Every business venture is geared towards profitability. However with taxes taking a considerable chunk out of business earnings, tax planning is becoming an integral part of management decision making and overall corporate strategy. If not dealt with expertly, tax risks threaten to demolish years of hard work. Companies today, are therefore addressing risks in every major area of a tax cycle – planning, provision, compliance and controversy/ litigation.

However in the present environment, Tax risk does not merely cover compliances issues. The ambit of Tax risk has broadened to cover its adverse impact on business objectives, corporate policies, loss of reputation, sacrifice of business opportunities and last but not the least – a significant burden in terms of financial and time costs. As such Tax Risk Management is a part of the tax life cycle covering Tax planning, Tax accounting, Tax compliance and Tax controversy.

While tax scenarios the world over present sleepless nights to tax executives, the Indian Tax laws are easily twice as complex. To elucidate, apart from the corporate income tax, the tax payer is charged with surcharge, education cess, secondary and higher education cess, levied on the income of the tax payer. The corporate income tax is required to be deposited in four installments during the year. It involves estimation of income for the whole year by the tax payer.

Moreover the Government’s frequent attempts to simplify the taxation process, have resulted in ambiguity in interpretationsfurther compounding tax risk. Here are some of the instances.

Fringe Benefit Tax

The tax payer is subject to Fringe Benefit Tax (‘FBT’), a levy on the expenditure incurred for several purposes. The statutory provisions for FBT are rather ambiguous. Further the Circular No. 8/2005 issued by the Central Board of Direct Taxes (CBDT), the only piece of legislative position available on FBT, is largely i n contradiction with the purpose of FBT. With lack of clarity, FBT remains an area largely prone to litigation.

Withholding Taxes

The withholding tax regime now requires the tax payer to file monthly compliance statements with the revenue authorities apart from the annual withholding tax compliance statement. Based on the turnover or income limits of the
tax payer, there is a requirement to undertake a tax audit (Revenue Audit).

ITR Forms

The forms for filing the return of income with the revenue are also difficult to comprehend, and have undergone significant changes in each of the past 3 years. Since the adoption of paperless returns, the return form has become the only mode of communication with the revenue authorities. Hence, it has to be filled with utmost caution to avoid misinterpretation.

Costly Litigation

The number of cases selected for scrutiny by the tax department has also increased substantially. The economic slowdown and decreasing tax revenues have also caused the Government to become very aggressive‐ making substantially large and highly debatable additions/disallowances in assessments. This is more pronounced in cases involving international transactions, with associated foreign companies being picked up for intensive Transfer Pricing scrutinies. The high pitched assessments are resulting in huge tax demands which comprise tax, interest and penalty. These assessments invariably lead to a long period of litigation between the tax payer and the tax department, progressing from appeals before the Commissioner, to the Income Tax Appellate Tribunal, followed by the High Court and even Supreme Court. Often Supreme Court judgements are nullified by amending the law. All this merely boils down to a huge amount of time and resources spent on litigating.

Plight of Business Houses

The large scale compliance driven work load often bogs down the accounting staff of business houses. With loads of paper work and the continuous pressure of numerous deadlines, most in‐house accountants have little time to devote to updating themselves with the latest case laws and practical developments in the field of taxation.

In India, the past few months have seen numerous decisions, rendered either in the courts or at the appellate stages. Business houses would require to maintain a team of tax officials to cope with the pressures of compliance as well as knowledge updating on a regular basis. Nevertheless those not in regular touch with case laws, would find it difficult to fully appreciate a particular case law in isolation.

Executives in the corporate inhouse tax function face the challenge of handling a variety of tax issues and meeting the
compliance deadlines with accuracy of data submitted to the Revenue within limited time. This exposes the company to the risk of the quality of the tax function being compromised. This, in effect, adds to the tax risk of the company. In the current turbulent economic environment, in‐house teams face the highly demanding task of bringing more and more cost savings in the tax function and minimising the effective tax rate of the company. This also places the requirement of taking aggressive positions on tax issues. Lack of experience of the in‐house team makes it difficult to assess the risk involved in adopting aggressive positions.

Further, difficulty in finding human resources capable of handling tax matters and training, developing and retaining them also significantly contributes to the tax risk. The increased mobility enjoyed by tax professionals also adds to therisk. Besdes the risk of the in‐house tax function becoming person‐specific rather than process‐specific always exists.

With taxes taking up one‐third of the revenues of a company, the importance of tax function cannot be denied. However the resources employed to manage the tax function are often not commensurate to the costs and risks involved.

Outsourcing the Tax Function

One of the ways of minimising the risk could be to transfer it to a third party service provider. Effective management of tax matters, save the company substantial costs –both direct and latent.The idea is to adopt aproactive approachinsteadof areactive approach, enabling the company to concentrate on its main purpose of doing business without getting bogged down by regulatory compliances.