The Telegraph
Saturday , July 12 , 2014
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Tax litigation cost set to rise

- Budget fine print reveals areas of discomfort

New Delhi, July 11: There’s some bad news for industry — especially small businesses.

The Modi government has raised the cost of litigation against the demand notices it serves on excise duty and service tax assessees.

As a first step, it has tweaked section 35F of the Central Excise Act which mandates that assessees will have to deposit a pre-fixed deposit of 7.5 per cent of duty demanded or penalty imposed or both while filing an appeal with the Commissioner (Appeals) or the tribunal at the first stage.

The pre-deposit will rise to 10 per cent for filing a second stage appeal before the tribunal. The amendment says the pre-deposit ceiling has been capped at Rs 10 crore.

Under the existing law, there was no pre-specified deposit amount to be paid while challenging a notice.

In fact, the appellant could approach the Commissioner (Appeals) or the appellate tribunal who were empowered to dismiss the requirement for the payment of a deposit if he was convinced that it “would cause undue hardship to such a person”.

The pre-deposit rule is designed to put a lid on frivolous litigation that stymies the government from realising dispute dues.

A report by the Comptroller and Auditor General (CAG) had estimated that the government was unable to realise dues worth Rs 1.27 lakh crore in central excise and service tax cases which were tied up in litigation.

The report said that dues worth Rs 73,274.4 crore were tied up in service tax cases and another Rs 54,172.65 crore in excise cases.

The surge in service tax cases is a result of the government’s bid to bring more and more services within the tax net. As a result, service tax has become the largest stream of indirect taxes for the government.

The Modi government has estimated service tax revenues at Rs 2,15,973 crore this fiscal, outstripping excise collections at Rs 2,07,110 crore.

Courts have also been disturbed by the level of litigation involving the government in excise and service tax cases.

In a recent case, the Mumbai high court had said the government was the largest litigant accounting for 70 per cent of the 3 crore cases pending in various courts.

The government has also been keenly aware of the problem. In October 2010, the government had drawn up a national litigation policy which aimed “to reduce government litigation so that the government ceases to be a compulsive litigant”.

The policy was designed to ensure that valuable time of the courts was not spent in resolving pending cases and “in bringing down the average pendency time in the courts”.

According to one estimate, the average time taken for an indirect tax case to attain finality ranges from 14 to 20 years.

The department of revenue imposed some self-restraint by directing chief commissioners of customs, excise and service tax not to file appeals before the tribunal in cases where the duty involved or the total revenue, including fine and penalty, was less than Rs 1 lakh.

It also decided not to file appeals before the high courts in cases where the total revenue involved was less than Rs 2 lakh.

Having set the self-restraint on itself, the government has now decided to stop frivolous litigation by the assessees as well.

The pre-deposit rule, it hopes, will now deter the assessees from resorting to needless litigation.