Table of Contents
1. Legal framework
1.1 Which laws govern taxation and tax disputes in your jurisdiction?
In India, the taxation system is bifurcated into two main categories: direct taxes and indirect taxes. The primary law regulating direct taxation is the Income Tax Act of 1961 (IT Act or “IT Act”). This comprehensive act levies taxes on individuals and corporations based on the income they generate. Under the IT Act, individuals and companies are subject to taxes such as income tax, corporate tax, and capital gains tax on the profits and gains derived from their economic activities.
Indirect taxes in India pertain to levies imposed on the consumption of goods and services. Several laws govern these taxes, including the Central Goods and Services Tax Act of 2017 (CGST Act), the State Goods and Services Act of 2017 (SGST Act), the Integrated Goods and Services Act of 2017(IGST Act), and the Customs Act of 1962.
The CGST Act, levies taxes on transactions of goods and services, with the tax revenue accruing to the central government. Conversely, the SGST Act, imposes taxes on the value of transactions of goods and services, with the tax revenue collected by the respective state governments. The IGST Act governs the taxation of interstate supplies of goods and services involving two or more states or Union Territories.
The Customs Act of 1962 establishes a framework for customs authorities to administer and enforce customs duties, tariffs, and procedural guidelines.
Focus of this guide will be to give information relating to Income Tax and Goods and Service Tax.
1.2 Do any other regional, national or supranational rules or regulations have relevance in this regard?
Apart from major laws governing direct and indirect taxation as discussed above, State governments levy land revenue on the land held within the state, stamp duty on transactions of sale and purchase of properties, as also the professional tax on individuals and entities carrying on the business or profession within a given state.
The Land revenue and stamp duty may vary across different states and regions in India. Each state government has its own regulations regarding land revenue and stamp duty.
Municipal corporations, municipalities and Panchayats may levy property tax, vehicle tax etc., these taxes can vary from one region to another based on local needs and priorities.
Supranational rules: Section 90 of IT Act provides that the Central Government may enter into an agreement with the government of other countries for the grant of relief in respect of double taxation and section 90(2) provides that where Central Government has entered in such an agreement with another government for avoidance of double taxation, in relation to an assessee to whom such agreement applies, the provisions of the IT Act shall apply to the extent they are more beneficial to assessee. In other words, if tax treaty provisions are more beneficial, they will prevail over the provisions contained in the IT Act. India has about 94 comprehensive DTAAs with different foreign governments. To read more about tax treaty benefit under income tax act click here.
India also has bilateral agreements with certain jurisdictions e.g. UK for avoidance of double taxation regarding the duties on the estates of deceased persons.
1.3 Which authorities are responsible for enforcing the tax laws? What is their general approach to enforcement?
In India, the Department of Revenue exercises control with respect to matters relating to all the Direct and Indirect Union Taxes through two statutory Boards the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBID); levy and collection of direct taxes e.g. income tax, corporate tax and capital gains are looked after by the CBDT and levy and collection of Customs and other indirect taxes are looked after by the CBIC.
At the assessee level, enforcement of tax laws will happen through a jurisdictional assessing officer who will be an appropriate income tax officer appointed under the IT Act or by the assessing officer under the Faceless Assessment Scheme; enforcement against the assessee under the CGST Act, or Customs Act, 1962 will be taken care of by the concerned officer under these acts.
These agencies conduct tax audits/assessments to validate the correctness of tax returns submitted by taxpayers and further investigations is carried out in case of discrepancies raising suspicion.
Income Tax assessment now normally happens in a faceless mode with introduction of Faceless assessment scheme to expedite the process and ensure neutrality.
Development of GST Network (GSTN), is with specific focus on ensuring compliance with the Goods and Services Tax (GST) regulations. Central government has also constituted National Anti-Profiteering Authority (NAA). NAA’s function is to ensure that the registered suppliers under the GST law are not profiteering by charging higher prices from recipients in the name of GST
1.4 To what extent do the tax authorities cooperate with (a) other national authorities and (b)their international counterparts in enforcing the tax laws? Does this vary depending on the applicable tax?
Sharing of data by IT department is aimed at finding the mismatches between GST returns and Income Tax Returns; in case of major discrepancies, concerned business will come under the scanner for further scrutiny.
Orders of a similar nature for information exchanges are passed from time to time for the exchange of information between different tax authorities and other national authorities e.g. in a case of transaction pertaining to immovable property exceeding the threshold value, duty is cast upon the concerned sub-registrar under the Registration Act, 1908 to report such a transaction via Form 61A. Various standing orders require banks to report cash transactions exceeding threshold value as well as the companies where investment comes to be made by a given assessee in cash.
(b) Majority of the DTAAs the Government of India has with other Governments are based on the UN Model Convention and contain exchange of information article based on article 26 of Model Convention for information that is foreseeable and relevant for carrying out the provisions of concerned DTAA or for enforcement of the domestic laws of parties to DTAA. Similarly, the information exchange also is made in terms of TIEAs(Information Exchange Agreements) Government of India has with other governments e.g. Marshal Islands.
2. Tax investigations
2.1. How do the tax authorities monitor compliance with the tax laws? Does this vary depending on the individual taxpayer or the applicable tax?
Tax investigations and audits serve to uphold tax laws, promote fairness in the tax system, and safeguard government revenue. Taxpayers can mitigate the risk of facing a tax investigation by maintaining precise and transparent financial records.
Methods may vary based on taxpayer scale, complexity, and perceived compliance risk. Both income tax and indirect tax authorities in India leverage cutting-edge technologies and standardised procedures to uphold tax compliance, thus fostering transparency and integrity in the taxation system.
Regarding Income Tax, both individuals and business entities are mandated to submit their income tax returns on an annual basis. Department then conducts meticulous investigations using advanced techniques such as data analytics, big data, and Artificial Intelligence/Machine Learning to verify the accuracy of the information provided by taxpayers. Furthermore, taxpayers are required to link their PAN Number and Aadhar Card, which enables tax authorities to track financial transactions effectively and verify income reporting.
Central Board of Indirect Taxes and Customs (CBIC) utilizes similar methods to monitor compliance with indirect taxes. ADVAIT (Advanced Analytics in Indirect Taxes), is an initiative regarding the same.
