Mint reported earlier this month that the government would seek to prepare a road map to reduce existing tax litigations and look into increasing pecuniary threshold limits to discourage tax departments from launching new litigation.

The move follows the constitution of a committee headed by former judge RV Easwar last week to reform the Income Tax Act to reduce the potential for disputes caused by ambiguity in the Income Tax Act 1961, and streamlining existing complex laws and sections to increase predictability and certainty.

Notwithstanding that the promise to end “tax terrorism” was part of the current government's election manifesto and very clearly a pro-business salvo aimed at the Congress party, the dynamics on the ground belie easy fixes.

But the kinks in the complicated mesh of tax laws are gradually getting hammered out by the often frustrating legal system.

Let's talk about Vodafone

One company has arguably had it worse than most and has become a short-hand for Indian tax troubles in the process.

But in the last year or so, Vodafone has won several important high court decisions (though not for wont of resistance from government lawyers).

Last month, on 8 October 2015, the Bombay high court overruled an Rs 8,500 crore transfer pricing order against Vodafone by the Income Tax Appellate Tribunal (ITAT), relating to the 2007 sale of a call centre unit in Ahmedabad that the ITAT claimed was structured to circumvent transfer tax. The full Bombay high court judgment exonerating Vodafone has still not been published by the high court and whether the government will appeal is not yet known.

DMD senior partner Fereshte D Sethna, who has been representing Vodafone in this and other tax matters, says that subject to the wording of the full judgment and whether there is an appeal, the case would likely settle and clarify transfer pricing jurisprudence for a while by affirming the Supreme Court position from 2012.

Nearly exactly one year before that, on 10 October 2014, the Bombay high court had ruled in Vodafone's favour in a separate Rs 3,200 crore transfer pricing case relating to its Pune-based outsourcing arm issuing shares to its parent company.

That judgment was a boon to more than 20 other companies facing the income tax department on a similar issue (oil major Shell won two transfer-pricing cases worth Rs 18,000 crore in November 2014 on the back of it in the Bombay high court).

And then, in January 2015 in a long-absent stroke of luck for Vodafone and others, communications minister Ravi Shakar Prasad then promised that the government would not appeal the judgment in the Supreme Court.

“That was a very big case as well on matters concerning transfer pricing,” comments Sethna. “That has by a stroke of the pen weeded out a significant amount of issue that were all going to languish for a time to come.”

However, the mother of all tax disputes is hard to just forget and a bitter taste will still be all too fresh for Vodafone and spooked foreign investors. Vodafone had infamously lost its writ petition in the Bombay high court against the tax department's 2007 show-cause notice.

And while the company ultimately prevailed at the Supreme Court in 2012, the then governing UPA quickly turned around and changed the tax law with retrospective effect to ensure Vodafone would be on the hook again for the Rs 20,000 crore tax bill arising out of its $11bn buy of Hutchison Essar in 2007.

Government and Vodafone have since been in arbitration, which has shown little signs of accelerating; the government most recently appointed Cost Rican international lawyer Rodrigo Oreamuno as its arbitrator in July 2015 after previous the previous arbitrator, former Chief Justice of India RC Lahoti, recused himself.

Revenue secretary Hasmukh Adhia told Mint earlier this month that the arbitration would continue according to its own rules and pace, while the retrospective amendment would not be re-examined by the panel.

“The problem with the retrospective amendment is that it's a legacy issue,” says Anuradha Dutt, senior partner at DMD who also advised Vodafone with Sethna. “You need a lot of guts to say: 'We are not going to implement the retrospective amendment'. Cairn India is a glaring example.”

DMD is also representing Cairn which faces a $1.6bn Indian tax bill, according to Cairn unfairly for an entirely internal intra-group restructuring. The company has also started international arbitration proceedings with the Indian government.

Ground control

“There are two ways to look at this problem, whether you look at it positively or pessimistically,” says BMR Legal managing partner Mukesh Butani, who acted for Shell in the earlier Bombay high court matter that benefited from the 2014 Vodafone judgment, and for several other companies facing similar tax troubles. “If you look at it positively, I would say that you are dealing with a leadership which is responsive.”

Other than appointing a law commission panel to examine an overhaul of tax laws, Butani particularly lauds the “unprecedented decision” in January of this year not to appeal against the high court order. On the other hand, he added, “a negative way to look at it is there's very little that's changed at the ground level.”

