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How to Avoid Tax Disputes

Avoid tax disputes

How to Avoid Tax Disputes

The very nature of compulsory exaction in the form of tax warrants natural resistance towards it, more so during the global economic slump. However, it is essential to avoid tax dispute, intentionally or unintentionally as the consequences may be dire. This article describes the various types of disputes that may arise and ways to avoid the same.

Classification of types of disputes

  • Deliberate Evasion– Disputes that may arise when the taxpayer deliberately or wantonly avoids paying taxes and such evasion is detected by the concerned department.
  • Interpretational Disputes– Disputes that may arise due to interpretational issues, for example with valuation, classification of services/ goods, or even mistakes in drafting of notifications, law etc.
  • Disputes that the department makes out of a non-existent case just to serve a specific purpose. This is not an uncommon trend and may breed avoidable tax disputes and litigation. Although the taxpayer may emerge victorious in the case, it leads to significant costs in terms of money and time and also loss of faith in the government.

Deliberate Evasion

In this type, there is deliberate defiance of law and evasion, and the law is fairly equipped to deal with the evaders with stringent penalties in the form of interest payments apart from prosecution. The government has evolved safety latches and safeguards to prevent misuse and abuse of power.

Interpretational Disputes

These disputes are related to issues in the interpretation of the law. There is a conflict of interest between the tax collector and the taxpayer, in that the tax collector want to increase revenues while the taxpayer wants to keep liability to the minimum within the confines of the law. Due to this conflict of interest, the way in both parties interprets the law may be diametrically opposite which would lead to issues. In some cases like these, a genuine interpretational issue may be projected as an evasion of law and the taxpayer may be prosecuted or subject to heavy penalties/ interest on the evaded amount.

Reasons for tax disputes

  • Frequent amendments and uncertainty in the law.
  • Drafting issues
  • Complicated provisions
  • interpretational issues by department
  • Corruption wherein unnecessary litigation is pursued
  • Biases approach towards taxpayers
  • Lack of guidance and support from the tax department
  • Lack of protocol while conducting assessments/ adjudication.

Errors committed by the taxpayer

Below are some of the common mistakes made by the taxpayer while filing of returns/ auditing/ compliance.

  • Faults in perception/ understanding of the law
  • Ignorance of the law and latest provisions/ positions
  • Delayed filing of returns
  • Non- cooperation with audit/ investigation by delaying response or providing inadequate information.
  • Lack of record of past correspondence
  • No response to audit queries
  • Wrong testimony
  • Lack of legal assistance/ opinions by law professionals
  • Lack of dedicated team for tax compliance
  • Lack of vetting/ review by independent tax professional

Steps to be taken by the taxpayer

The following steps need to be taken by the taxpayer to avoid disputes intentionally or unintentionally. He needs to stay abreast of the latest developments in law. Their staff needs to be properly trained in tax laws and specific roles needs to be assigned to employees. Counsel needs to be approached for legal assistance and whenever there is any doubt, clarification from the department needs to be sought out in writing. Some of the demand provisions like section 73 of the Finance Act 1994 provide for ways to end disputes when the penalties are paid at various stages. The taxpayer needs to ensure that the records/ documents are revisited/reviewed by an independent expert and that remedial action is taken whenever required.