2.2. What typically triggers a tax investigation in your jurisdiction?
A suspicion of tax evasion is one of the biggest causes of tax investigation. Suspicion may arise owing to inaccurate information on assets or income in the return filed, TDS(withholding tax) discrepancies or incorrect claims etc. Tax authorities may detect inconsistencies in a taxpayer’s reported income, expenses, or assets, prompting doubts about the accuracy of their tax payments.
Large amounts of cash transactions or significant assets disproportionate to income can also capture the attention of tax authorities, potentially leading to further scrutiny. These transactions might involve property acquisitions or investments that seem disproportionate to the taxpayer’s declared income. Additionally, failure to disclose all sources of income is another common trigger for tax investigations.
Mismatch in the ITR filed and return filed with GST also may trigger investigation as also the large cash transactions exceeding the prescribed threshold for investment in any company or otherwise, huge cash deposits exceeding threshold value made with banks can, for banks, NBFCs and companies are obligated to report such cash transactions.
2.3. What is the limitation period for commencing a tax investigation in your jurisdiction?
The limitation period for initiating a tax investigation in India can vary depending on the specific provisions governing the investigation.
Under IT Act, time limit for the department to issue a notice requiring the assessee to attend the office of the assessing officer or to produce any evidence which the assessee seeks to rely upon when the prescribed income-tax authority considers it necessary to ensure that assessee has not understated income or that it has not computed excessive loss etc. is three months from the end of the financial year in which the return is furnished.
For the conduct of an inquiry before issuing a notice for making reassessment or recomputation under section 147 of the IT Act 1961, a notice u/s.148 could be issued for the relevant assessment year before three years have lapsed from the end of the relevant assessment year or before ten years have lapsed from end of relevant assessment year if assessing officer has in his possession books of account or other documents revealing that income represented in the form of an asset, expenditure in respect of a transaction or relation to an event or occasion or an entry or entries in the books has escaped assessment and the same is or is likely to amount to 5 million rupees or more. To read more about section 147 and powers of assessing officers click here.
Under the Goods and Services Tax (GST), the limitation period for initiating an investigation is regulated by Sections 73 and 74 of the CGST Act. The typical or standard limitation period for commencing a GST investigation is three years from the due date for filing the annual return corresponding to the relevant financial year. In instances where there are allegations of fraud, suppression of facts, or wilful misstatement, the limitation period extends to five years from the due date for filing the annual return.
2.4. How does a tax investigation typically unfold in your jurisdiction?
Tax investigations are typically managed by the appropriate tax enforcement officers.
Generally, these investigations commence in response to various triggers like suspicious transactions or discrepancies in tax filings. Upon detecting potential tax violations, tax authorities gather relevant information and evidence pertaining to the taxpayer under assessment. This process involves examining tax returns, financial statements, contracts, bank records and any other documents necessary for the investigation. Tax authorities may also issue notices to the taxpayer, explaining the reasons behind the investigation, and may conduct interviews with the taxpayer, their representatives, or other relevant individuals. Concerned tax officers have the powers of discovery and inspection, enforcing the attendance of any person, compelling production of books of account and other documents and issuing commissions for the purpose of carrying out inquiry or investigation.
2.5 What is the typical timeframe for the investigation?
There is no explicitly mentioned timeframe set for completing the investigations as such but investigations are ultimately aimed at assessment of income, to unearth any misstatement of income, underreporting of income, turnover, or claiming greater amount of losses, etc and the enactments provide for a timeline for issuance of notices for initiation of inquiry/ investigation as highlighted in response to question No 2.3 above.
S.153 of ITA provides for the time limit for completion of assessment, reassessment and recomputation of income, etc. Thus, while there is no time limit prescribed during which investigation/ inquiry should be completed, there are time limits prescribed for initiation of inquiry/ investigation and also for completion of assessment or reassessment at the end of such inquiry/ investigation and these timelines would be ultimately required to be adhered to.
Similarly, under the CGST Act, there are no specific provisions dictating the timeframe or limitation period for concluding tax investigations. Sections 73 and 74 of the CGST Act set limitations on initiating investigations for tax evasion.
2.6 What powers do the tax authorities have in conducting their investigation, in relation to (a) the taxpayer itself, (b) its employees and (c) third parties?
The tax authorities in India have a diverse array of powers granted to them under the relevant taxing statutes e.g.IT Act and CGST Act. Few examples are given below.
Section 131 of IT Act empowers the assessing officer and various other officers /prescribed authorities under the Act, with the same powers as are vested in a court under the Code of Civil Procedure1908for the purposes of IT Act as regards;
(a) Discovery and inspection,
(b) Enforcing the attendance of any person (including third party) including any officer of the banking company and examining such person on oath,
(c) Compelling the production of the book of account and other documents,and
(d) Issuing commissions.
Section 133A of the IT Act provides the income tax authority with the power of survey, which allows him to enter various places as detailed therein and require the proprietor, any employee or other person to furnish such information as he may require which may be relevant to the proceedings under the IT Act.
Section 67 of CGST Act empowers joint commissioners to conduct searches and seizures during investigations. Sections 70 and 71 of the CGST Act grant joint commissioners the authority to summon individuals for evidence or document production, carry out inspections, searches, and seizures, and issue notices to suspected violators of the GST Act, including taxpayers, their employees, and third parties.
2.7 On what grounds, if any, can taxpayers refuse to disclose commercial information during the investigation?
While different sections empowering the officers to seek information provide that the powers are to be exercised by the officer for the purposes of concerned act(IT Act or CGST Act), and don’t state anything further, the same is interpreted through judicial pronouncements as meaning that
(i) The notice/summons calling for the information must clearly state the purpose of issuing such notice/summons and specific information or documents mustbe demanded to be produced through the notice;
(ii) sweeping inquiries are discouraged.
(iii) Notice must have been issued based on a reason or a belief that the information or documents being demanded are relevant to the tax investigation for IT Act 1961
(iv) The summonses/notices must be compliant with the procedural safeguards provided under the relevant provisions, and also must comply with the provisions of natural justice and must grant sufficient time to the concerned person to produce such information.
If the taxpayer finds that the demand for disclosure of the commercial information is not justified as the information being sought by the tax department is not relevant and material for the IT Act or CGST Act or for any other reasons, a suitable reply to notice/summons could be given by the taxpayer indicating so.
