Strengthening India’s ADR mechanisms in tax matters
India has seen a mind shift in its tax regime to make it non-adversarial and more conducive to foreign investment. Yet, despite these reforms, India has seen some of the most significant tax disputes, such as the Vodafone case and the Cairn Energy case, which are still pending before the courts. Average tax litigation in India takes several years before the Supreme Court finally resolves a matter.
Various ADR mechanisms such as the Dispute Resolution Panel (DRP), Advance Pricing Agreement (APA) have been in place for a while now, with mixed records of effectiveness. This is why the recent changes introduced by the Finance Act, 2021 (passed by parliament on 23.03.2021 and pending presidential assent) bring about welcome changes to the existing tax-related ADR mechanisms.
1. the new Board replaced the former Authority for Advance Ruling (AAR) for Advance Ruling (BAR). Predictability is what matters most to any business when managing its tax affairs. An advance ruling is a prevention mechanism rather than a dispute resolution one. The advance ruling is a decision on a specific question asked by the applicant concerning its tax exposure.
The posts of Chairman and Vice-Chairman of the earlier Authority for Advance Ruling (AAR) remained vacant for a long time, which seriously hampered the AAR's working. This is why the Finance Act, 2021, replaced the earlier AAR by the Board for Advance Ruling (BAR). Importantly, Advance Rulings of such Board shall not be binding on the applicant or the department. If aggrieved, the applicant or the department may appeal against the ruling or order passed by the Board before the High Court.
The following are the transactions on which an advance ruling can be sought in India:
2. Income Tax Settlement Commission (ITSC) – discontinued. The ITSC has been a forum where an assessee may at any stage make an application containing a full and accurate disclosure of his income which had not been disclosed earlier before the AO, including how such income has been derived and the additional amount of income tax payable on such income, with the Settlement Commission deciding on the final settlement of the case. Now in a significant policy shift, the Finance Act 2021 discontinues ITSC, and, subsequently, no new applications shall be filed for settlement. However, for the pending cases, a new Interim Board has been constituted, which shall settle all pending cases.
With this, the government has given a clear message that no further opportunity shall be granted to persons with undisclosed income. The government shall go strict on tax defaulters with the regular course of penalties and prosecutions.
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