Tax Experts Propose Reforms for Quicker Disposal of Pending Appeals and Reduced Compliance Burden

As part of the ongoing review of the Income Tax Act, 1961, tax experts are calling for significant reforms, including faster resolution of pending cases at the Commissioner of Income Tax (Appeals) level, reduction of compliance burdens on MSMEs, and greater flexibility for taxpayers to settle select litigation cases.

The Ministry of Finance recently issued a notification outlining its direct tax policy focus for the medium term, which includes phasing out tax incentives and rationalizing tax rates. The government has solicited industry recommendations on reducing compliance requirements, ensuring tax certainty, and minimizing litigation.

Currently, over 580,000 cases are pending with the Commissioner of Income Tax (Appeals), a number that has risen from 530,000 at the start of 2024. Experts highlight delays in hearings and orders, with some cases languishing for more than six years. To address this, tax professionals suggest implementing a phased action plan to clear these cases within the next 1-2 years and increasing the number of adjudicating commissioners if needed.

Another proposal involves setting time-bound disposal of appeals under the faceless appeal regime, especially to ease the burden on MSMEs. These enterprises are particularly affected by tax demands that hamper working capital during the appeal process.

Regarding MSME payments, tax experts urge the Central Board of Direct Taxes (CBDT) to clarify the implications of the 45-day payment rule under Section 43B(h) of the Finance Act 2023, which denies tax deductions if payments to micro and small enterprises aren’t made within the prescribed period. This rule has created a substantial compliance burden for larger businesses.

Additionally, experts suggest amendments to Section 270AA, allowing taxpayers the flexibility to settle disputes for select orders instead of being forced to contest or settle all orders in dispute.

Other recommendations include extending the carry-forward of tax losses to all sectors, removing the current limitation that restricts this benefit to industrial undertakings under Section 72A. Expanding this provision to the service sector would provide much-needed relief and greater flexibility for businesses undergoing amalgamation.

These proposals, if implemented, could significantly ease the compliance and litigation burden on taxpayers and enhance efficiency in the tax administration process.