Measures to Avoid Tax Disputes
Given the very nature of a tax, ie, compulsory exaction, necessary evil, etc, there is a natural resistance to pay it. Anything taken away by compulsion would naturally evoke resistance and so is the case with taxes. After all no one pays tax with a smile, although some may find solace and inspiration in the quote tax is the price paid for civilisation, while discharging their tax obligations. While the exchequer appears to be a bottomless pit, the taxpayer has limited resources and hence the battle between the tax collector and taxpayer is not uncommon and ever increasing. Going by the way in which the GST Law has been initially drafted, and frequent amendments of notifications/rules, it appears that tax disputes could multiply and would result in uncertainty and corrupt practices in the initial years, unless effective steps are taken to alter the law and simplify it.
Trend in Past Regime
Going by the trend in central indirect taxes, it would be possible to arrive at a general classification of types of disputes:
Firstly, disputes which arise when the taxpayer deliberately evades tax and such evasion is detected by the department;
Secondly, disputes which arise out of genuine interpretational issues w.r.t. classification of goods/services, valuation, notification benefits, etc. Interpretational issues may arise because of poor drafting of law, ambiguity in rules/notifications, etc;
Further, a third category of dispute is where the department makes out a non-existing case just to reach targets, and to create nuisance. This is not very uncommon and is a dangerous trend in indirect tax regime and breeds corruption, avoidable tax disputes and prolonged litigation. Ultimately, the taxpayer emerges victorious but at the cost of losing confidence and faith in the tax system and Government.
In this article, emphasis is given on the first two types of disputes and as to how those disputes can be avoided, as the GST Law appears to be a collection of existing tax provisions with additional burden of procedural compliance cast on taxpayers.
In the first type of cases, where there is deliberate defiance of law and evasion, the long arm of law is fairly equipped to deal with the evaders with stringent tax demands with interest and penalties apart from prosecution. To prevent misuse or abuse of power, the law has evolved safeguards and safety latches. In McDowell & Co. Ltd v CTO, 1985 (154) ITR 148 (SC); 1985 (59) STC 277 (SC), it was held that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
In a later decision in UOI & Anr. v Azadi Bachao Andolan and Anr, 2003 (263) ITR 706 (SC), the Apex Court held that if the Court finds that notwithstanding a series of legal steps by an assessee, the intended result had not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the real motive of the assessee. It was further held that the Court must deal with what is tangible in an objective manner and cannot afford to chase a will-o-the-wisp.
With regard to the second type of disputes, they are mainly related to interpretation of law. As said in the beginning, there is a tussle between the tax collector and taxpayer with conflicting interests. While the tax collector wants to increase the revenue, the taxpayer wants to keep the liability to the barest minimum within the parameters of law.
There is a conflict of interest and the way they read the law and understand it would be diametrically opposite to suit their interests. It is in this context that abuse of powers by the department may be rampant as a genuine interpretational issue may be projected as evasion of tax and a taxpayer may be subjected to staggering tax liability with interest and penalties apart from prosecution.
Trend in State Regime (Local VAT Laws-Pre-GST Regime)
Given the fact that VAT laws varied from State to State, a person having establishments in different States had to independently follow the VAT laws of the respective States. Compliance was all the more complex and cumbersome as the human resources handling tax matters had to be trained in understanding of 28 odd variations of the respective State laws. It was difficult to evolve a system (accounting or otherwise) to suit all VAT laws. That apart the other kinds of disputes as discussed in the context of central indirect taxes equally apply to the local VAT laws. The common perception is that corruption was much more rampant in local VAT administration, which hampers ease of doing business and discourages honesty. The industry hopes with optimism that the situation would change with the advent of the GST regime.
