They have identified areas like transfer pricing, capital gains, related party deals, and mergers and acquisitions — which are prone to disputes and often lend themselves to multiple interpretations — where tax payers should have a chance to put across their points over web conference with officials of the tax department.
The apex body, Central Board of Direct Taxes (CBDT), under the ministry of finance, has agreed to examine the suggestion made in the course of meetings in the past few weeks, two persons who participated in the discussions told ET.
Corporates and tax professionals fear that in the absence of a window to explain the finer points of transaction, a faceless regime could increase litigation even as it minimizes corruption. Such concerns can be addressed through virtual hearings which would also reduce the scope of corruption.
“The faceless scheme envisages that personal hearings will be granted only in exceptional circumstances to be notified by CBDT. It is a legitimate expectation of industry that such hearings will be liberally granted in complex matters like transfer pricing, M&As, high stake additions, issues involving invocation of GAAR, matters which are referred to Technical Unit, etc,” said Sudhir Kapadia, Partner & National tax Leader at Ernst & Young.
What are the kinds of transactions where assessees may feel the need to verbally explain their case? For instance, in related party transactions — which could be sale of a division, payment of interest or rent to a group company or parent — it would be easier, over a meeting, to convince the taxman why the rate or valuation of a transaction varies from the market or arm’s length price. Similarly, in tax liabilities on capital gains arising out of indirect transfers, the department may decide that the controlling interest has changed hands even though in reality the seller in question may be having a lesser holding. Also, there could be grey areas related to General Anti-avoidance rule (GAAR), where the parties concerned may be better placed to clear the fog through virtual interactions.
“Why not fix thresholds for personal and businesses assesses beyond which, if required, assesses can participate in virtual hearing.
A rise in litigation will defeat the government’s purpose. Tax laws are complicated and a deep dive into facts may be required..There are practical problems. For example, in a faceless regime, the assessee will try to upload a mountain of material to defend itself and this can be a pain for the department as well,” said senior chartered accountant Dilip Lakhani.
Another area where differences have cropped up between assessees and the department relates to computing capital gains following a merger. While the law says that a share bought before January 2018 (say at Rs100), and sold after January 31, 2018 (say at Rs 180), the capital gain would be Rs 40 — the difference between the price on January 31 (say Rs 140) and Rs 100 — and not Rs 80 (the difference between Rs 180 and Rs 100). But when this company is merged with another entity and ceases to exist, disputes arise over whether to consider January 31, 2018 price of the first company or the entity to which it is merged.
According to Rajesh P. Shah, Chairman of Research and Publication Committee of the Chamber of Tax Consultants, ”Under the Faceless Assessment Scheme, the draft assessment order (happens) in one city, review in another city and finalisation in a third city. Unless all facts uploaded at the time of assessment proceedings are not readily available on the tax portal, it could be a challenge for officers carrying out review and finalization.”
The new system — which was introduced through an amendment in the Finance Act 2020 – entails absence of human interface, issuance of notices by a central cell, allocation of cases to assessment units in a random manner, and a central cell serving as the single point of contact between the taxpayer and I-T Department.
While the move is being largely perceived as a paradigm shift in tax administration, professionals, urging the need for virtual hearing, point out that involvement of multiple officials often ends up with the matter going in favour of the department due to the absence of unanimity among the officers. “The history of performance of the dispute resolution panel (DRP) supports this,” said Lakhani.