INSIGHTS INTO THE LOW SUCCESS RATE OF THE INDIAN INCOME TAX DEPARTMENT IN LITIGATION: A GROUNDED THEORY APPROACH

AbstractThe Economic Survey of India of 2017-18 and data published by the Organisation for Economic Co operation and Development (OECD) show that the Indian Income Tax Department (ITD) loses more than two thirds of the income tax appeals litigated before the Income Tax Appellate Tribunal (ITAT), the High Courts, and the Supreme Court in India. However, reasons for the ITD’s suboptimal performance, which may adversely impact revenue collection and, thus, the ability of the Indian Government to fund public services, are unknown.

To understand reasons behind the low success rate of the ITD, I reviewed High Court and Supreme Court cases corresponding to income tax assessment years 2015-20 and 2010-20 respectively, interviewed 34 tax professionals, and analysed 123 responses from an online survey of tax professionals. I used grounded theory methodology to analyse the case law and interview and survey data, and developed, through the analysis, a theoretical model of the Indian bureaucratic culture to explain the low success rate of the ITD in income tax litigation.

My research shows that Indian bureaucratic culture, which is characterised by poor accountability, ineffective performance management, and a trust deficit, contributes to the ITD’s low success rate in income tax litigation before the ITAT and the courts. Inadequate accountability and ineffective performance management in turn lead to the poor quality of income tax assessments and the ITD filing meritless or frivolous appeals. Other factors leading to the substandard quality of income tax assessments and appeals include unreasonable revenue targets imposed on income tax officials, inadequate supervision of officials with regard to their assessment of tax, and income tax officials disregarding precedent in the process of making assessments and filing appeals. The inferior quality of income tax assessments made and appeals filed by the ITD results in the low success rate of the ITD in income tax litigation. In addition, poor accountability and ineffective performance management perpetuate inadequate representation of the ITD before the appellate fora, adding to the ITD’s losses in litigation.

Further, trust deficit, which underlies the Indian bureaucratic culture, fosters a mindset of income tax officials that reflects prejudice against taxpayers and a fear of audit and investigation. Trust deficit also leads to officials being revenue-minded and abdicating their responsibility to be objective and fair. Trust deficit adds to the poor quality of assessments made and appeals filed by the ITD, compounding the ITD’s losses in income tax litigation.

By explaining reasons for the low success rate of the ITD in income tax litigation as well as the poor quality of income tax assessments made and income tax appeals filed by the ITD, the theory of Indian bureaucratic culture provides insights for reforming Indian tax administration. Further, the use of grounded theory methodology to develop a theory based on multiple sources of empirical evidence is a unique contribution to the field of taxation and to the literature on tax administration, especially, to the literature on Indian tax administration.