In case the department does not withdraw its demand for the information/documents, that according to the taxpayer are not relevant and material, the remedy for the taxpayer will be to approach the writ court challenging said notice/summons and seeking suitable writ against the department for quashing thereof.
2.8 Can the taxpayer object to or challenge the tax investigation? Are there any other avenues available for resolving the matter?
Yes, the taxpayer can object to and challenge the tax investigation.
For example, the IT Act provides for the time limit for initiation of inquiry/investigation for different purposes under the act, and also it specifically prescribes the grounds on which the inquiry/investigation could be conducted by the income tax department in peculiar cases.
Taxpayer can challenge the conduct of investigation on the grounds of the investigation having been initiated beyond the period of limitation prescribed for initiating such investigation or on the grounds that the reasons on which such investigation is being conducted are not as are prescribed under the IT Act 1961 for carrying out such investigation.
2.9 What actions can the tax authorities take if the taxpayer does not cooperate in the investigation?
Non-compliance with notices issued under Sections 142(1) or 143(2) of the IT Act 1961 can result in penalties under Section 271(1)(b). Additionally, willful failure to adhere to such notices can lead to harsher consequences, including imprisonment for up to one year and fines under Section 276D. Non-compliance to certain notices could result in best judgment assessment by the income tax officer inviting heavy financial liabilities. To read more about section 143 of IT Act, click here.
Similarly, under the Central Goods and Services Tax (CGST) Act of 2017, failure to cooperate in an investigation can lead to legal consequences. Tax authorities can exercise their power under Section 67 to conduct inspections, searches, and seizures of relevant goods, documents, or other items.
2.10 If the investigation concludes that taxes are overdue, what powers do the tax authorities have to collect them? Does this vary depending on the applicable tax?
If the tax authorities find overdue tax after the conclusion, it will be followed by assessment or reassessment proceedings under the provisions of the IT Act, which will provide the assessee with ample opportunities to present its position in facts as well as in law. In case the department finds at the end of assessment or reassessment proceedings that the tax is due, it is equipped with various powers to effect the collection of overdue taxes, which vary depending on the specific tax laws.Under the IT Act 1961, of 1961, tax authorities can utilize methods such as property attachment, tax recovery proceedings, and adjusting against any pending refunds owed to the taxpayer, issuance of garnishee orders, as provided under Sections 220 to 227 of the IT Act.
Similarly, the CGST Act provides its own set of mechanisms for tax collection.Section 79 of the CGST Act, grants the authority to recover tax due in land revenue, allowing tax officials to employ tactics like property and bank account attachment, as well as appointing a Collector for recovery purposes.
2.11 Do tax authorities have any leeway to settle in the course of tax investigations?
Section 245A of the IT Act pertains to the settlement of a ‘case’; ‘case’ will mean any proceeding for assessment under the IT Act pending before an assessing officer on the date of an application u/s. 245C. Proceedings of reassessment, appeals, etc. do not fall within the ambit of the word ‘case’, and are not eligible for settlement.
Application under section 245C by assessee can be made to the settlement commission containing full and true disclosure of his income, which was not disclosed before the assessing officer, the manner in which such income was derived and other prescribed particulars to the settlement commission.
Settlement commission will pass an order after hearing the authorities/officers under the IT Act and the assessee, providing for the terms of the settlement including any demand by way of income tax, penalty, etc. the manner in which the sum due under the settlement shall be paid etc. and the settlement will be void if it is subsequently found by the settlement commission that the settlement opted by the misrepresentation of facts.
For international businesses in the Indian market, in case of a dispute pertaining to transfer pricing, apart from regular mechanisms of appeal, etc., there is an option to for an eligible assesse as defined under said section to approach the dispute resolution panel in terms of section 144C for resolving disputes related to transfer pricing and international transactions.
2.12 On what grounds are penalties imposed and how are these calculated?
There are several grounds on which penalties are imposed and calculated. Both calculations and imposition of penalties differ in accordance with different provisions and the gravity of the offence.
Penalties under the IT Act are imposed for various offences committed by the taxpayer. These penalties, distinct from the tax owed, are determined in accordance with the law applicable at the time of the offence. For instance, under Section 158BFA, undisclosed income during a search or requisition can incur a penalty ranging from 100% to 300% of the tax payable. Similarly, Section 221(1) stipulates penalties for defaulting on tax payments, set by the assessing officer but capped at the outstanding tax amount.
Penalties under the CGST Act of 2017 are imposed for violations such as non-payment of tax, incorrect input tax credit claims, failure to issue invoices, and non-filing of returns. For instance, penalties for non-payment or short-payment of tax as per Sections 73 and 74 can be up to 10% of the tax amount involved or Rs. 10,000. Similarly, penalties for incorrect input tax credit under Section 74 can amount to 10% of the ineligible credit availed or Rs. 10,000, whichever is higher. Under section 122 Penalties are levied for not issuing tax invoices or documents as required under the CGST Act and the penalty can be up to Rs. 25,000.
2.13 On what grounds is interest levied and how is this calculated?
Interest is imposed for various reasons and with distinct calculation methods. there are several provisions that ensure compliance with tax payment timelines, discouraging delays and promoting the fulfilment of tax obligations.
Sections 234A, 234B, and 234C of the IT Act 1961 outline the levy of interest due to taxpayer errors, with rates determined by the Government. Section 234A addresses failure to pay taxes by due dates, resulting in monthly interest at 1% of the outstanding tax amount. Under Section 208, if a taxpayer fails to pay the stipulated advance tax percentage by specified dates, interest at 1% per month is levied for three months on the shortfall amount.
Accordingly, under the CGST Act, interest is charged for delayed tax payments. As per Section 50, interest is calculated on the unpaid tax amount from the due date until payment, currently set at 18% per annum.
2.14 What defences are typically available to the taxpayer?
Generally speaking, additional tax liability under the IT Act 1961 on account of rejection of the explanation by the assessee is one part, but the same is not sufficient for the levy of penalty; for example, the assessee might have made an incorrect claim in law or may not have been able to support its claims as made in the tax return and addition in income may have been made for lack of supporting evidence from the side of the assessee, the same will not be sufficient for imposition of penalty.
