelKhana and Babygogo, revolves around the issue of angel tax (a 30 percent tax levied on angel investment in start-up companies). But with the Central Bureau for Direct Taxes (CBDT) countering that, in the case of TravelKhana, this was a case of levying tax on unexplained cash credits (an allegation which the founder of TravelKhana has contested), this saga seems set to join the long list of tax disputes and litigations.

As of 2017-18 (the data comes with a two-year lag), that long list—tax revenues not realised because they are under dispute—adds up to Rs 7.77 lakh crore. That was more than the fiscal deficit of that year—Rs 5.91 lakh crore. Of this Rs 7.77 lakh crore, disputes worth Rs 74,633 crore have been pending for over five years.

In his maiden Budget speech in July 2014, finance minister Arun Jaitley had flagged this issue. At that time, data for 2012-13 showed tax revenues under dispute at Rs 4.1 lakh crore—83 percent of tax revenues not realised (which includes amounts not under dispute). Calling this a serious concern, he listed steps he intended to take.

Representational image - Reuters

Representational image - Reuters

These were: Allowing resident taxpayers to get tax liability from the Authority for Advance Rulings (AAR), adding more benches to the AAR, enlarging the scope of the Income Tax Settlement Commission, setting up a high-level committee to be in regular touch with the business community and give clarity on any grey areas in taxation and changes in transfer pricing regulations.

Most of these were done before the next Budget in February 2016. In June 2016, a Direct Tax Dispute Resolution Scheme was also announced and was open till March 2017.

The direct tax bias in these steps stems from the fact that direct taxes have always been the more litigated category, in the range of 80 percent of total amounts under dispute since 2010. The share of indirect taxes in amounts under dispute touched a high of 28 percent in 2009-10 but has remained below 20 percent since 2010-11. But the government’s steps do not seem to have helped very much; the total amounts under dispute have risen from Rs 4.1 lakh crore in 2012-13 to Rs 7.7 lakh crore in 2017-18 (their share in tax revenues not realised have increased from 83 percent to 86 percent over the same period).

A more telling indicator of the government’s inability to rein in the tax bureaucracy is amounts under dispute for over a year but less than two years (a rough indication of new disputes). In 2014-15, the amounts under the direct taxes category accounted for 33 percent of total amounts under dispute. In 2016-17, the share had increased to 52 percent, before dropping to 40 percent in 2017-18.

No wonder, the Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome noted that India has “by far the highest number of disputes between the tax administration and taxpayers with the lowest proportion of recovery of tax while arrears in dispute resolution are pending for the longest time periods”.

The Shome Committee had pointed out that revenue collection targets set in the Budget often put pressure on tax officials, who may be unduly over aggressive in their assessments, setting the stage for tax disputes. Businesses have constantly complained about financial year-end demands from tax officials for high advance tax payments. That there has been no relief on both counts can be seen from the share of corporation tax in direct taxes under dispute—this has increased from 44 percent in 2014-15 to 64 percent in 2017-18.

No doubt the growing number and value of disputes have to do with a complex tax structure. A simpler direct tax code to replace the current complicated regime is the need of the hour. That is something that is proving elusive.

One code had been unveiled during the United Progressive Alliance tenure but that had lapsed with the dissolution of the previous Lok Sabha. A new committee was formed in November 2017 but that could not submit the report. With the retirement of its convenor Arbind Modi, a new task force has been constituted. It is expected to submit its report by February-end. What kind of a direct tax code it unveils remains to be seen.

In any case, action on a new code will have to wait for the next government, since the current Lok Sabha session is the last one. The tax bureaucracy will continue to reign supreme till the next government assumes office. Both the earlier and the current governments missed golden opportunities to make the tax structure simple and harassment-proof. Businesses will just have to pray that the next one does not.

(The writer is a senior journalist and author. She tweets at @soorpanakha)

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Updated Date: Feb 12, 2019 11:31:21 IST

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