Tax litigation delays hindering India’s economic potential, says Dinesh Kanabar

Dinesh Kanabar, CEO of Dhruva Advisors, believes that there is an urgent need for reforms to expedite tax dispute resolutions in India.

Speaking to CNBC-TV18, Kanabar highlighted that currently, it takes up to 15 years to settle tax disputes, creating prolonged uncertainty for taxpayers and financial burdens for the government.

With high expectations from Budget 2025, Kanabar underscored the importance of simplifying tax laws to enhance India’s ease of doing business—an area historically hindered by tax-related challenges. He noted the ambiguities in current tax regulations, especially in mergers and acquisitions, often lead to unintended interpretations and disputes.

However, recent signs of government openness to feedback and proactive clarifications provide hope for meaningful reforms, he said.

As India’s global economic role grows, he advocated for predictable and transparent tax policies to attract investments and foster sustainable growth.

Edited excerpts from the interview.

Q: An overhaul of direct taxes has been promised by the finance minister. So what are you now anticipating in terms of the next big wave of changes starting, of course, with the budget? We’re on the cusp of consultations, and the Budget, of course, will be announced on February 1. What’s the expectation?

Kanabar:

There is a huge amount of expectation, and rightly so. If you step back and reflect as to what are those two or three things which can really get India into that ease of being business mode? The World Bank index of ease of doing business has been abolished. It is no longer being published annually. But what pushed India down was really taxes and nothing else. And the question is, what can the government do? First and foremost, how do we put litigation behind us? If I can make two points at this stage, on litigation, we have a situation where an appeal against an assessing officer’s order today takes almost five years to reach the first level, at which point of time the taxpayer has to pay 20% of taxes which the taxpayer believes is not payable and the revenue is losing out on that 80%.

And then, if everything gets litigated all the way to the Supreme Court, if the stakes involved are more than ₹5 crore, then we are looking at a 15-year journey before you can find a resolution. Now, I know that this is not peculiar only to taxes, but the reality of the matter is that you cannot have a situation where litigation starts today and you see a resolution after 15 years and then, at times, after 15 years, you have a retrospective amendment and rollback of that retrospective amendment. Mercifully, we have gone out of that stage of retrospective amendment, but 15 years is too long a time.

So what is that mechanism that the government can put in place to help a speedier resolution of disputes? And there’s been an active consultation. We have had several discussions with the finance minister, with the revenue secretary. Lots of thoughts have been provided, and I’m hoping that some of these are really put into place.

Q: The arbitration mechanism is likely to be something that the government is considering. Your take on that?

Kanabar: I don’t know whether it will happen. The reason I’m a little bit sceptical is that when the OECD recommended global arbitration, India came back to say that taxes are a sovereign right and we cannot cede our right to a third country. That obviously was an arbitration where any Indian dispute went to a third country and the government rightly does not believe that arbitration is a right course. Here, of course, we are looking at arbitration within the country. In fact, rather than an arbitration, I would call it a settlement mechanism.

And I can give you’re very concrete example, we have chatted a lot on the Vodafone controversy in India. Around the same time when the Vodafone controversy happened in India, there was a similar controversy in the UK with regards to an acquisition made in Europe and there was a demand raise of about 4 billion pounds, and it was settled for 1.5 billion pounds where both sides came back to say we don’t know where this is going, how long will it take, what cost will it entail and why don’t we settle it down? That’s the most pragmatic way and we have actually tabled some of the papers to the government on how we could implement it. Also, in the direct tax code which was drafted earlier, there are several mechanisms which are provided and it will be very interesting to see where this goes.

Q: On those other aspects that you brought up, both cross-border as well as M&A, what’s the expectation? Given the fact that India’s role in relevance in this new geopolitical framework is also significantly changing, what are the expectations over the next few years?

Kanabar: On the M&A side, really, the way the law is drafted probably leaves a lot to interpretation. And the funny part is sometimes when you go back to the government and say that here is an interpretation of the law, is this what you intend and the answer is no. Could you please clarify? And those clarifications have not been forthcoming. But my recent interactions gave me a lot of hope that we are indeed being heard.

I can give you one very simple example without making it complicated. If you’re looking at a listed security and you acquire, say 30% of an unlisted company, then you are obliged to make an open offer, and that open offer is open for a period of time and only after the open offer is closed can you consummate the transaction. Now, between the point of time that you transacted, buy the 30%, and you actually consummate the transaction, a period of 4-5 months has gone by, by which point of time the share price has moved very considerably. A literal interpretation of the law would make a person who has acquired the shares liable to tax if the price has moved up in the meantime. Now, is that the intention? The answer is no. This is an anti-abuse law. So there are a lot of clarifications which are required. These are not disputes. This is not where a taxpayer is seeking a concession. What we are seeking is for things can be clarified so that we don’t have litigation.