Under the Central Goods and Services Tax (CGST) Act, 2017, similar principles apply regarding penalties and imposition of tax liability.
In essence, both the IT Act and the CGST Act emphasize that penalties are not automatically levied solely based on the rejection of explanations or additional tax liabilities. There must be evidence of deliberate misconduct or inaccurate particulars furnished by the taxpayer to justify penalty imposition and there has to be a deliberate act of omission on the part of the assessee for the purpose of concealment of income through furnishing inaccurate particulars.
If the penalty is anyway levied by department, assessee could challenge the same on various additional grounds e.g. the show cause notice(“SCN”) for the imposition of penalty was not proper; SCN did not contain specific charge expressly stating the precise violation for which the penalty was sought to be imposed, lack of proper opportunity of hearing or disproportionate quantum etc.
2.15 Can the results of the tax investigation have criminal implications for the taxpayer? Does this vary depending on the individual taxpayer?
In several circumstances, the outcomes of tax investigations can carry criminal ramifications for the taxpayer.
Examining the provisions provided in Chapter 22 of the IT Act 1961 reveals that breaches of certain clauses or offences are deemed to have criminal implications, potentially leading to fines or incarceration. For instance, Sections 276C, 276CC, and 277 delineate offences associated with tax evasion, deliberate attempts to avoid taxes, and the falsification of financial records, which could culminate in criminal proceedings. Additionally, Section 276B also addresses instances of failing to remit tax deductions at source (TDS), which may also invoke the criminal liability of taxpayers.
Under the provisions of the CGST Act similar to the IT Act 1961, violations or offences such as purposeful tax evasion, fraudulent invoice issuance, and the deliberate concealment of sales may result in criminal repercussions. Sections such as 122, 132, and 132A specify various offences and penalties, including potential imprisonment and fines, contingent upon the seriousness of the violation.
2.16 If the tax investigation has criminal implications for the taxpayer are the answers to any of the above questions different?
The answers remain the same. However, it is apposite to add that the criminal implications are not automatic and in a case, where the outcome of the investigation may have criminal implications, the same will only result in triggering the prosecution, which will be initiated at the discretion of the officer under the IT Act in accordance with CBDT guidelines or by an officer under CGST Act in accordance with CBIC guidelines; such prosecution will happen before competent criminal court. The accused assessee will have additional defences in such prosecution as will be available in a criminal trial and punishment is not automatic until the accused assessee is found guilty by criminal court on touchstones of principles of criminal jurisprudence.
3. Voluntary disclosure and amnesties
3.1 Are any voluntary disclosure or amnesty programmes applicable in your jurisdiction? Does this vary depending on the applicable tax?
The Central Board of Direct Tax and Central Board of Indirect Tax, guided by the Ministry of Finance, has been vested with the power to issue different schemes and programmes to encourage taxpayers to voluntarily disclose undisclosed income or tax liabilities, regularizing their tax affairs to avoid severe penalties or prosecution and schemes are floated from time to time. For example, in 2016, the Income Declaration Scheme (IDS) was introduced allowing taxpayers to declare undisclosed income and assets. Tax, surcharge, and penalty totalling 45% of the declared income were payable. An amnesty scheme was introduced for GST as well to make up for the delay in filing the GST appeal and the same remained in effect until 31.01.2024.
4. Forum for tax disputes
4.1 In what forum(s) are tax disputes heard in your jurisdiction? Is there any choice of forum available?
Under the IT Act 1961, taxpayers can appeal to the Commissioner of Income Tax(Appeals) challenging the order passed by the assessing officer and to the Income Tax Appellate Tribunal against orders issued by the Commissioner of Income Tax (Appeals). High Courts and the Supreme Court can decide onfurther appeals involving substantial legal issues under Sections 260A and 261, respectively.
Settlement Commission under Section 245B also offers a venue for amicably resolving disputes in line with provisions explained above.
Similarly, under the CGST Act, taxpayers can appeal to the Goods and Services Tax Appellate Tribunal against orders by the Commissioner (Appeals) or the Adjudicating Authority as per Section 112. High Courts and the Supreme Court handle appeals involving significant legal issues under Sections 117 and 118, respectively. Advance rulings can be obtained from the Authority for Advance Ruling under Section 97. These forums provide taxpayers with diverse options for resolving tax disputes effectively.
4.2 Who is the fact finder in a tax dispute? Does this change based on the venue?
The fact finder in a tax dispute under the IT Act 1961 is the jurisdictional assessing officer of a given assessee or the ‘specified officer’ under the faceless assessment scheme. These officers conclude assessment proceedings based on inquiry on facts and appreciation of evidence; the scope of appeal before the CIT(A) and Income Tax Appellate Tribunal is regarding whether facts have been appreciated correctly and whether applicable law has been properly applied; appeals to High Courts and Supreme Court of India are on question of law.
The fact-finding and assessment under CGST is done by the ‘proper officer’ as defined under CGST Act. The proper officer is defined under the said Act as the Commissioner or the officer of the Central Tax who is assigned that function by the Commissioner in the Board (CentralBoard of Indirect Taxes and Customs). The scope of appeal before appellate authorities and High Courts or Supreme Court of India remains similar to that in case of appeals relating to Income Tax.
5. Filing a tax dispute
5.1 What is the limitation period for filing a tax dispute in your jurisdiction?
The limitation period for filing a tax dispute varies based on factors such as the nature of the dispute and the forum where it is being pursued. For instance, under the IT Act 1961 of 1961, appeals to the Income Tax Appellate Tribunal must typically be lodged within 60 days from the date of receiving the assessment order, as indicated in Section 253. Subsequent appeals to the High Court have a limitation period of 120 days from the receipt of the order, as outlined in Section 260A.
Regarding tax disputes under the Central Goods and Services Tax (CGST) Act, the limitation period for filing appeals is contingent upon the forum and the nature of the dispute. When appealing before the Commissioner (Appeals) against an order from the Adjudicating Authority, the limitation period is 3 months from the date of receiving the order, in terms of Section 107(1) of the CGST Act. Similarly, appeals to the Appellate Tribunal have a limitation period of 3 months from the date of receiving the order or decision, as specified in Section 112(1). Appeals to the High Court under Section 117 of the CGST Act must be filed within 180 days from the receipt of the order.
