Recognising high penalty as the main reason for income tax litigation, the government announced a series of measures in the Budget 2016-17 to reduce the penalty percentage and encourage taxpayers to settle disputes expeditiously. Even as penalty rates are being lowered, tax experts said significant discretion will still be available to the tax officers under the new dispensation, which needs to be reduced for litigation to come down.
There are currently over 3 lakh cases involving amount of over Rs 5.5 lakh crore pending in direct taxes. To reduce litigation from the assessees side, the government has reduced the maximum penalty rate from 100-300 per cent to 50-200 per cent. The penalty for misreporting income stands doubled to 200 per cent, which could be area of dispute since interpreting misreported income remains a grey area, experts said.
Vishal Shah, Partner-Tax at PricewaterhouseCoopers said: “The discretion to levy penalty has been provided to the assessing officer for malafide intent only, not bonafide. So long as the taxpayer has disclosed all information while filing his/her tax, he/she should not be charged a penalty.”
- Finance Ministry may hike monetary limit for filing tax appeals
- Moody's India rating upgrade: Concerns over NPAs, private funds persist
- Direct tax collection up 16% from last year, growth in advance tax down
- Reducing tax litigation: Govt identifies over 7,300 cases fit for withdrawal
- Post-GST rollout, govt to levy cess sparingly: Hasmukh Adhia
- Budget to simplify taxes, reduce exemptions and litigations: Hasmukh Adhia
The idea of the new announcement is to remove all discretion, but the fear now is that in case of any income adjustment, the taxpayer will be charged a penalty, Shah said.
“Even though discretion has been removed, it has not been aptly brought out how the new penalty process will be implemented. Genuine bonafide cases, with no intent of concealment of information, should not be penalised. Ideally, clear guidelines should be defined in case of different interpretation,” Shah said.
Even as the new penalties have been provided under Section 270A, it seems that inadvertently no provision has been made for an appeal to Commissioner (Appeals) against the order of the assessing officer levying penalty under Section 270A, BMR Advisors said in its analysis of the Budget.
The Budget proposed penalty rate at 50 per cent of the tax payable in case of under-reported income, while 200 per cent penalty will be levied in case of misreporting of income. This has been done by insertion of Section 270A in the Income Tax Act, which will replace existing penalty provisions prescribing minimum penalty of 100 per cent and maximum penalty of 300 per cent of tax evaded.
“The good part about the recent Budget announcement is that the penalty amount has been reduced but some problems still remain. Even if there are some bonafide claims by taxpayers, it will still be up to the discretion of the tax officer whether he/she will believe the taxpayer or not. Also, earlier there was 100 per cent penalty for misreporting, which has now been increased to 200 per cent and that is an area of concern,” said Deloitte Haskins & Sells LLP Partner CA Gupta.
Another grey area is levy of penalty of 50 per cent on income mismatch in Form 26AS, Gupta said. The income mismatch has been listed as one of the areas for penalty, but there is problem of implementation as it is not clear if the penalty will be automatically levied or will be open to discretion of the tax assessing officer, he said.
As explained in the Budget documents, under-reported income is basically the difference between the income assessed and returned, while misreporting is defined to include situations of misrepresentation, suppression of facts, claims of expenditure not substantiated by evidence, false entries in the books and so on. It is in the case of misreported income, which will attract 200 per cent penalty, where the tax assessing officer can exercise discretion.
“In the Income Tax (Act), major culprit for litigation is the penalty percentage. It’s so high — 100-300 per cent is the range. So even for smallest of the offence one has to pay 100 per cent penalty. People don’t mind paying the original sum of the tax, but when he is given such a big bill of penalty … so then naturally he will fight up to the Supreme Court,” Revenue Secretary Hasmukh Adhia said.
“ … we have reduced the penalty rates to 50 per cent and 200 per cent and also we have finished the discretion and put in the Finance Bill the three categories of offences. Two rates are there and nothing in between. We are specifying the situations in which 50 per cent will be levied and the situations in which 200 per cent will be levied. So people will get lot of relief. No discretion also, so the litigation will also reduce,” Adhia said.
Tax experts, however, say the absence of clear guidelines regarding interpretation of tax to be paid in bonafide cases may not help in reduction in litigation.
“Ideally, clear guidelines should be defined in case of different interpretation regarding tax amount for bonafide cases, while the malafide cases should be segregated under either of the two categories. Else, litigation will still be high, which is not the intention of the government,” Shah said.
Apart from reducing the penalty percentage, the Budget also introduced the Direct Tax Dispute Resolution Scheme, 2016, to reduce the huge backlog of cases and to enable the government to realise its dues expeditiously, in relation to tax arrears and specified tax. This scheme covers two scenarios of tax disputes.
First, in the case of ‘normal tax arrears’ where an appeal is pending — no penalty will be levied if the tax dispute is less than Rs 10 lakh, while 25 per cent of penalty is to be paid along with tax and interest up to the date of assessment if the tax dispute exceeds Rs 10 lakh.
Second, where tax dispute is for ‘specified tax’ i.e. where tax liability arose due to retrospective tax amendments; the taxpayer under the scheme shall get immunity from imposition of penalty and interest upon payment of tax.
The scheme also provides immunity from prosecution. Consequent to such declaration, appeal in respect of the disputed income and disputed wealth pending before the Commissioner (Appeals) shall be deemed to be withdrawn “In the dispute resolution we have said, forget about penalty, we’ll not take penalty from you. Just pay your basic sum and interest up to the date of assessment, and if the amount if more than Rs 10 lakh, then 25 per cent of minimum imposable penalty, which means 100 per cent minimum imposable at that time, and 25 per cent of that means 7.5 per cent. Even in cases of more than Rs 10 lakh, your penalty will be maximum 7.5 per cent. If your case dispute is upto Rs 10 lakh, then no penalty. So lot of cases should get sorted out,” the secretary said.