New IT Act: Experts Warn of Increased Tax Disputes Due to Granular Data Reporting
New Income Tax Act Brings Data-Driven Reporting, Potential for Increased Litigation
The recently introduced Income Tax Act has placed a significant emphasis on more "data-driven" reporting by companies, which is likely to lead to increased tax disputes in the short-to-medium term, according to tax consultants. This shift is aimed at improving the quality and usability of data available to the tax administration, ultimately resulting in higher tax collections.
Government officials believe that the expanded disclosure framework will plug gaps and improve tax collections. The new Act, read with the Income Tax Rules, has introduced a significantly expanded disclosure framework. Vaibhav Luthra, Tax Partner at EY India, notes that the reduction in sections, rules, and forms may seem like a simplification, but a critical reading reveals the opposite for data reporting. Fewer forms do not mean less data; it means more data consolidated into each form.
The New Tax Audit Report (TAR)
The new tax audit report contains segment-wise clauses with a far more detailed reporting structure. The TAR includes:
| Feature | Description |
|---|---|
| Secondary adjustment | A method of pricing the transaction with a foreign entity to calculate the appropriate tax to be paid by the Indian entity |
| Interest limitation | A bar on the interest that Indian entities pay to their foreign affiliates (on the loan they take) to prevent over-claiming of deductions |
| Foreign remittance | Every foreign remittance, whether or not TDS was deducted, must be captured and cross-referenced in TAR |
| VDA transactions | Reporting of information on profits and gains from the transfer of VDAs, breakdown of VDA transactions including purchase date, cost, sale date, and consideration, and confirmation that losses from VDAs have not been set off against other income and that certain deductions have not been claimed against VDA income |
The expanded reporting framework is likely to increase litigation in the near term, say consultants. Ashish Mehta, Partner at Khaitan & Co, notes that greater data granularity will invite greater scrutiny by the tax department, particularly in cases of exempt foreign tax payments, crypto asset transactions, etc. This combination is expected to lead to issuance of more notices to verify transactions.
As data becomes more detailed and machine-readable, differences between the audit report, TDS returns, and the income tax returns are likely to be automatically flagged, potentially resulting in adjustments and increased scrutiny. Litigation may spike in the initial years simply because new law typically generates new disputes and open areas for interpretation, according to EY India's Luthra.
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Government officials, however, say the intent is not to overburden taxpayers or auditors, but to improve the quality and usability of the data available to the tax administration. They believe that a more structured reporting system will lead to higher scrutiny, particularly in areas where data mismatches or inconsistencies emerge. However, this does not automatically mean an increase in tax disputes in the long run.
Over time, the expectation is that this data-driven approach will actually improve voluntary compliance. Taxpayers are likely to be more cautious in their reporting, which should lead to better tax realisation and reduce the need for enforcement, according to government officials.
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