5.2 What are the formal requirements for filing a tax dispute?
The filing of a tax dispute entails adherence to formal requirements outlined in the IT Act 1961, 1961, and the Central Goods and Services Tax (CGST) Act, 2017.
Under the IT Act, a taxpayer must typically submit a formal appeal to the appropriate appellate authority within the specified timeframe, accompanied by relevant documentation and grounds for challenging the tax assessment or decision. While, section 246 of the IT Act 1961 delineates the grounds on which a taxpayer can file an appeal against a tax assessment or decision. These grounds encompass various aspects, including disputes related to the computation of income, deductions, exemptions, or any other substantial question of law or fact, section 249 specifies the timeframe within which a taxpayer must file an appeal with the appropriate appellate authority.
Requirement for resolution of disputes through Dispute Resolution Panel relating to transfer pricing regulations etc. are governed by s.144C.
Similarly, under the CGST Act, a taxpayer must adhere to formal procedures when disputing a tax assessment. This involves filing an appeal with the Appellate Authority within the prescribed time limit, as specified in Section 107. The appeal must include supporting documentation and legal arguments challenging the tax assessment. Adherence to these formal requirements is crucial to ensure the effectiveness and validity of the tax dispute resolution process under both acts.
5.3 What are the procedural and substantive requirements for filing a tax dispute?
Procedural and substantive requirements for filing a tax dispute are as indicated in response to question No. 5.2.
5.4 Is there any possibility for collective proceedings (eg, involving several taxpayers or multiple tax assessments)?
Under the CGST Act, there is no scope for having collective proceedings.
Although not a collective proceeding in strict sense, something similar to what can be said to be collective proceedings could be triggered under the IT Act by virtue of a search and seizure action in terms of section 132 of the IT Act pursuant to formation of reason to believe by specified officers based on information in possession of such officer that any person is in possession of any money, bullion, jewellery or other valuable article or thing, etc. that represents either wholly or partly the income or property which has not been or would not be disclosed for the purpose purposes of the IT Act.
Upon search and seizure action, the assessing officer is required to issue a notice in accordance with provisions of 153A of IT Act to such person requiring him to furnish the returns of income of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search was conducted or requisition was made.
If concerned officer is satisfied that any money, bullion or other valuable article as well as any books of account or any documents seized or requisitioned in terms of section 132 or 132A relates to a person other than a person who is searched., he can can issue notice and assess or reassess the income of such person for six assesment years immediately preceding the assessment year in which the search was conducted and requisition was made, in terms of section 153C of the IT Act.
5.5 Must the sum in contention be paid into court before a tax dispute is filed?
Under the IT Act, there is normally no requirement for a deposit of the disputed sum in advance before the tax dispute is filed. The deposit of a sum of the tax due on the return filed by the assessee and the amount of tax as calculated based on the return of the assessee itself must however be deposited in terms of section 249 (4) (a) of IT Act and in the case where no return has been filed by the assessee, then the assessee must have paid the amount equal to the amount of advance tax which was payable by him.
In terms of the provisions of section 107(6) of the CGST Act, however, the person appealing the order is required to deposit the sum equal to 10%of the disputed amount at the time of filing of the appeal.
For the calculation of the amount of 10% under section 107(6) (b), the amount of fees, interest, and penalties are not included. furthermore the terms of the notifications issued by CBIC, the appellant is not required to pay any amount as referred to in the above-mentioned provision as a precondition to filing an appeal to the appellant tribunal.
5.6 Has the filing of a tax dispute any effect on the payment of tax, resp. collection possibilities from the authorities?
Filing of an appeal does not result in any automatic stay against collection of taxes and stay application must be filed.
In terms of modified instruction No. 1914 dated 21.03.1996 issued by CBDT, payment required to be made by the assessee as a precondition for stay of demand disputed before CIT(A) is 20%. To read more about condition of pre-deposit of 20% tax click here.
Many confuse this to be a precondition of absolute nature for obtaining stay under any circumstance, which is incorrect. Instruction simply talks about the powers of assessing officer to grant stay till disposal of first appeal before CIT(A). It could not have and it does not talk about on what conditions CIT(A) could grant stay.
However, while power of AO are limited and factors that could be considered by AO are exactly as are prescribed in CBDT Circular i.e. whether addition on same issue has been deleted by appellate authorities or superior courts etc., powers of CIT(A) will not be restricted by any circulars and he could consider all factors that may be relevant for grant of stay e.g. strong and prima facie case, whether in law or in facts, irreparable injury, any special circumstances and any other relevant factors. CIT(A) or other appellate authorities have powers to grant stay of demand even without deposit of even a single percent of disputed demand.
5.7 In case the tax dispute is decided in favour of the authorities are late interest due if the tax has not been settled? Are interests due by the state in case the tax dispute is decided in favour of the taxpayer and the tax has already been settled?
In tax disputes governed by the IT Act 1961 and the Central Goods and Services Tax (CGST) Act, the resolution outcome dictates the interest treatment, contingent upon the tax liability settlement status.
If the tax authorities prevail and the tax remains unsettled, the taxpayer may face interest charges if the overdue tax is not paid post-resolution. In this instance, specified in Section 220 of the IT Act 1961 and Section 50 of the CGST Act, mandates interest on the outstanding tax amount.
If the resolution of the dispute is in favour of the taxpayer and tax settlement has occurred, the state may be liable to compensate the taxpayer with interest on any excess tax amount refunded. Provisions like Section 244A of the IT Act 1961 and Section 56 of the CGST Act govern such instances, ensuring fair treatment.
6. Disclosure and privilege
6.1 What rules apply to disclosure in your jurisdiction? Do any exceptions apply?
Basic disclosure requirement under the IT Act 1961 which applies to all companies or firms or any person other than a company or a firm whose total income exceeds the maximum amount that is not chargeable to taxes required to furnish the return of income under section 139 of the IT Act 1961, giving comprehensive details of income, deductions, expenses and various other financial particulars.
