In 2011 the Government of Bangladesh inserted specific provisions [1] in the Income Tax Ordinance 1984 (“the ITO”) dealing with alternative dispute resolution (ADR) methods for resolving tax disputes between the taxpayer and the National Board of Revenue (“the NBR”). This addition is certainly welcomed by the stakeholders of the Bangladeshi business world. In the long and complex world of tax dispute resolution process in Bangladesh, there are an estimated 16,000 backlog cases.[2] It is hoped that the new ADR process in the ITO would help to reduce this huge backlog of cases slowly.
On 05.03.2012, the NBR issued Income Tax Alternative Dispute Resolution (Procedure) Rules 2012 (“the Tax ADR Rules”). The Tax ADR Rules lay down the procedure to be followed by the taxpayer and the NBR in resolving their tax disputes. Rule 1(2) of the Tax ADR Rules, with reference to section 152F(2) of the ITO, allows the NBR, by notification in the official gazette, to specify the classes of assessees eligible for the ADR. By notification dated 01.07.2012,[3] the NBR made all the taxpayers in Bangladesh eligible for ADR.
Section 152J of the ITO sets out the eligibility of the assessee for applying for the ADR – namely – (a) the assessee has submitted the return of income for the relevant year(s) or (b) the assessee has paid tax payable under section 74 of the ITO. This ADR eligibility requirement is also stipulated in rule 11(2) of the Tax ADR Rules. Thus, if the requirements of eligibility to apply for the ADR under section 152J of the ITO are met, there seems to be no other way to reject or refuse an assessee’s application to submit to ADR under the ITO.
Now, let us consider a hypothetical case. X1 Company is an associate company of X Group of Companies. X2 Company and X3 Company are shareholders of X1 Company. X1 Company claims that the determination of dividend by the Deputy Commissioner of Taxes (DCT) for advance of loan made by X1 Company to X4 Company, which is another member of X Group, is not in accordance with section 2(26) of the ITO. In making this claim, X1 Company and its advisers are challenging the NBR’s interpretation of the law. There is no disagreement regarding the facts of the dispute and the case turns purely on the interpretation of the relevant legislation. Now, X1 Company does not intend to appeal against the order of the DCT. Under rule 5(1) of the Tax ADR Rules, if no such appeal is filed against the DCT’s order, then the application for ADR shall be filed before the appellate forum in which the appeal against the DCT order would have been lodged. X1 Company has submitted the return of income for the relevant year and has also paid tax payable under section 74 of the ITO.
When X1 Company files its application for ADR, the NBR shall appoint a facilitator, inform X1 Company and the concerned tax commissioner about such appointment and forward X1 Company’s ADR application to the said facilitator under rule 6 of the Tax ADR Rules. The appointed facilitator, upon receipt of X1 Company’s ADR application from the NBR, shall inquire from the DCT as to whether the requirements of eligibility (under section 152J of the ITO) for ADR have been satisfied. Under rule 11(3) of the Tax ADR Rules, if the DCT does not respond to such queries of the facilitator, then the ADR eligibility requirements shall be deemed to have been satisfied.
Let us assume that the NBR does not wish to participate in the ADR with X1 Company notwithstanding that X1 Company fulfills the ADR eligibility requirement of section 152J of the ITO. The NBR thinks that the challenge made by X1 Company against the DCT’s order gives rise to interpretation of law and for public interest, it is appropriate to have judicial clarification of the issue. Can the NBR resist the ADR on this ground? Is there any provision in the Tax ADR Rules that allows the NBR to invoke its decision not to participate in the ADR with X1 Company on this ground?
The Tax ADR Rules is silent about the circumstances in which it would be inappropriate for the NBR to participate in the ADR process. The effect of this can lead to some uncomfortable position for the NBR. In our example, if the NBR decides not to participate in the ADR process with X1 Company on the ground that the legal challenge of X1 Company should have a judicial clarification for public interest, then X1 Company could argue that such a decision by the NBR is in violation of section 152J of the ITO because X1 Company, having fulfilled the ADR eligibility requirement of section 152J, has a right to require the NBR to participate in the ADR process. X1 Company may file a judicial review in this regard to compel the NBR to participate in the ADR process. On the other hand, if the NBR participates in the ADR process with X1 Company, the parties would privately settle on an issue better suited for judicial clarification so that the precedent gained could be applied to other cases. Further, the parties could disagree on the exact legal interpretation, in which case the ADR process may be unsuccessful and the NBR may find itself litigating on the same issue before the tax appellate and higher judicial forum, thereby losing valuable time and incurring additional cost in the ADR process.
The Tax ADR Rules and the relevant incorporation in the ITO on the ADR are certainly positive steps towards reducing tax disputes between the taxpayer and the revenue. However, the law is unclear and does not give the NBR a mechanism by which it can decide on the appropriateness of a case for the ADR process. Therefore, suitable amendment should be made to the relevant provisions of the ITO incorporating specific circumstances in which the NBR could decide whether or not to participate in the ADR process.
Written by Junayed Chowdhury, Managing Partner
† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.
[1] Sections 152F-152S of the ITO
[2] See https://www.wbginvestmentclimate.org/advisor y-services/regulatory-simplification/alternativedispute-resolution/bangladeshi-businesses-trymediation-to-resolve-their-tax-disputes.cfm
[3] SRO No. 250-Ain/Ayekor/2012
[1] Sections 152F-152S of the ITO
[2] See https://www.wbginvestmentclimate.org/advisor y-services/regulatory-simplification/alternativedispute-resolution/bangladeshi-businesses-trymediation-to-resolve-their-tax-disputes.cfm
[3] SRO No. 250-Ain/Ayekor/2012
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