Taxation Current Affairs - 2019
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Union Government has received Rs. 3,000 crore of additional tax from MNCs that have entered into advance pricing agreements (APAs) with it over last five years and also has eliminatedbig source of tax litigation. It was revealed in recently released annual report on advance pricing agreements (APAs) for FY18 by Central Board of Direct Taxes (CBDT).
Key Highlights of report
219 APAs signed by CBDT has resulted in MNCs accepting extra income of Rs 10,000 crore, translating into tax of Rs 3,000 crore. Between FY06 and FY15, around Rs. 2.6 lakh crore were added by taxman to income of MNCs through what are called ‘transfer pricing adjustments’, and many of these have been settled by using APAs.
The rate of completing APAs pacts has slowed down in FY18 compared to year ago. CBDT had signed 88 APAs in FY17 and it has now come down to 67 in FY18. One of the reasons for dip was increasing complexity of cases, which required more time for analysing relevant international transactions.
Shortage of manpower at level of additional or joint commissioners and deputy or assistant commissioners in APA teams also has slowed down processing of applications. At the end of FY 17, there were 684 APA applications under process compared with 985 filed since launch of programme.
Despite slowing, India has outperformed China in finalising APAs in last five years. Compared to its 219 APAs since FY14, China managed to sign only 139 APAs in 12 years between 2005 and 2016. Of 58 unilateral APAs entered into in FY 17, 40 have associate enterprise of Indian applicant based in US, followed by UK with 22 applications.
Advance Pricing Agreement
APAs are primarily aimed at avoiding transfer pricing disputes arising from cross-border transactions undertaken by MNCs. Through these agreements, tax department and companies seek to resolve transfer pricing disputes in advance before the cross-border related party transaction actually takes place. Its provision was introduced in Income-tax Act, 1961 in 2012 and Rollback provisions to it were introduced in 2014.
APAs provide certainty to taxpayers in domain of transfer pricing by specifying methods of pricing and setting prices of international transactions in advance. It gives certainty to MNCs that agree on certain principles in valuation of their cross-border transactions. It also provides them with alternate dispute resolution mechanism with respect to transfer pricing. It helps in determining arm’s length price of international transactions in advance for max period of 5 future years. It also strengthens Government’s resolve of fostering non-adversarial tax regime. It also has significantly contributed towards improving ease of doing business in India and has been appreciated nationally and internationally for being able to address complex transfer pricing issues in a fair and transparent manner.
Union Finance Ministry has hiked threshold monetary limit for tax departments to file appeals all three levels of appeal — Appellate Tribunals, High Courts, and Supreme Court. The move is aimed at significantly decreasing taxpayer greivances and litigation burden of tax departments in courts and tribunals across the country.
Tax departments, Central Board of Direct Taxes (CBDT) files appeals in ITAT (Income Tax Appellate Tribunal) while Central Board of Indirect Taxes and Customs (CBIC) files appeals in CESTAT (Customs, Excise and Service Tax Appellate Tribunal) and also in High Courts and Supreme Courts.
Under new limits tax departments CBDT and CBIC can file appeals in ITAT/CESTAT only if the tax amount involved is Rs 20 lakh or more, up from Rs 10 lakh at present. Moreover, appeals can be filed in High Courts if tax amount involved in litigation is Rs 50 lakh (up from Rs 20 lakh at present). For appeals in Supreme Court, the threshold limit has been hiked to Rs 1 crore (from Rs 25 lakh at present).
The new threshold limits will result in 41% reduction litigation from CBDT’s side, including 34% cases in ITAT, 48% of cases in case of High Courts and 54% of cases in case of Supreme Court. Similarly, in case of CBIC, it will result in reduction in 18% of cases as 16% of cases will be withdrawn in CESTAT, 22% in High Courts, and 21% in Supreme Court.
This decision will give relief to taxpayers. It is also based on premise that the cost of litigation is sometimes more than the recovery sought. It will also create trust in tax administration and give relief to honest, small and mid-sized taxpayers. It will promote tax friendly environment and help to promote ease of doing business.
More than 66% of cases are stuck in litigation involve 1.8% in value. In many cases, cost of litigation is higher than the recovery. As per Economic Survey 2017-18, even though success rate of tax department at all three levels of appeal — Appellate Tribunals, High Courts, and the Supreme Court is under 30% for both direct and indirect tax litigation, it remains undeterred and persists in pursuing litigation at every level of the judicial hierarchy making it the largest litigant in India. The tax department unambiguously loses 65% of its cases. Over period of time, the success rate of tax departments has only been declining, while that of assessees has been increasing.