Three key levers to build trust with stakeholders

Tax disclosures – earlier aimed mainly at investors – now need to speak to a larger audience and go beyond reporting the effective rate of corporate income tax.¹⁷ Since tax-related data is measurable and lends itself to analysis and comparison, transparent disclosure of key tax metrics not only enhances the credibility of the company, but also validates its broader commitment to ESG values.

At a global level, countries are benefiting from implementing tax transparency and exchange of information (EOI) standards. The global meltdown of 2008 and consequent need to augment domestic resources led to countries agreeing to develop efficient information exchange mechanisms with a view to prevent tax base erosion. The Multilateral Convention on Mutual Administrative Assistance and Information Exchange (2012) developed by the OECD and propagated by the Global Forum required countries to provide tax-related information without taking recourse to bank secrecy or any other country practice that allowed opacity.

Corresponding changes were agreed to in the OECD Model Convention as well as in the UN Model Convention to strengthen the Article on exchange of information. A new instrument termed as a limited-purpose bilateral Tax Information Exchange Agreement was devised to help countries to reach out to jurisdictions with whom they did not wish to have a comprehensive tax treaty.

Automatic exchange of financial accounts information was successfully implemented globally through the Foreign Accounts Tax Compliance Act (FATCA) of the United States and the Common Reporting Standard (CRS) devised by the OECD. India was a major supporter, participant and early adopter of all these initiatives and now has a formal exchange of information relationship with about 135 countries. A large number of developing countries, including offshore financial centres and small island states are active participants in this information explosion, with very good outcomes in terms of domestic revenue mobilisation.

Since 2009, Asian members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) have identified at least EUR 20.1 billion in additional revenue – tax, interest and penalties – owing to exchange of information on request (EOIR) and automatic exchange of financial account information (AEOI), including voluntary disclosure programmes and offshore tax investigations.¹⁸

While these efforts were aimed at facilitating cooperation among tax authorities, the G20/OECD Base Erosion and Profit Shifting (BEPS) project introduced country-by-country reporting (CbCR) in 2015 by multinational corporations to tackle issues related to tax avoidance and profit-shifting. Nearly 100 countries are currently implementing the CbCR, which is one of the minimum standards agreed to by countries in the BEPS project and requires MNEs to disclose the amount of revenue, profit before income tax, and income tax paid and accrued for each jurisdiction in which they operate.¹⁹ They also need to provide details on their stated capital, tangible assets, number of employees and retained earnings in each tax jurisdiction.²⁰

Further, Action 12 of the BEPS project provided guidance on mandatory disclosure rules under which the existence of certain hallmarks in an arrangement or transaction would require prior disclosure to tax authorities. Mandatory disclosures are meant to provide tax administration advance information on potentially abusive or aggressive tax planning schemes and to identify users of such schemes. Taxpayers, too, would be wary of entering into certain schemes if they need to be disclosed.²¹

Countries like the United Kingdom, Canada, United States and Portugal already follow disclosure regimes for identification of tax planning, avoidance and tax abusive schemes.²² India may also do so in the near future. These regimes are expected to not only help either side in reviewing and preparing for the schemes sought to be implemented but also foster greater mutual understanding and trust between taxpayers and tax administrations.

Moreover, with the emergence of new and highly digitalised business models, countries are seeking more coordinated and uniform measures to enhance transparency. For instance, the OECD along with G20 countries has developed the Crypto Asset Reporting Framework, a dedicated global tax transparency framework which provides for the automatic exchange of tax information on transactions in crypto assets.²³

Businesses attach great importance to tax certainty and reducing disputes. Thus, enhanced tax transparency and increasing disclosure requirements must be accompanied by concrete measures to enhance tax certainty. Tax certainty is a key focus area of tax administrations to ensure dispute avoidance as well as resolution of disputes, be it in direct taxes or in indirect taxes. This is reflected in the OECD declaring 14 November as Tax Certainty Day to emphasise the necessity of tax certainty for all stakeholders.

When it comes to direct taxes, India has made substantial progress through Alternate Dispute Resolution mechanisms. But in case of indirect taxes, especially the Goods and Services Tax (GST) which was rolled out in 2017, there is a larger scope for improvement in tax certainty, both in terms of statutory as well as administrative measures. In the present GST landscape, a large number of notices have been served by the Central and State Tax authorities to taxpayers across the country, especially to beat the extended limitation period for the years 2017–18 and 2018–19 for non-fraud cases. A substantial number of these notices were generated through data analytics and automated processes triggered by mismatches beyond a particular threshold that were detected in the GST returns filed by the taxpayers. These notices have led to numerous disputes which have added to the existing heavy litigation burden on taxpayers.

Advance Rulings are an important tool for building trust with taxpayers by imparting both stability and certainty in their tax positions. However, such dispute avoidance mechanisms in GST have not led to the desired levels of tax certainty. One of the main drawbacks is the lack of a centralised Appellate Authority for Advance Rulings (AAARs) which can resolve the often contradictory or conflicting Advance Rulings in different states on the same issue. The GST Council had acknowledged that the Authorities for Advance Ruling (AARs) in different states were giving conflicting decisions on similar issues involving similar facts, causing confusion among tax officials and taxpayers. It had given an in-principle nod to set up the umbrella body in December 2018,²⁴ but the recommendations are yet to be implemented.

Furthermore, the dispute resolution process in GST is currently rather truncated and delayed as the establishment of the GST Appellate Tribunals (GSTAT) is still some time away. Under the GST framework, Appellate Tribunals are meant to hear appeals against the orders passed by the Appellate Authority under the Central and State GST laws.²⁵ Currently, taxpayers are often forced to approach the High Courts in cases where the authorities try to recover the disputed amount even before the taxpayer has exhausted the appellate remedy at the tribunal level. The number of appeals under central GST laws alone in High Courts stood at about 15,000 in October 2023.²⁶ The urgency and necessity to operationalise the GSTAT cannot be overemphasised in the context of certainty in the dispute resolution process. The government has said that Appellate Tribunals are likely to begin operations around July or August 2024.²⁷

Simultaneous or parallel investigations by different GST authorities on the same taxpayer for the same issue is a burning problem that results in avoidable tax uncertainty, business disruptions and a huge compliance burden on the taxpayer. This needs urgent attention of the GST Council as streamlining the investigation process will lead to greater trust and enhanced compliance.

While there is much to be expected from the tax administration for ensuring timely and effective resolution of tax disputes, particularly in respect of GST, businesses must also gear up and make conscious efforts towards minimising tax litigation, including: