Tax experts are advocating for a more efficient mechanism to expedite the resolution of pending appeals and to lessen the compliance burden for companies involved in MSME-related payments. They also propose allowing taxpayers the opportunity to settle specific cases currently under litigation.
These recommendations come amid the comprehensive review and re-crafting of the Income Tax Act of 1961. In a recent notification, the finance ministry indicated that the government aims to gradually phase out tax incentives, deductions, and exemptions in the medium term, while also rationalizing tax rates. The ministry has specifically sought input from the industry on how to “reduce compliances,” provide “tax certainty,” and “minimize litigations.
Official reports suggest there are over 580,000 cases pending at the Commissioner of Income Tax (Appeals) level, a notable increase from approximately 530,000 cases at the beginning of 2024. Experts point to significant delays in scheduling hearings and issuing orders by the commissioner, both online and offline. Despite numerous reminders and requests, there has been little action from the department regarding these long-standing cases, some of which have been pending for over six years.
Yogesh Kale, executive director at Nangia Andersen India, recommended that all pending cases with the Commissioner of Income Tax (Appeals) be resolved in a phased and timely manner over the next one to two years. He also mentioned that the number of commissioners handling these cases could be increased if necessary.
Sanjay Sanghvi, a partner at Khaitan & Co, urged the government to implement a provision for timely disposal of appeals, particularly under the faceless appeal regime. This change could significantly aid medium and small enterprises since the requirement to pay a tax demand (typically 20% of the disputed amount) while an appeal is pending can strain their working capital and create undue hardship.
Regarding the controversial “45-day” payment rule to MSMEs, experts believe that the Central Board of Direct Taxes (CBDT) should provide a set of FAQs addressing various scenarios that lead to non-compliance and their related tax implications. Currently, this norm imposes a hefty compliance burden on larger businesses and has resulted in disputes.
The Finance Act 2023 introduced Section 43B(h) in the Income Tax Act, which states that if payments to micro and small enterprises are not made within the stipulated 45 days, businesses cannot claim tax deductions for those payments. This 45-day timeline is derived from Section 15 of the Micro, Small and Medium Enterprises Development Act of 2006, which requires payments to be made to micro and small enterprises within 45 days under written contracts and within 15 days without them.
Under Section 43B, deductions on expenses can be claimed on an accrual basis for the previous fiscal year, provided the payments are made by the due date for filing income tax returns in the subsequent year. However, Clause (h) specifies that deductions are based on payment made, not on an accrual basis, adhering to the deadlines established in Section 15 of the MSME Act.
Additionally, tax experts are suggesting an amendment to Section 270AA, which currently allows assessees to settle disputes. Presently, if an assessee receives multiple orders from authorities, they must either seek immunity for all or dispute them all. Kale suggests that the section be revised to permit assessees the flexibility to select which orders to settle and which to contest. This change would provide much-needed flexibility for taxpayers and help free up capital.
Other proposals include allowing the carry forward of tax losses across all sectors. Currently, Section 72A permits the carry forward of accumulated tax losses only when the transferor company operates an ‘Industrial Undertaking.’ This exclusion means that transferor companies in the service sector are not eligible for this benefit following an amalgamation. Experts like Dipesh Jain, partner at Economic Laws Practice (ELP), argue that this disparity should be eliminated, allowing the carry forward of accumulated tax losses in all sectors and industries.