Reasons for Increase in Tax Disputes
a. Uncertainty in law and frequent changes;
b. Complex provisions difficult to understand and follow;
c. Poor drafting of law;
d. Perverse interpretation by revenue department;
e. Corruption leads to situations where honest assessees are unnecessarily dragged into litigation;
f. Fear gripping the tax adjudicators leading to confirmation of demands even when issues are settled by higher legal forums. A sense of trust and faith is lacking in tax administration;
g. Unfair and biased approach towards taxpayers;
h. Revenue zeal has so clouded the minds of the tax gatherers that fair appreciation of facts or evidence is virtually not possible and audit has become an engine of oppression and a tool of harassment;
i. No guidance or support from tax department to taxpayer;
j. Frequent changes and retrospective amendments leading to uncertainty;
k. Precedents ignored while conducting assessments/adjudication:
l. The information technology infrastructure the GST Network not enabling procedurally aspects set out in the law clearly.
m. The GSTN Portal does not allow uploading at times. Assessees not educated to take screen shot. Later, disallowing the ITC, due to reason of not having been filed in time. This was true for the transitional credit.
n. Defective Annual Return and Audit formats put in place. Just clarification not being provided for months together.
It is said that there is no convenient time for death, birth or payment of taxes. However, an assessee or taxpayer is entitled to resist any wrongful exaction of money in the form of taxes. Disputes may even be occasioned by revenue zeal. Greater the zeal, the more would be the resistance to pay tax. We would now look at ways of avoiding dispute, and for this purpose, it is necessary to understand the common errors committed by the assessee/taxpayers. If these errors could be avoided, then the probability of landing in a tax dispute situation is minimised to a great extent or completely eliminated.
Common Errors by Assessee/Taxpayer
a. Ignorance of law and latest legal position;
b. Wrong perception or understanding of law. Most of the times opting for a view which is beneficial contrary to legal position;
c. Returns not filed or delayed;
d. No registration leading to denial of credit later;
e. Non-cooperation with audit/investigation by delayed response or not producing information called for;
f. Past correspondence with department not preserved;
g. No response to audit queries;
h. Statement given by a person (not conversant with facts/law) leading to wrong testimony;
i. Not taking legal assistance or opinion from professionals, when it is actually required leading to self-inflicted injuries;
j. Dedicated team not available for tax compliance;
k. Tax-related transactions, procedures and system not vetted/reviewed by an independent tax professional at reasonable intervals;
l. Poor or inadequate record maintenance and non-preservation of crucial correspondence with tax department;
m. Not taking departments acknowledgment at the time of filing documents/information/records. Not using registered or speed post mode of service;
n. Not escalating the matter in writing to higher officers to resolve issues when the attitude of the officers be they from the Commissionerate or DRI.
o. Wrong notion that following the footsteps of big assessees would be foolproof as the factual scenario and circumstances may be different.
Special Care in GST Regime
a. Review existing business scenarios for possible tax implications.
b. Reviewing existing contracts for identifying contradiction in clauses.
c. Consult tax professionals to understand GST implications of entire business and take remedial action.
d. Due to increase in compliance burden the compliance team should be trained and strengthened.
e. Vendors should be educated to improve their compliance to avoid of loss of credits.
f. All areas of tax compliance to be reviewed vis-à-vis taxable event, time of supply, place of supply, valuation, classification and determination of rates, payments, returns, records.
g. Adequate training to be given to compliance team.
h. Basic training on GST to be imparted to other functional departments like marketing, finance, procurements, human resources, to sensitise them about GST implications.
i. Training of vendors to help them to comply and pass on saved taxes/credit could be a value added activity.
j. Comparison with similarly placed assessees in the industry.
k. Creating awareness through trade bodies/associations and representations to Government on unresolved issues/difficulties.
l. To ensure proper migration to GST regime by filing last return of past regime and first return of GST regime accurately.
m. To reconcile the GSTR 3B to GSTR-1 and then only filing the Annual Return (9 or 9A) and Audit Report (9C).
n. To ensure that the ITC entries for 2017-2018 are made within March 2019 return filing.
Common Errors by Revenue Department
Further, even the department may commit some errors, which leads to avoidable disputes, which are also analysed.
a. Not knowing the latest legal position laid down by the Courts and Tribunals. Board Circulars (tweets, press releases in GST) are not followed in letter and spirit.
b. Attitude of arrogance and superiority due to unbridled discretionary powers continued in spite of law based on trust.
c. Absence of an effective dispute resolution mechanism to discuss and thrash out settled issues leading to repetitive notices.
d. Different stands taken by different authorities (within revenue ranks).
e. Lack of judicial discipline leading to non-following the orders of higher authorities /forums.
f. Lack of knowledge of rudimentary principles of new GST law by officers who have not been oriented in law.
g. Not trained in adjudication and appellate process.
h. No co-ordination between departmental officers at adjudication and appellate level nor between the Central & State GST officers within the same State.
i. Revenue biased approach while conducting audit or investigation or scrutiny of returns.
j. Relevant law as it stood during the period of dispute is not applied. Either the old law or new law is applied, which results in loss of revenue as the departments case would fail due to such fatal mistake.
k. Automatic demands based on audit objections without independent application of mind.