Additionally, section 285BA provides that any assessee and other people e.g. The registrar or sub-register appointed under the Registration Act 1908, Registering Authority empowered to register motor vehicles of the Motor Vehicles Act and various other prescribed persons must report the specified financial transactions which are:
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- transaction of purchase or sale or exchange of goods or property or right or interest in a property
- transaction for rendering any service
- transaction under a works contract
- transaction by view of an investment made or an expenditure incurred or a transaction for taking or accepting any loan or deposit that exceeds the prescribed value as may be prescribed by the CBDT.
Similarly, the CGST Act requires registered taxpayers to disclose their GST liabilities, input tax credits, and relevant financial information through regular filings, according to Section 37. Additionally, Section 68 empowers tax authorities to request information or documents for GST-related purposes.
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6.2 What rules on third-party disclosure apply in your jurisdiction?
Normally, the assessee is required to furnish the information, furnish and disclose the information relating to its own affairs under the IT Act 1961. However, in terms of section 285A, if any share or interest in a company or an entity registered or incorporated outside India derives directly or indirectly its value substantially from the assets located in India as referred to in explanation five 2(I), section 9 (1), and such company or entity holds such assets in India through an Indian concern, then such Indian concern is required to furnish within the period prescribed under rule 114DB, the information or documents relating to the same as are prescribed under said rule.
Furthermore, section 286 of the IT Act 1961 provides that a consitutuent entity of international group that is resident in India where parent is not resident in india is required to furnish details pertaining to whether it is an alternate reporting entity of the international Group or the details of the parent entity or alternate reporting entity, if any, of the international group. Every parent entity or alternate reporting entity shall furnish a report to prescribed authority containing the aggregate information in respect to the amount of revenue, profit, or loss before income tax, amount of income tax paid, accrued, stated capital accumulated, accumulated earnings, the nature and details of main business activities of each constituent entity etc.
6.3 What rules on privilege apply in your jurisdiction?
There is no separate and specific set of rules under the IT Act 1961 Or CGST Act relating to the privileges, except relating to privileges of privileged communications.
The privileged communication and the rules relating to the same are governed by the provisions of Section 156, of the Indian Evidence Act, which requires that the advocate must not disclose, without the consent of any client,
- any communication to him by the client or vice versa.
- Contents and the conditions of a document and
- the advice given to the client.
This rule is subject to specified exceptions as are stipulated in the above-stated Section. The rule of privileged communication is applicable to interpreters, clerks or servants of advocates/pleaders/attornies etc.
7.1 What types of evidence are permissible in tax disputes in your jurisdiction? Is expert evidence accepted?
In India, the provisions of the Evidence Act 1872 determine whether a piece of evidence is relevant and admissible in a judicial proceeding.
The assessing officer and the tax tribunals are quasi-judicial authorities conducting quasi-judicial proceedings and while certain specific provisions of the Evidence Act 1872 are made explicitly applicable by reference to such provisions in different sections of the IT Act, and CGST Act the rules of evidence and the provisions of the Evidence Act do not strictly apply to the proceedings under the IT Act 1961 and CGST Act.
As held by the Supreme Court of India, in the case of ChuharmanS/O Takarmal Mohnani v. Commissioner of Income Tax [(1988) 172 ITR 250], the rigours of the rule of evidence contained in the Evidence Act are not applicable to the IT Act 1961. Nonetheless, The principles contained in the Evidence Act 1872 and the rules appealing to common sense will have to be applied to the proceedings under theIT Act 1961, 1961.
The proceedings related to income tax and Goods and services tax will be surely governed by the rules of Evidence as contained under the Evidence Act 1872, although not all the technicalities contained under the Evidence Act 1872 will be applicable e.g., the inadmissibility of electronic evidence without strict compliance to the conditions contained in Section 65B of the Evidence Act, may not be applicable to the proceedings under the IT Act 1961 or CGST Act.
7.2 What is the applicable standard of proof?
As held by the Supreme Court of India in different judgments.The tax law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not, and it all depends on the facts and circumstances of each case.
Standard of proof is on the principle of human probabilities or a preponderance of probabilities as enunciated in the judgment in the case of CIT versus Durga Prasad [(1971) 82 ITR 540 SC].
The standard of proof relating to the different situations contained in different sections has been evolved through judicial pronouncements.
For example, section 68 of the IT Act provides that unexplained cash credit is income and the explanation against the addition of such cash credit could be given by the assessee by providing the identity of the individual or corporate creditor through furnishing a PAN Card, Aadhaar card, bank particulars, certificate of incorporation, etc; the creditworthiness of lender by submitting the statement of assets and liabilities showing adequate worth and the bank statement etc. Genuineness of transaction would be required to be explained through security arrangements for lending, payments of interest and enforceable agreement for enforcement of the debt etc.
There are different standards evolved through judicial pronouncements for different sections dealing with different situations e.g. for s.69A dealing with unexplained money, bullion, jewellery etc, section 37(1) regarding claiming expenditure against the income etc.
7.3 On whom does the burden of proof rest?
The burden of proof is upon the person who asserts a proposition, not upon the person who denies it.
The burden of proof in the proceedings related to income tax and goods and services tax is based on the specific provisions contained in the different sections of the IT Act and CGST 2017, respectively. Broad principless regarding the burden of proof are that it is upon the tax authorities to show that the receipt constitutes income and that the income is liable to tax. In contrast, a claim that any particular income is exempt from taxation lies upon the assessee.
Similarly, the burden of proving that the transaction is a bogus one lies upon the revenue unless the same is transferred to the assessee under the provisions of General Anti Avoidance Rules contained in section 95 to 102 of the IT Act, the initial burden to prove concealment of income is upon the department.
The onus of showing that a particular item of income is exempt under any clauses of section 10 is on the assessee, as prescribed in India’s supreme court judgment, CIT v. Ramakrishna Deo [1959] 35 ITR 312 (SC)]
8. Proceedings
8.1 Are tax proceedings in your jurisdiction public or private? If the former, are any options available to the parties to keep the proceedings or related information confidential?
Tax Proceedings before the assessing officer and appeals before CIT(A) are always a matter between the assessee and department and de facto confidential.
However, when the appeal is carried forward to public forums e.g. Income Tax Appellate Tribunal, High Courts and the Supreme Court of India, the proceedings are public. The hearings are accessible to the public if they so desire. Judgments and orders of such proceedings are uploaded online and even the case papers can be obtained by making an application for certified copies thereof.
