Indian Central Board of Taxation Seeks to Reduce Tax Litigation

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By Dezan Shira & Associates
Editor: Tracie Frost

India’s Central Board of Direct Taxes (CBDT) has issued a circular that changes the monetary limits under which the government can file for an appeal in cases before the appellate tribunal and the High Court.  The stated objective of the change is to reduce tax litigation.

In October 2014, the CBDT set monetary limits for the filing of appeals in income-tax matters.  The limits define when the government can appeal a decision that was decided in the taxpayer’s favor.  Previously, the government was not allowed to appeal cases wherein the tax effect did not exceed 400,000 rupees in the appellate tribunal, 1 million rupees in the High Courts, and 25 million rupees in the Supreme Court.

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The new limits will preclude the government from appealing cases in which ax effects do not exceed 1 million rupees in the appellate tribunal, 2 million rupees in the High Courts, and 25 million rupees in the Supreme Court.  The revised limits have also been made applicable retrospectively to pending appeals.  Moreover, the circular specifically states that the government should not file appeals merely because the tax effect in a case exceeds the monetary limits, but that appeals should only be filed on the merits of the case.

For purposes of determining whether an appeal can be filed, the term “tax effect” means “the difference between the tax on the total income assessed and the tax that would have been chargeable” under the taxpayer’s  method of calculating total income.  “Tax effect” does not include interest unless the chargeability of interest itself is the subject of the dispute.  Further, the tax effect is calculated separately for every assessment year.  The circular does allow composite orders, however, under which an appeal can be filed for all assessment years, even if the tax effect is less than the monetary limits in any single year. 

The CBDT also permits appeals under the following four scenarios even if the tax effect is less than the monetary limits:

  1. Where the constitutional validity of a provision is challenged;
  2. Where the CBDT’s order has been held to be illegal;
  3. Where a revenue audit objection has been accepted by the CBDT; and
  4. Where the addition relates to undisclosed foreign assets or bank accounts.

Separately, the CBDT has instituted a focus group to consider withdrawal of appeals filed by the Department in cases involving tax effect above the monetary limit. If no question of law is involved, the issue is considered settled by the Department, or the appeal is no longer relevant in view of a subsequent amendment.

The CBDT expects this decision to reduce pending litigation filed by the Department by up to 50 percent and to provide relief to taxpayers facing long-standing litigation.

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This is another in a recent series of circulars and notifications which are aimed at either reducing compliance burdens and litigation or bringing India’s regulations in line with international standards.  It is noteworthy that cases involving undisclosed foreign assets are exempted from the monetary limits, as this signals the government’s continued fight against so-called black money.  Additionally, it is important to note that these monetary limits apply only to income-tax cases.

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