Building on last year’s clearance of 172K cases, I-T department is pushing for faster appeal disposals, penalty reforms and system-driven processes to curb litigation and boost tax certainty.
Illustration: Dominic Xavier/Rediff
Key Points
- The I-T department aims to dispose of over 2 lakh cases in FY26, up from 1.72 lakh last year.
- 1.65 lakh cases already cleared by January 20, indicating faster disposal momentum.
- 5.4 lakh appeals were pending in FY25, involving disputed tax of ₹16.75 trillion.
- 50% penalty waiver if under-reporting is accepted, tax and interest paid, and no appeal filed.
- Misreporting penalty cut from 200% to 100%, positioned as additional tax rather than punishment.
- 1.22 crore updated returns filed, allowing corrections up to four years with graded fees.
- Unified 15.5% safe-harbour margin introduced for IT, ITeS, software, and KPO after analysing 6,000 companies.
- Safe-harbour turnover threshold raised to ₹2,000 crore, leaving only 90 companies outside the regime.
- Foreign cloud firms won’t face global income taxation just for locating data centres in India.
Record push to clear tax appeals
The income tax (I-T) department has set a target to dispose of over 2 lakh Commissioner of Income Tax (Appeals), or CIT(A), cases this financial year (FY26), building on last year’s disposal of 1.72 lakh cases, with a significant number already cleared by January, a senior finance ministry official said in a post-Budget interaction with Business Standard.
As of January 20, the department has already disposed of 1.65 lakh CIT(A) cases, the official added.
In FY25, nearly 5.4 lakh appeal cases were pending, involving a disputed tax demand of about ₹16.75 trillion.
Penalties simplified, litigation cut
On penalties, the official explained that assessment and penalty proceedings will now be combined into a single order, eliminating separate litigations that earlier accounted for 1 lakh to 1.5 lakh cases out of 5.4 lakh cases.
If taxpayers accept under-reporting, pay tax plus interest, and forego appeal, 50 per cent penalty is waived.
For misreporting cases, the penalty has been reduced from 200 per cent to 100 per cent, positioned more as additional tax.
“If you agree and pay, the matter closes without branding the taxpayer as penalised,” the official said, adding that appeals and prosecution remain options only if contested.
Updated returns drive voluntary compliance
Another major compliance booster is the updated return facility, which the official described as “very successful”.
Around 1.22 crore updated returns have been filed since its expansion, allowing taxpayers to voluntarily correct discrepancies up to four years with graded fees, he said.
Kindly note this illustration was generated using ChatGPT.
Safe-harbour rules widened for IT sector
The recent expansion of safe-harbour rules for the information technology (IT) and IT-enabled services (ITeS) sector will provide tax certainty to virtually all players, with only around 90 companies falling outside the regime due to higher turnover above ₹2,000 crore, the official disclosed.
He revealed that the unified safe-harbour margin of 15.5 per cent — applicable across IT services, IT-enabled services, software development, and knowledge process outsourcing (KPO) — was arrived at after analysing records of nearly 6,000 companies.
These overlapping sectors have now been brought under a single umbrella to eliminate impractical distinctions.
Of the approximately 44,000 companies engaged in cross-border related-party transactions, about 30 per cent belong to the IT/ITeS space.
With the eligibility threshold raised to ₹2,000 crore, the vast majority now qualify for safe-harbour benefits.
“Only around 90 companies fall outside. Of these, 60 already have advance pricing agreements (APAs). The remaining 30 can opt for APAs, which we aim to complete within two years,” the official said.
System-driven approvals remove discretion
Crucially, safe-harbour approvals will be entirely system-driven, based on fixed parameters, removing any scope for discretion.
“This is not tax relief. It is certainty of taxation. And certainty drives investment,” the official emphasised, underscoring the move as a boost for India’s position as a global tech services hub.
“The reforms address longstanding industry demands for predictability in transfer pricing, reducing litigation risks and encouraging foreign investment in the sector,” he said.
Clarifications, not retrospective tax
Certain amendments perceived as retrospective are clarifications to address technical interpretations and protect revenue interests, without introducing new positions, the official clarified.
These involve two key fixes applied from past dates: One, clearing up the 60-day deadline for transfer pricing officers to finish their work, and the other ensuring tax orders are not invalidated over minor errors in mentioning the computer-generated Document Identification Number (DIN), as long as the number is referred to in some way.
Cloud investments get tax certainty
On attracting data centre investments, the official reiterated that foreign cloud providers face no risk of global income taxation in India merely for locating facilities here, with domestic revenue appropriately taxed through local entities.
Feature Presentation: Rajesh Alva/Rediff