8.2 How do the proceedings unfold in your jurisdiction?
Tax proceedings in India follow a structured process outlined in the IT Act 1961 and the Central Goods and Services Tax (CGST) Act. Under the IT Act 1961, proceedings typically start with taxpayers filing tax returns under Section 139. Tax authorities may then conduct assessments, audits, or investigations to verify the accuracy of the information provided. Sections 143 and 147 deal with assessments and reassessments. Appeals against assessment orders can be made to the Commissioner of Income Tax (Appeals) under Section 246, followed by appeals to the Income Tax Appellate Tribunal under Section 253, and further appeals to the High Court and Supreme Court under Sections 260A and 261, respectively.
Similarly, under the CGST Act, proceedings begin with taxpayers filing GST returns as per Section 39. Tax authorities may then conduct audits, investigations, or assessments to ensure compliance with GST laws. Sections 73 and 74 outline the procedure for determining tax liability and imposing penalties for non-compliance. Appeals against orders under the CGST Act can be made to the Appellate Authority for Advance Ruling under Section 99, the Appellate Tribunal under Section 112, and the High Court and Supreme Court under Sections 117 and 118, respectively.
Throughout these proceedings, taxpayers have the opportunity to present their cases, respond to allegations, and appeal adverse decisions at higher levels of authority. The procedural requirements and timelines are laid down in the respective sections of the IT Act 1961 and the CGST Act, ensuring transparency and due process in tax matters.
8.3 What is the typical timeframe for proceedings?
8.4 Are settlements possible between the taxpayer and the tax authorities once judicial proceedings have been opened?
In the Indian tax regime, There are no possibilities of settlement between the taxpayer and the tax authorities once the judicial proceedings have been initiated. The same has been elaborated in the answer to question 2.14.
8.5 Do courts in your jurisdiction have full power to review facts and legal questions?
Under the IT Act 1961, the High Courts and the Supreme Court of India have the authority to review questions of law and not facts. Section 260A of the IT Act 1961, 1961, provides for the appeal to the High Court, which can be made by the taxpayer or the Commissioner of Income Tax against the orders passed by the Income Tax Appellate Tribunal (ITAT) on substantial questions of law.
Similarly, under the CGST Act, courts, including the High Courts and the Supreme Court, have the power to review legal questions. Appeals against orders passed under the CGST Act can be made to the appropriate High Court or the Supreme Court under Sections 117 and 118 of the CGST Act.
While courts have no power to review facts concerning assessment processes per se, if courts find any factual finding to be perverse i.e. totally unsupported by or contrary to material on record, that itself gives rise to the question of law. In other words, the court would not substitute its own opinion on facts if two views are equally possible but will reverse a finding of fact if it is perverse.
Also, it will be worthwhile to mention that while appeals are provided against assessment proceedings on questions of law, there are several other issues that High Courts could consider on facts in writ proceedings e.g. whether an action for search and seizure was justified on facts, whether grant or refusal of stay order against disputed demand was justified on facts and many more.
9. Remedies
9.1 What remedies are available in tax disputes in your jurisdiction?
In India, taxpayers embroiled in tax disputes can explore various avenues for resolution such as Under the IT Act 1961, taxpayers can rectify errors in assessments through Section 154, challenge Assessing Officer decisions by appealing to the Commissioner (Appeals) under Section 246 or opt for Dispute Resolution Panels under Section 144C. Further recourse includes appeals to the Income Tax Appellate Tribunal under Section 253, followed by potential escalation to the High Court under Section 260A and to the Supreme Court for significant legal questions.
Similarly, under the CGST Act, taxpayers can seek rectification under Section 161, appeal to the Appellate Authority under Section 107, and proceed to the Appellate Tribunal under Section 112. Should the need arise, appeals against the Tribunal’s decisions can be directed to the High Court under Section 117 and to the Supreme Court under Section 118. Additionally, the Proper Officer retains the authority to revise orders under Section 108 in cases of evident errors.
These provisions offer taxpayers a structured framework to navigate tax disputes effectively, ensuring adherence to legal processes and avenues for fair resolution.
9.2 What factors will the court or tribunal consider in deciding on the appropriate remedies?
Court or tribunal will consider legality and procedural compliance, substantive legal issues, evidence and documentation, and adherence to principles of natural justice. Courts may assess whether tax assessments and proceedings have been conducted following the Act’s provisions, interpret and apply tax laws, evaluate the evidence presented by both parties and ensure the principles of natural justice are upheld throughout the proceedings.
10. Appeals
10.1 Can the decision of the court or tribunal be appealed? If so, on what grounds and what is the process?
In both the IT Act 1961 and the Central Goods and Services Tax (CGST) Act of India, parties dissatisfied with decisions rendered by courts or tribunals in tax matters have the option to appeal. Under the IT Act 1961, if a party is unhappy with the outcome before the Income Tax Appellate Tribunal (ITAT), they can escalate the matter by appealing to the High Court and subsequently to the Supreme Court. These appeals typically revolve around substantial questions of law rather than factual disputes, as delineated under Section 260A of the IT Act 1961. Similarly, under the CGST Act, parties can challenge decisions of the Appellate Tribunal by further appealing to the High Court and then to the Supreme Court. Appeals in both instances primarily focus on legal issues or jurisdictional questions, as outlined in Sections 117 and 118 of the CGST Act. The appeal process entails submitting a formal appeal petition within the specified timeframe, accompanied by supporting documentation and legal arguments. Appellate authorities review the merits of the case and may affirm, modify, or reverse the decision based on applicable legal principles. It’s imperative to adhere to procedural requirements and deadlines outlined in the respective Acts, such as Sections 260A of the IT Act 1961 and Sections 117 and 118 of the CGST Act, to ensure the efficacy of the appeal process.
11. Costs, fees and funding
11.1 What costs and fees are incurred in tax disputes in your jurisdiction? Can the winning party recover its costs?
In matters of tax disputes, there are no settled principles in absolute terms in India that mandate the recovery of the actual cost by the winning party against the losing party. However, the courts at their discretion may award the cost to either party not necessarily equivalent to the cost incurred for prosecuting or defending the litigation. Typical costs involved in tax disputes are the owed fee or the fees for lodging of suitable application before appropriate authorities, including the tax tribunal, settlement commission, etc. and the fees of legal practitioners,to represent the party in the matter of tax disputes.