“Transformational changes take time,” he says. “These are deep-rooted administrative reforms you've got to undertake,” spanning deeper issues such as the use of technology, staffing, training and remuneration evaluation.

Other tax lawyers spoken to broadly agree that the basic structure of the tax office is not necessarily conducive to commerce, with high recovery targets for tax officers sometimes encouraging and rewarding creativity in chasing multinationals.

“They think that multinationals are just sitting ducks and they can do whatever, whatever is their shortfall they can go after the multinationals,” complains one tax lawyer, noting that traditionally multinationals have often been less likely to push back. However, it would not be “fair to say that there is an unwarranted level of aggression” from tax officers. “We find them extremely cognisant of the issues we are facing, and we don't know at what level decisions on these large assessments get taken.”

At the end of the day, the Indian system simply does not leave much room for dialogue or negotiation with tax officers, unlike many other jurisdictions. The underlying perception that dealings with the bureaucracy here can be 'managed' off-the-book, makes it very hard for tax officers to exercise discretion when it could sometimes be useful rather than fighting an assessee tooth-and-nail.

Even initiatives such as dispute resolution panel with high-ranking officers aiming to solve tax disputes before they clog up the judicial system are often ineffective, as few bureaucrats are willing to stick their neck out and take decisions for which they might be questioned later.

Tax Sutra editor Arun Giri adds that many areas of tax laws are also very complicated and an adversarial system of assessment and litigation, while helping to ensure that India gets the taxes it is due from multinationals doing business here, will by definition create friction. “The solution really ought to be, a lot more consistency from the tax officers. You have thousands of tax officers, if each of them interprets the same income tax act in a different manner, then that's surely a disservice, and that's what creates litigation.”

“I would not brand our revenue as tex terrorists under any circumstances,” notes Sethna. “They're just doing their job as they must and there are extremely intelligent officers in our revenue system. One respects and one sees the products of their orders.

“Of course we don't agree with them, we believe the law can be interpreted differently, but the assessee ultimately has to deal with going through travails of the litigation.”

The travails of litigation, while often being described as a punishment in their own right, also give rise to the feeling that the courts are slowly but surely untangling the tax mess despite the large values attached to some of the tax claims.

“Big numbers are not going to deter the judiciary, that's what's important,” muses Dutt. “There's a signal to foreign investors, there is a vision of law, a consistency, and the judiciary is not going to be scared of the numbers.

“That's something very positive.”

What's less positive, as in most facets of the judicial system, is the mountain of tax cases that are piling up. “If you look at amounts locked up in litigation, these sums are growing and growing,” says Butani. “The other struggle is that disposals for appeals are not picking up.”

The numbers

As at December 2011, an estimated 65,998 income tax appeals worth Rs 1,83,895 crore ($28bn) were pending at tax appellate tribunals, high courts and the Supreme Court, according to data supplied to Lok Sabha from the then-Minister of State for Finance SS Palanimanickam.

According to Arun Jaitley on 31 July, that number in 2015 stood at 77,448 cases and Rs 1,87,338 crore in dispute. (see table)

And as at November 2012, an additional 76,652 indirect tax appeals at tribunal, high court or apex court level were pending, worth cases worth Rs 95,734 crore.

Rather than blaming terrorists, the blame in clogging up the system must lie squarely at the government's door, as the new road map and reform committee seems to have recognised.

The rates of success of the government in tax litigation and appeals have been abysmally low: between 2008 and 2012, the government lost more than 80% of indirect tax tribunal cases, according to finance ministry data disclosed to the Lok Sabha in 2012.

At the next stage, the high court, the government's success rate in indirect tax cases was slightly better, winning between 28% and 35% of cases, but this nosedived at the final stage, the Supreme Court level, to a success rate of only between 5.5% and 10.6%.

In other words – the government would lose as many as nearly 19 out of 20 indirect tax appeals at the Supreme Court, which is a good indication that many of these legal challenges should never have been filed in the first place.

On the one hand, the most egregious acts of tax terrorism under the previous regime was the short-sighted retrospective tax legislation, which there are very few fans of and which can be easily avoided by not passing any more such laws.

But the grassroots of tax terrorism, systemic and deeply-entrenched, can only be stamp out with bold reform and action to effect change.

The latest steps by the government in that direction are the right ones.

A version of this article was first published in Mint. Mint’s association with LegallyIndia.com will bring you regular insight and analysis of major developments in law and the legal world.

Photo by Maksym Kozlenko