Taxation is the most important component in any economy. It serves as a vital revenue stream for governments to finance public services and developmental projects. However, just like any other system, it is not without its challenges. The complex nature of tax laws oftentimes results in disputes between legal authorities and taxpayers.
Tax disputes can arise due to various reasons including differing interpretations of tax laws and disagreements over their application. In most cases, these conflicts result into tax litigation.
Read this article to know what tax litigation is, its types and what possible factors can cause it. The article will also deal with the process of tax litigation in India and its appeals.
Taxation System in India
India’s tax system has a clear division of authority between the central government, state governments, and local bodies. The Central Government imposes both direct and indirect taxes on individuals and commodities.
State governments levy taxes such as value-added tax (VAT), stamp duty, state excise, and professional tax. Lastly, local bodies have the authority to impose taxes on properties and utilities like water supply and drainage.
Over the past decade, India’s taxation system has seen severe changes. Tax rates have been rationalized, and tax laws have been simplified. It leads to improved compliance and better enforcement.
What is Direct Tax?
Direct taxes are a form of taxation imposed on individuals or entities in accordance with the ability-to-pay principle. This principle asserts that those with more resources and higher incomes should bear a greater tax burden. The direct tax system aims to redistribute wealth within a country.
Direct taxes are not transferable; the responsibility for payment lies solely with the companies or individuals to whom they apply. Failure to pay these taxes on time may result in fines and even imprisonment.
Types of Direct Tax
In India, the central government levies various types of direct taxes. Some of the most common forms of direct taxes include:
1. Income Tax
Income earned by individual entities, Hindu Undivided Families (HUFs), and associations of persons (AOPs) come under the Income-tax regime. The Income Tax Act of 1961 provides guidelines for the collection and computation of income tax.
2. Corporate Tax
Levied on the profits earned by corporations, applicable to both domestic and foreign entities operating in India. The Finance Act determines corporate tax rates, deductions, and exemptions for different categories of companies.
3. Capital Gains Tax
This applies to gains arising from selling or transferring capital assets like real estate, stocks, and mutual funds. Capital gains are categorized as long-term or short-term, with rates and exemptions varying based on the asset and holding period.
4. Securities Transaction Tax (STT)
Imposed on the purchase and sale of listed securities, including shares, bonds, derivatives, and equity-oriented mutual funds. Payable by the buyer or seller, STT aims to generate revenue and discourage speculative trading.
5. Dividend Distribution Tax (DDT)
Levied on dividends distributed by companies to shareholders. Before April 1, 2020, it was imposed on the company distributing dividends, but now it is added to the recipient’s taxable income and taxed at applicable slab rates.
6. Gift Tax
Previously imposed on the transfer of specified assets without consideration, gift tax has been abolished in India. However, any income arising from gifts is now subject to income tax.
What is Indirect Tax?
Indirect tax is the tax levied on a person upon consumption of goods and services. It is not directly levied on a person’s income. He needs to pay the tax in addition to the actual price of goods or services purchased by the seller. Indirect is a tax that is passed on to another person. Generally, indirect tax is levied on sellers who pass it on to the final consumer.
In indirect taxes, the person on which the burden falls and the person who pays the tax are different. The sellers are required to pay these taxes to the government (e.g., manufacturers and retailers). But since they sell goods to the consumers, they pass the burden of paying the tax to you.
Thus, when you purchase goods, you pay the amount, including tax, to the seller. The seller then pays the tax to the government.
Types of Indirect Tax
In India, the government levies various types of indirect taxes. Some forms of indirect taxes include:
1. Service Tax
Service tax is what you pay to the government when you use taxable services like those from restaurants, hotels, travel agents, cab services, and cable providers. The service provider collects the tax and sends it to the central government.
2. Value Added Tax (VAT)
VAT is a flat tax on goods. Unlike sales tax, where the shopper pays the entire amount at the time of sale, VAT involves different parties paying different parts of the tax during the transaction.
3. Excise Duty (CENVAT)
This is a tax on goods produced within the country, now known as the Central Value Added Tax (CENVAT). It applies to items like tires, airline tickets, fuel, and heavy trucks.
4. Custom Duty
Customs Duty is a tax levied on imported goods or exported from a country, divided into import duty and export duty.
5. Entertainment Tax
Entertainment Tax is charged on various sources of entertainment, such as feature films, amusement parks, sports activities, commercial exhibits, celebrations and parties.
6. Stamp Duty
Stamp Duty is imposed on the transfer of immobile possessions within the state and is applicable to all legal documents.
7. Goods and Service Tax (GST)
GST has replaced several indirect taxes in India, creating a unified taxation system. It is categorized into Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST), and Integrated Goods and Service Tax (IGST), depending on the nature of the transaction and whether it involves intra-state or inter-state supply.
What is Tax Litigation?
Tax litigation in India refers to the legal process of resolving disputes between taxpayers and the tax authorities regarding tax assessment, collection, and enforcement. It contains both civil and criminal proceedings involving various taxes like income tax, GST, excise duty, etc.
History Of Tax Litigation In India
The saga of tax litigation in India stretches back centuries. In ancient India, taxes existed in various forms, often collected through land levies or tributes. Disputes regarding these taxes were likely settled through customary practices or local adjudication mechanisms.
The arrival of British rule in the 18th century marked a turning point. The introduction of Western-style taxation systems, like the Permanent Settlement in Bengal (1793), laid the groundwork for a more formalized tax litigation process. However, it also brought disparities and discontent among Indian subjects.