11.2 Are contingency fees and similar arrangements permitted in your jurisdiction?
Contingency fee arrangements are not permitted for lawyers practising in India under the rules established by the Bar Council of India. The Bar Council of India Advocates Act, 1961, and the Rules framed thereunder govern the professional conduct and ethics of advocates practising in India. These rules typically prohibit lawyers from charging fees that are contingent upon the outcome of a case.
11.3 Is third-party funding permitted in your jurisdiction?
In India, there are currently no specific regulations addressing third-party funding (TPF) in legal matters. Although there is no direct prohibition on TPF in Indian law, an understanding of the practice can be derived from past legal cases and judicial remarks.
An observation made by the Indian Supreme Court in the case of Bar Council of India v. AK. Balaji (2018) highlighted the absence of an explicit prohibition on third-party funding by non-lawyers in India. While advocates in India are generally restricted from funding litigation on behalf of their clients, there are no restrictions on third parties (non-lawyers) funding litigation and seeking repayment after the outcome.
12 International tax disputes
12.1 What is your jurisdiction position on solving international tax disputes (APAs, MAPs,arbitrations)?
APAs
Section 92CC to s.92D of the IT Act empower CBDT to implement Advance Pricing Agreements (APAs); Rule 10F to Rule 10T of the Income Tax Rules outline procedure for implementing APAs. Rule 44GA, outlines the process for negotiating APAs involving multiple tax jurisdictions.
APA process begins with Pre-filing Consultation followed by Furnishing of an APA application and acceptance or rejection after preliminary processing. Afterwards, it goes through various steps e.g. assignment of application to APA team, Examination and analysis of APA application, conversion of a unilateral APA into a bilateral one and negotiation for the same by competent authority etc.; after the APA department is prevented from challenging the ALP or application of TPM to covered transactions.
MAPS
Majority of DTAAs of India contain provisions on MAP based on Article 25 of OECD. CBDT has issued guidance note detailing situations for access to MAP. MAP covers the disputes relating to transfer pricing adjustments, charcaterisation of an expense or receipt as taxable expense or taxable income if it results in taxation not in accordance with DTAA, determination of existence of a Permanent Establishment and attribution of profit to it.
Indian tax authorities however will not take a position contrary or deviating from the order passed by ITAT in a matter of cross border tax disputes that may be undergoing simultaneous resolution through MAP as ITAT is the highest fact finding statutory appellate body and is outside the administrative jurisdiction of tax department.
12.2 Has your jurisdiction implemented the OECD minimum standards concerning international tax dispute resolution or is it a party to other agreements in this respect?
India has implemented certain elements of the OECD minimum standards regarding international tax dispute resolution, particularly focusing on areas such as transfer pricing and exchange of information. Additionally, India has ratified various bilateral tax treaties, including Double Taxation Avoidance Agreements, which often incorporate provisions related to dispute resolution mechanisms.
India has taken steps to enhance tax dispute resolution mechanisms through its participation in the Base Erosion and Profit Shifting (BEPS) project. It has adopted the BEPS Action 14 Minimum Standard, which aims to improve the resolution of tax-related disputes across jurisdictions.
Since June 7, 2017, India has also become a party to the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI) that allows modification of existing treaties to incorporate BEPS.
12.3 Does your jurisdiction’s position differ significantly from art. 25 of the OECD Model Tax Convention (incl. commentary)? If so, in what aspects?
India’s position does differ in some respects. While India has treaties based on Article 25 of OECD model convention, in relation to paragraph 25 of OECD commentary, India is of the view that competent authorities can reach an agreement under Article 25 during pendency of domestic law action; however, the taxpayer has option accept or reject resolution order and if it accepts the resolution, it has to withdraw domestic law action.
India further does not agree with the view expressed in para 42 that tax payer may be permitted to defer acceptance of the solution agreed upon as a result of the mutual agreement procedure until the court had delivered its judgment in that suit.
It further does not agree to interpretation given in para 14 as it does not agree with the view that MAP can be initiated where taxation appears as a risk which is probable and India considers that it can be initiated only where taxation appears as a risk which is certain.
India further has taken a position that access to MAP can be denied in certain cases and it does not agree all circumstances on which access could be denied must be made clear in convention.
13 Trends and predictions
13.1 How would you describe the current tax dispute landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Major overhaul in indirect taxation came with advent of Goods and Service Tax which came to be implemented with effect from 01.07.2017 which replaced the Central and State indirect taxes such as VAT, excise duty and service tax.
Apart from routine changes being introduced in budget, major overhaul in direct taxation was introduction of equalization levy in 2016 which applied to online advertisement etc. for using digital advertisement space. In April, 2020, the Indian Government expanded the scope of equalization levy with introduction of s.165A in Finance Act, 2020 which requires non-resident e-commerce operators providing supplies or services to people resident in India to remit the equalization levy at the rate of 2%.
We see know major overhaul in coming one year as such. However, further expansion in scope of equalization levy and streamlining the guidelines may be expected. Apart from that, government is likely to keep introducing industry specific incentives to boost particular sectors in India e.g. Semiconductor.
14 Tips and Traps
14.1 What would be your recommendations to parties facing a tax dispute in your jurisdictionand what potential pitfalls would you highlight?
We will suggest:-
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- Treat every communication from the department with utmost seriousness and do not leave any communication not replied to.
- Indian Tax laws are complex. Always consult a professional when entering the Indian market or structuring any major transactions, entering a Joint Venture or having a merger, creating Interantional Agency etc.
- Have Tax due diligence done before entering the Indian Market or before entering a major transaction. Depending on sphere of activities, they are advised to check for eligibility for special taxation regime.
- Meticulously check up your withholding tax obligations for domestic as well as international transactions and comply accordingly.
- Foreign Companies are advised to especially assess the risk of creating a Permanent Establishment while dealing with Indian market any way. To read more about Determination of Corporate Residence under Income Tax Act, 1961 & Tax Implications for Foreign Corporations click here.
- Opt for Advance Rulings and Advance Pricing Agreements for certainty.
- Check up your eligibility for presumptive taxation regime and weight advantages and disadvantages for opting for presumptive taxation.
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