Special Care Needed in GST Regime
a. Proper coordination between Central Tax Officers and State Tax Officers.
b. Imparting training (on GST including attitudinal changes very much required) to Officers across the country by engaging high ranking honest officers, legal experts and professionals. This should culminate in an examination as the rights of the citizens would be in the hands of such officers.
c. Creating awareness programs for the benefit of taxpayers in remote areas.
d. Strengthening the vigilance cell to check corrupt practices.
e. Taking lenient view during initial years in case of bona fide mistakes by taxpayers in complying with law.
f. Demarcation and assignment of assessment functions to State or Central Officers in a transparent manner.
g. Peer review of the assessments done by Central Officers by State Officers and vice versa.
h. Redressing the grievances of exporters and speeding up the process of refunds.
i. System generated notices for demand of tax, late fee or penalties should be avoided till the arthritic IT system becomes an athletic system.
j. Bringing back the provision relating to collusion in the demand s 74 and central excise provision on vexatious search which has been omitted in GST.
Steps to be Taken by Assessee
a. Staying abreast of latest developments in law by referring authentic web sites.
b. Employees/staff and vendors if possible should be properly trained in tax and allied laws.
c. Assigning specific roles to employees.
d. Approach Counsel for legal assistance and whenever in doubt seek clarification from the department in writing.
e. Some of the demand provisions like ss 73 and 74 of the CGST Act provide for ways to end litigation when the tax is paid with interest and minimum penalties at various stages.
f. Ensuring that the tax records/documents are revisited or reviewed by an independent expert and taking remedial action, wherever required.
g. Deputing concerned staff for seminars/workshops/training programs on GST.
h. Conduct internal assessment as to the steps to be taken by the organisation to embrace GST.
i. Conducting the annual returns and audit in a purposeful manner.
Steps to be Taken by the Revenue Department
a. Precedents should be carefully studied and meticulously followed.
b. Create a committee in each Commissionerate to resolve issues, which have been already decided by the higher forum and where the Board/State Commissioner has accepted the final outcome.
c. Fair and unbiased approach should be developed and the officers should be trained to deal with cases in a quasi-judicial spirit.
d. Periodic updates on laws and relevant judicial decisions should be made available to the departmental officers to enrich their knowledge. Initially, these maybe from the earlier tax laws which are decided by the Courts, laying down legal principles which are still relevant in GST regime.
e. Officers should also be trained in basic principles of administrative law.
f. Transparency should be built in and encouraged to curb corrupt practices.
g. All appellate orders should be made available in the public domain, which would enable the public to know the stand taken by the department in different cases.
h. The monetary limits prescribed for filing appeals by the department should be increased and implemented even at the stage of first appellate authority apart from other appellate forums/courts.
i. State Taxes litigation policy should be aligned with Centres policy.
j. Department should not take coercive action when the mandatory pre-deposit has been complied or when the time limit for filing appeal has not expired.
k. Not to resort to recovery or prosecution when the investigation is still not complete.
l. The department should conduct training programs/seminars jointly with trade and professional bodies to create awareness.
m. Booklets should be published by the Department about GST and its implementation.
It is time that the Department distinguishes between a tax evader and a taxpayer who disputes a levy due to genuine reasons or avail a benefit conferred by law, which is not acceptable to the revenue.
It is our earnest view that for resisting tax liability for sound legal reasons, a taxpayer cannot be persecuted or harassed. We firmly believe that a tax evader should be sent a strong message that their creed cannot be tolerated and the penal consequences should have adequate deterrent effect. At the same time, the department and taxpayers should work out some mechanism to resolve genuine tax disputes and to ensure that such taxpayers are not harassed or persecuted for disputing a tax liability. Doing otherwise would result in supremacy of the department and would not reflect existence of a vibrant democracy, where a citizen has every right to resist illegal levies.
Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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