Following independence in 1947, India embarked on a journey of building its own tax system and legal infrastructure. The Income Tax Act of 1961 became successful in establishing the framework for income tax assessment and dispute resolution.
Recognizing the growing volume of tax cases, the government established the Income Tax Appellate Tribunal (ITAT) in 1941. This dedicated tribunal aimed to provide a quicker and more accessible forum for taxpayers to appeal against assessments made by tax authorities.
What are the Types of Tax Litigation?
The following are the types of tax litigation:
1. Direct Tax Litigation
Direct tax litigation includes legal disputes related to direct taxation. The payer cannot transfer this tax liability to another party. The Central Board of Direct Taxes (CBDT) has the exclusive authority for governing and approving decisions concerning direct taxes.
2. Indirect Tax Litigation
Indirect tax litigation involves legal disputes related to indirect taxation. Examples include excise duty and sales tax.
Also Read: GST Litigation and Dispute Resolution
What are the Possible Factors of Tax Litigation?
Possible factors contributing to tax litigation include:
- Disputes arising from tax obligations for individuals or partnerships.
- Tax-related issues affecting corporations with non-profitable or charitable status.
- Issues related to taxation in cross-border business operations.
- Disputes regarding tax obligations on earnings from royalties.
- Disputes arising from concerns related to tax withholding.
- Tax litigation stems from efforts to reorganize corporate structures.
- Disputes related to valuation as per the provisions of the 1962 Customs Act.
What is the Process of Tax Litigation in India?
The process of tax litigation in India can be quite complex, depending on the type of tax involved (direct or indirect) and the nature of the dispute. However, here’s a general overview of the common steps involved:
1. Filing of Returns
You must complete the return filing process before the deadline to avoid fines.
2. Assessment Order Passing
After filing returns, the assessment assessor carefully reviews the return and issues an assessment order.
3. Appeal Submission
If dissatisfied with the assessment order, you can follow the appeal hierarchy:
- The Tax Authority
- Income Tax Appellate Tribunal
- The High Court
- The Supreme Court
Income Tax Appellate Tribunal
The Income Tax Appellate Tribunal (ITAT) is a quasi-judicial authority established by the central government. It operates under the jurisdiction of the Ministry of Law and Justice.
With its nationwide presence, ITAT functions through various benches strategically placed across regions. Each bench, consisting of an accountant member and a judicial member, contributes to the impartial resolution of tax-related disputes.
Functions of ITAT
1. Appellate Matters
ITAT deals with appeals against orders of income tax authorities, serving as the second forum after the Commissioner of Income-tax (Appeals).
ITAT operates under the supervision of the jurisdictional High Court, bound to follow precedents set by the High Court and the Supreme Court of India.
3. Fact-Finding Authority
ITAT is the final fact-finding authority, and its decisions on factual matters are conclusive.
Set by the Central Board of Direct Taxes (CBDT) for regulating appeals to ITAT:
- Before ITAT: Up to ₹ 50 lakh.
- Before High Court: Up to ₹ 1 crore.
- Before Supreme Court: Up to ₹ 2 crore.
Procedure to File an Appeal
- Appeal in Form No. 36, submitted in triplicate, accompanied by a paper book.
- The paper book includes relevant orders, statements, and documents. Submission should be made at least a week before the scheduled hearing.
- Fees depend on the assessed income by the Assessing Officer.
- Ranges from ₹ 500 to 1% of total income assessed (not exceeding ₹ 10,000).
Time for Filing an Appeal
60 days from the date of communication of the order, subject to appeal.
Dealing with tax litigation can be mentally taxing and time-consuming. Thus, keeping abreast of GST regulations becomes crucial in such scenarios. Consider leveraging GST billing software to simplify your invoicing and ensure compliance.
It offers a speedy way to organize your invoicing, facilitating timely payments, inventory control, cost reduction, and the effortless growth of your business. Utilizing such technology can significantly ease the challenges associated with tax-related matters, enabling you to concentrate on the success of your business.
Q1. What are the Litigation Issues Under GST?
GST litigation specifically refers to disagreements relating to matters pertaining to the administration of GST in India.
Q2. What is an Indirect tax, With example?
An indirect tax is a tax passed on to another individual or entity. Examples include sales tax, entertainment tax, excise duty, and more.
Q3. Is GST a Direct or Indirect tax?
Goods and Services Tax is an indirect tax collected on the consumption of goods or services.
Q4. Is TDS a Direct tax?
Tax Deducted at Source (TDS) is an indirect form of taxation involving the direct collection of revenue at the point of the recipient’s income.
Q5. How Much Capital Gain is Tax-Free?
No tax duty is applicable on gains below ₹ 1 lakh.
Q6. What is the Success Rate of Tax Litigation?
The success rate of tax litigation for the Tax Department is up to 30%, considering that 80%-85% of the appeals constitute the department’s caseload.
Q7. What Happens if Income tax is not Paid in India?
The Income Tax Department is empowered to enforce legal measures, including freezing the assets of the taxpayer, initiating legal proceedings, and attaching the taxpayer’s property.
Q8. How much Income is Tax-Free?
No tax is applicable on income up to ₹ 3 lakh.
Q9. What is the Time Limit for Filing an Appeal Under the VAT act?
The initial appeal must be submitted within thirty days, while the subsequent appeal must be submitted within sixty days from the date of receiving the order subject to appeal.
Q10. What is the Function of the Income Tax Tribunal?
The Income Tax Appellate Tribunal (ITAT) is a quasi-judicial institution specializing in addressing appeals arising under the Direct Taxes Acts.