The Soaring Tax Defaults and Litigation in India
India is grappling with a substantial surge in tax defaults and the ensuing elevated litigation, with the quantum of defaults skyrocketing by a staggering 1000 percent over the past eight years, as per data compiled by Moneycontrol from various Union Budgets.
As of FY23, the unpaid tax notices demand amounts to a staggering Rs 9.08 lakh crore compared to Rs 80,003 crore in FY14. Notably, of the total amount, notices accounting for Rs 4.23 lakh crore were issued less than two years ago, with Rs 2.13 lakh crore from notices sent between two and five years ago. Furthermore, nearly Rs 1.43 lakh crore of taxes remains unpaid even after a decade.
Escalating Defaults
The escalating defaults are primarily attributed to the complexity and frequent changes in the law, posing significant confusion and compliance challenges for businesses, as highlighted by Alay Razvi, Partner at Accord Juris. This complexity has particularly impacted small and medium enterprises (SMEs), creating unintentional defaults.
Moreover, tax notices being dispatched to companies under the Insolvency and Bankruptcy Code (IBC) have emerged as another major cause of defaults. The moratorium on regulatory proceedings provided under the IBC has not shielded insolvent companies from receiving demand notices, contributing significantly to the outstanding tax dues figures.
Amit Singhania, founder of Areete Law Offices, noted that the tax due pertaining to IBC companies significantly contributes to the outstanding tax dues figures. The enforcement of such tax demands against the officers in default proves to be a prolonged battle for revenue authorities.
Unpaid Taxes Breakdown
The bulk of the defaults are on the direct taxes side, with unpaid corporate tax demands amounting to around Rs 3.97 lakh crore, followed by ‘taxes on income other than corporate tax’ with defaults totaling Rs 4.81 lakh crore. Notably, this category encompasses disputes regarding capital gains and transfer pricing.
Litigation on the Rise
Besides the surge in defaults, tax litigation has witnessed a sharp increase, with disputed amounts more than doubling to Rs 12.2 lakh crore in FY23 from Rs 5.03 lakh crore in FY14. The lion’s share of litigations lies within the realm of direct tax, with approximately Rs 6 lakh crore worth of litigation in corporate tax matters and another Rs 4.5 lakh crore under the ‘taxes on income other than corporate tax’ head.
Disputes over Goods and Services Tax (GST) accounted for a comparatively lower amount at Rs 2,317 crore, but experts anticipate a significant surge in the upcoming year due to the influx of GST notices sent to various companies in the past year. Additionally, disputes over customs, union excise, and service tax accounted for Rs 22,077 crore, Rs 49,367 crore, and Rs 99,939 crore, respectively.
Looking Ahead
The rise in tax notices can be attributed to the extensive digitization of data, enabling immediate identification of discrepancies and prompt issuance of notices, as emphasized by Ankit Jain, partner at Ved Jain & Associates. As the government continues to focus on collecting tax returns online and processing them digitally, a comprehensive data cross-referencing approach has been adopted, flagging inconsistencies in income, expenditure, and purchases.
The alarming rise in tax defaults and litigation underscores the urgent need for a comprehensive review of tax policies and their enforcement, in order to address the complexities and challenges faced by businesses. Moreover, measures to streamline the taxation framework and alleviate compliance burdens, especially for SMEs, are imperative to mitigate unintentional defaults and alleviate the burden on the revenue authorities.
