Analysis, Income Tax

Effect of Tax-Effect

As we highlighted in an earlier article, there is a big burden of disputes on our economy. The government does realise this, and routinely takes measures to curb the problem. In this article, we will look at three measures in particular.

Data used for analysis: The impact is calculated based on data from Income Tax Appellate Tribunals in Maharashtra & Goa (Mumbai, Pune, Nagpur, & Panaji). It is important to mention that there might be other variables at play, like judicial appointments, increase in the number of tax payers, change in rate of disposal of disputes etc., that may have also affected the pendency.

What is Tax-Effect?

Central Board of Direct Taxes (CBDT) from time to time, formulates policies where it specifies that no appeal can be filed by Revenue if the tax-effect is below the specified limit.

In simple terms, it can be denoted by the following formula:

Tax-effect = [Tax on income assessed by Revenue] – [Tax on income as specified by the taxpayer]

Graph 3

Tax-Effect 1 – July 2014

In July 2014, CBDT released a circular saying appeals cannot be filed by the Revenue, in the ITAT, if the tax-effect is less than INR 4 lakh. This circular applied to all cases filed after Jul 2014.

We analysed the ITAT data 1 year before and after the event to check the success of the initiative.

Tax effect1

As the graph above shows, there was a 5% decrease in the number of cases filed despite there being a big increase in the number of taxpayers.

Also Read: The Burden of Disputes!

Tax-Effect 2 – Dec 2015

In Dec 2015, CBDT increased the minimum tax-effect amount to 10 lakh for appeals by Revenue and also applied it retrospectively for all ongoing appeals in the ITAT.

Again, we analysed the ITAT data 1 year before and after the event to check the success of the initiative.

Tax effect2

From the above graph, despite the Tax-Effect 2 being in force, the increase in cases filed is significant, which possibly means the tax-effect in most cases was not trivial. However, the positive impact of the initiative is apparent on the number of cases disposed. We believe, applying the tax-effect retrospectively has had a positive impact.

Direct Tax Dispute Resolution Scheme – Feb 2016

Within two months of Tax-Effect 2, the Direct Tax Dispute Resolution Scheme was introduced by the Finance Act. It affords an opportunity, to tax litigators, to settle their dispute with the Tax authority before filing their case in ITAT. To settle the dispute, the declarant must pay the disputed tax, and interest (and 25% of minimum penalty leviable if the disputed Tax is more than Rs. 10 Lakhs).

The graph from Tax-Effect 2 also covers impact for this scheme. It indicates that there may not have been many takers for this scheme.

Summary & Metrics

Graph 2

Impact of Tax effect 1 from July 2014 to July 2015 in  comparison with July 2013 to July 2014

Impact of Tax-Effect 2 from December 2015 to December 2016 in comparison to December 2014 to December 2015

Overall, the data does depict that the government is trying to curb the number of disputes and has managed to curb the cases filed with respect to the tax paying population to some extent. But it does need to think of more measures in the future as the tax paying population is increasing, and without adequate measures the burden may only get heavier.

This article was edited on November 13 to clarify the Summary Metrics

(Written by Anuj Sharma, Product Counsel and Rutuja Udyawar, VP – Data Analytics @ Riverus)

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