BUDGET From a Litigant's Perspective

Looking at the Pros and Cons of the Union Budget & Finance Bill, 2014

Every budget is a time of great expectations for the industry. It is generally expected that the annual exercise would further the transparency and uniformity and add to the ease of doing business in the country.

It is a known fact that our legal system functions at a snail's pace. However, with companies increasingly relying on their ability to innovate to stay relevant to consumers, the legal system too is expected to perk up and render quick justice.

Much of this can be achieved by administrative initiatives like setting up more benches of Tribunals, ensuring that there are no vacancies in the existing benches, enforcing the mandated timelines in statutes for disposal of appeals pending before Commissioner (Appeals) and CESTAT (Customs, Excise and Service Tax Appellate Tribunal).

The Union Budget and the Finance Bill (No. 2), 2014 has introduced provisions for mandatory pre-deposit, if a manufacturer or service provider appeals against an adverse order passed against it. Earlier, an assessee could have filed an appeal against an adverse order without making any pre-deposit of the confirmed demand by making an application for waiver of pre-deposit of the confirmed tax/duty, penalty and interest.

However, this budget has effectively introduced that no appeal shall lie unless a minimum percent of the confirmed duty is deposited to the Central Government.

In case of appeals to the Commissioner (Appeals), it is required to pay 7.5% of the disputed tax or 7.5% of penalty where only penalty is imposed. If the assesseefiles the second appeal against the order of the Commissioner (Appeals), the requirement is that 10% of the disputed tax or penalty should be paid before this second appeal can be entertained by CESTAT.

Now, it is accepted that such a provision is within the powers of the Central Government to enact and cannot be held unconstitutional. However, such provisions by itself have a negative impact. As litigation in the country today has become a luxury, no one wants to litigate till it is absolutely necessary. The cost of litigation is prohibitive. It is also a fact that the tax department loses more than 70% of the cases that are filed in CESTAT and other higher forums. That being the case, the requirement of mandatory pre-deposit is not fair. Such provision has made things more difficult for tax payers as demands are raised arbitrarily in many cases based on internal audit objections or CERA objections. It is common experience that the officers concerned are hesitant to stick their neck out and drop such demands at the adjudication stage or the first appellate stage. Such demands get dropped at the second appellate stage before the CESTAT which could easily be 3-4 years from the time appeal is filed before the first appellate authority requiring pre-deposit of 7.5%. Also, it is a known fact that once a dispute is raised, protective demands are raised blindly for subsequent periods till the dispute gets resolved at the CESTAT level which means cash of the company is stuck in litigation which could have been beneficially utilised to further the business. If the requirement of mandatory pre-deposit has to be introduced, then there should be a law that protective demands raised for the subsequent period be put in the call book and should be adjudicated once the initial dispute has attained finality.

This requirement is all the more important where the disputed issues are pure questions of law. In our country, more than the legislative initiative, many more administrative initiatives need to be enforced such as the time limits provided in excise, service tax and customs law for disposal of the show cause notice and first and second appeals. There is a need to have more benches of CESTAT; the vacancies in the existing benches need to be filled at the earliest. It is surprising to note that the Orissa High Court was shut for more than a month because the bar association opposed establishment of new high court regional benches in the state. It is a fact that many assessees do not exercise their right of appeal because the location of appellate forum is far from their place of business and thus, they function at the mercy of the local tax authorities.

Also, another provision that the present Finance Bill has introduced is the enhancement of rate of interest which will have to be deposited on delayed payment of service tax w.e.f. 1st October, 2014. The rate of interest on delayed payment of service tax is 18% per annum for delay up to six months, 24% per annum for delay beyond six months and up to one year and 30% per annum for delay beyond one year. The principle behind recovering interest on delayed payment is compensatory in nature. However, such rate of interest up to 30% per annum is penal in nature. The harshness of such provisions is all the more severe considering that many a time, the delay in payments can be bona fide, out of ignorance of law, bona fide disputes involving interpretation of law which takes a long time to settle before the appellate forums. So, indirectly such prohibitive interest rates in a sense are frustrating the right to appeal of the assessee.

One positive in the present Finance Bill is not introducing new provision but omission of the existing provision w.r.t. to the requirement of extension of stay orders granted by the appellate forums in Section 35C of the Central Excise Act, 1944. Stay granted by CESTAT against a confirmed demand in appeal is valid only for 180 days and on the expiry of the same, appellants are required to move applications for extension of stay beyond the original 180 days. However, the Hon'ble Tribunal had been granting stay of demand till the disposal of appeal pending before it. The legislature had thought it fit to delete first, second and third proviso to Section 35C (2A) of the Central Excise Act, 1944. This should free time for the Hon'ble CESTAT, where an application for extension of stay in the pending appeals was occupying considerable time and attention of the already overburdened benches of Hon'ble CESTAT.

One area where principally every stakeholder agrees is the changeover to the goods and services tax regime (GST). We have been hearing now for so many years as to how if GST is introduced, it will increase GDP of the country and will result in great tax mobilisation for both the States and the Union. However, the bureaucracy and the political class have proved over time that it has lost touch with the expectations of the populace. Ours is a populace where majority is of the age of around 25 years and this young populace wants economic growth in which it can find jobs for itself and fulfil its aspirations. GST is one initiative which should have been implemented at least two years back but has not seen the light of the day on excuses of requirements of constitutional amendments as the state cannot tax service and the union cannot tax sale of goods.

There is a need for uniformity in tax laws in the country which makes the interstate movement of goods free in the real sense, so that companies set up supply chain systems to bring in real efficiencies. As on date, many procurement, locations of storage and CFA, depot decisions are influenced more by the Central Sales Tax laws and the local VAT laws as the revenue neutral rate is 13.5% in most states which forms a significant cost of the transaction value. Companies have to struggle with the multitude state VAT laws, rules, notifications, Central Sales Tax Act and come up with supply chain structures.

A local Sales Tax can mean paying 13.5% VAT. However, if the same goods are sold as an interstate sale, it attracts 2% CST. Once, we make the sales tax laws in the country destinations-based and allow the purchasing dealers input tax credit of the taxes paid irrespective of the state from where the goods are originating, the administration of tax will become simpler. Everyone knows that in our economy, a large proportion of the economic activities are outside the tax net. So, the need of the hour is to gear up the commercial tax department to bring the large non-tax paying business setups into the tax net. No one wants to evade taxes.

Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.