Budget 2025: Faceless tax appeal needs a facelift

In 2020, GoI launched the Faceless Appeal Scheme (FAS) for appeals pending at the I-T commissioners (appeal) level (CIT(A)), with an aim to introduce automation in tax administration. This was followed by revised FAS in 2021, along with the setting up of National Faceless Appeal Centre (NFAC) to facilitate the conduct of e-appeal proceedings in a centralised manner.

While GoI's intention was commendable, there are several challenges:

Huge pendency

According to CBDT's FY25 Central Action Plan, 5.5 lakh appeals are pending as on April 1, 2024, of which more than 3 lakh were filed before the date. So, close to 3 lakh appeals are pending for disposal for more than two years since filing.

Repeat notices
Taxpayers are repeatedly asked to submit written support for their appeal, even if filed. Despite this, no notice is issued for the appeal hearing. In some cases, despite requests for a virtual hearing, NFAC issues appeal orders without providing an opportunity for a hearing, violating natural justice principles.

Blockage of working capital
Filing appeals before NFAC requires a 20% deposit of the disputed tax demand. Delays in appeal disposal harm taxpayers, particularly MSMEs, by tying up funds and causing financial hardship. This prolonged blockage impacts operations, undermining GoI's efforts to promote 'ease of doing business' and attract investment under 'Make in India'.

Multiple appeals
While GoI has reduced assessment/reassessment timeframes, NFAC's delays in disposing of appeals lead to tax officers making similar additions or disallowances in subsequent years. This escalates tax disputes and increases appeal pendency.

New authority, old problem
Given the delay and backlog of appeals, Finance Act 2023 created a new authority, joint commissioner of I-T (appeals) (JCIT(A)), to reduce the burden of NFAC/ CIT(A). However, even after the incorporation of JCIT(A) in the past year and a half, there has not been much progress on the disposal of pending appeals.

The major hurdle under the scheme is the absence of any specific time limit provided under the statute. Even though Section 250 of I-T Act provides for a 'recommendatory' time limit to hear and decide appeals (one year from the end of FY in which the appeal is filed), a specific and mandatory time limit should be introduced.

Under I-T Act, there is a specific time limit of nine months for the dispute resolution panel (DRP) to pass its order on appeal filed by eligible taxpayers against draft assessment orders. DRP mechanism was introduced as an alternate route to fast-track the resolution of tax disputes of foreign companies and Indian companies with transfer pricing-related disputes.

In the interest of fairness to taxpayers and to promote ease of doing business, GoI must take note of this situation and propose an amendment in the budget, stipulating a specific time limit within which NFAC/CIT(A) must hear and dispose of appeals - say, 15 months from the end of the month in which the appeal is filed.

Certainty and time-bound disposal of appeals will go a long way in inspiring taxpayers' confidence.