It is an open secret that the government fixes revenue collection targets for its tax officials. The targets are often based on the collections made in the earlier year without any regard to the estimated actual profits to be currently made by the businessmen and industrialists.
The tax officers are so obsessed with their targets that they do not hesitate to take coercive measures to collect more and more amount from the assessees. It will be wrong to blame the officers because their promotion, placement, transfer etc. is shown to be dependent upon the collection of taxes under their charge.
A situation often arises when the income-tax department raises a demand of tax from a foreign enterprise but the foreign enterprise does not agree with the department and decides to contest the case before higher authorities. In such a situation, the option is either to pay the disputed demand or obtain a stay till appellate proceedings are over.
The above situation, which on the surface, appears to be simple and logical, in fact, gets highly complicated when applied in practical parlance. In India, completion of tax assessments, including appellate proceedings, usually takes 3 to 5 years up to the tribunal stage and another 10 to 15 years if the matter goes to high court and Supreme Court.
If the foreign company pays the disputed demand, then, upon success in appellate proceedings, it will get a refund along with interest. But, in the process, the foreign company will remain involved in litigation in India in all these years. This creates practical difficulties, particularly in those cases where the foreign company goes back from India after completing its work here. There is, therefore, no dearth of cases when the refunds due to foreign companies remain unclaimed.
Therefore, some countries have initiated the move to amend the double taxation avoidance agreements to the effect that foreign companies may be allowed to provide a bank guarantee against their disputed taxes.
In view of the above problem, an understanding has already been reached between the US and India as well as between the UK and India that a disputed tax demand against US or UK companies will remain suspended if a bank guarantee is furnished by the assessee. It is however to be noted that the suspension of demand as aforesaid does not relieve the tax payer from payment of interest. Therefore, if the demand is ultimately found payable by the taxpayer, payment will have to be made along with interest up to the date of payment.
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For this purpose, a Memorandum of Understanding (MoU) was signed between India and the UK under Article 27 of their tax treaty, which was notified by Instruction No. 3/2004. The effect of the MoU is that the furnishing of the bank guarantee should be treated as sufficient arrangement to qualify for exercising discretion by the assessing officer for extension of time limit for payment of taxes.
The procedure for suspending the demand is provided in the relevant tax treaty. The treaties contain a provision for redressal of grievances, which is popularly known as Mutual Agreement Procedure (MAP).Therefore, if a US-based entity desires the suspension of tax demand, it has to invoke the MAP procedure as provided in the Indo-US tax treaty.
It may be kept in mind that the income-tax rates in India are among the lowest in developing countries. The advantage is however, inundated by the complexity of tax laws multiplied by bureaucratic hurdles.
Fixing unreasonable targets for collection of taxes is one single factor which besides being mostly responsible for corruption causes undue hardship to the tax payers particularly to foreign enterprises. This certainly sends a wrong message to foreign investors in India.
The Honourable Prime Minister is humbly prayed to unshackle the tax officials from unreasonable budgetary constraints so that the tax laws may be executed with justice and equity.
The author is a Partner in S.S. Kothari Mehta & Co.