The exceptions now encompass matters related to bogus capital gains/loss from penny stocks and cases of accommodation entries; disputes concerning various aspects of tax deducted at source (TDS) or tax collected at source (TCS); tax assessments based on information from law enforcement and intelligence authorities such as the CBI, ED, the department’s own investigation wing, GST department, or even state law enforcement agencies; disputes regarding tax treaty applicability, and even equalization levy (also known as Google tax), as highlighted in the ToI report.
What is tax effect
Tax experts advocate for a cautious “wait-and-watch” approach, emphasizing that the extensive list of exceptions introduced could potentially result in heightened litigation for individuals, Indian corporations, and overseas entities. As per a Times of India news report, in August 2019, the CBDT had adjusted the limits to Rs 50 lakh, Rs 1 crore, and Rs 2 crore for filing appeals by the I-T department with the Income-tax Appellate Tribunal (ITAT), high courts, and the SC, respectively. With the exception of the now-expanded list of exceptions, appeals by the I-T department to higher judicial forums are permissible only if the ‘tax effect’ surpasses these thresholds.
Put simply, ‘tax effect’ refers to the variance between the tax calculated on the total income assessed by the Income-tax (I-T) department and the tax amount without taking into account the disputed income. Government officials, who spoke with ToI, stated that the current thresholds are fair and expanding the list of exceptions was deemed necessary.
What it means for tax payers
A taxpayer, in conversation with Times of India, highlights a concerning trend of proliferating WhatsApp groups that lure unsuspecting investors into trading stocks of certain companies, often penny stocks. These investors may genuinely make capital gains or losses without involvement in any organized tax evasion scheme. However, the expanded exceptions now allow the Income-tax (I-T) department to appeal even for minimal gains or losses, potentially prolonging the litigation process.Matters related to statutes that no longer exist such as wealth tax, fringe benefit tax are included in the exception list, as is the equalization levy. The ToI news reported Gautam Nayak, tax partner at CNK & Associates as saying that “litigation has a cost for the taxpayer and the department, it also has a bearing on investor sentiment. Litigation on insignificant sums could send the wrong signal. Perhaps, issue-based limits could have been set.”As per Nayak, some exceptions carved out could impact India Inc and its international business partners. “The exception covers litigation relating to the determination of the ‘nature of transaction’ and thus the obligation to withhold tax in India. For instance, the Indian customer making payment to a US company for cloud-computing or off-the-shelf software could view that owing to specific terms it is not Royalty or Fees for Technical Services under the India-US tax treaty and no tax is to be withheld. The I-T could hold otherwise, resulting in its filing an appeal for an amount which may be a few lakhs only,” Nayak was quoted in the ToI news report
Case where the tax department has filed prosecution in a relevant case and the trial is pending, or if a conviction order has been issued but not compounded by the taxpayer, the latter entails paying a compounding fee, which is a percentage of the defaulted sum. This scenario encompasses cases involving failure or delay in depositing TDS.
Disputes relating to the applicability of a tax treaty are included in the exceptions. Anish Thacker, chartered accountant, who was quoted in the Times of India news reported states, “A taxpayer may have won an appeal at the Commissioner (Appeals) level that a tax residency certificate is adequate proof and the provisions of a tax treaty and its consequential benefits such as lower withholding taxes in India will apply on income such as ‘Royalty’ or ‘Fees for technical services’ or a Mauritius-based investor could contend that gains arising on sale of Indian shares purchased prior to April 1, 2017, are fully exempt in India. Such cases can now be contested by the I-T department, even if the disputed amount involved is below the prescribed thresholds.”
The circular retains most exceptions outlined in earlier years, such as cases concerning undisclosed foreign income or assets. It takes immediate effect and applies to appeals filed from this point onward.
How the new income tax rules expanding the scope for filing appeals by officials can affect taxpayers
The exceptions now include matters related to bogus capital gains/loss from penny stocks and accommodation entries, disputes over various aspects of tax deducted at source (TDS) or tax collected at source (TCS), tax assessments based on information from law enforcement and intelligence authorities like CBI, ED, the department’s investigation wing, GST department, or state law enforcement agencies. Disputes regarding tax treaty applicability and equalization levy (Google tax) are also covered in the report from ToI.
Tax experts caution against a potential increase in litigation due to the expanded list of exceptions, as individuals, Indian corporations, and overseas entities may face challenges. The CBDT had previously set the limits for filing appeals by the I-T department with the Income-tax Appellate Tribunal (ITAT), high courts, and the SC at Rs 50 lakh, Rs 1 crore, and Rs 2 crore, respectively, in August 2019. Appeals to higher judicial forums are only allowed if the ‘tax effect’ exceeds these thresholds.
‘Tax effect’ refers to the difference between the tax calculated on the total income assessed by the I-T department and the tax amount excluding the disputed income. Government officials believe the current thresholds are reasonable and the expansion of exceptions was deemed necessary.
For taxpayers, the expanded exceptions may result in prolonged litigation processes for even minor gains or losses. Issues related to obsolete statutes like wealth tax, fringe benefit tax, and the equalization levy are included in the exception list. Litigation on insignificant amounts could have negative implications on investor sentiment, according to tax partner Gautam Nayak.
Exceptions carved out in the circular could impact India Inc and its international business partners, particularly concerning the ‘nature of transaction’ and withholding tax obligations. Cases where the tax department has filed prosecution in a pending trial or a conviction order has not been compounded by the taxpayer may require paying a compounding fee.
Disputes over the applicability of tax treaties are also covered in the exceptions, affecting taxpayers who have won appeals at the Commissioner (Appeals) level. The circular retains most exceptions from previous years, including cases involving undisclosed foreign income or assets.
The circular is effective immediately and applies to appeals filed moving forward.
