Opinion: Economic Survey, Sunny Deol and Tax litigation in India

An economic survey document is the last place one would expect a film star to feature in. But Chapter 9 in Volume One of the Economic Survey of India (ESI 2018), which was tabled in the Parliament on Monday, introduces the reader to popular actor Sunny Deol and his enduring outburst in one of the films: “Tarikh par tarikh, tarikh par tarikh…”. The ESI called those lines an “iconic scream” and added that Sunny Deol was “Bollywood’s counterpart to Shakespeare”— the bard had expressed a similar sentiment in a less dramatic fashion in Hamlet. Needless to say, the actor would be as amazed by this analogy as by having found mention in the survey paper.

But Chapter 9 is no treatise on cinema or literature. Lest people get the wrong ideas, it is titled, “Ease of Doing Business’ Next Frontier: Timely Justice”. The novelty of ESI 2018 lies, therefore, not just in the evocation of Sunny Deol but also in the inclusion of a section on the role of the judiciary in contributing to a conducive business environment in the country.

The survey strongly maintains that the “next frontier on the ease of doing business is addressing pendency, delays and backlogs in the appellate and judicial arenas”. The reference is to the various cases that have piled up in courts across the country which have to do with economic development in the direct sense.

The ESI 2018 has flagged an important concern. While the issue has often been a subject of discussion, perhaps not enough attention has been paid to the contribution that timely judicial rulings can make to securing a robust business environment and enhancing economic growth. The matter has gained some traction with the latest World Bank ranking on Doing Business, where India jumped 30 places to enter the top 100 club. This is no doubt a big achievement, but there’s still a long road ahead.

It’s not surprising that the parameters where the country still lags behind are largely those where litigations are the most common and timely resolutions have been equally most uncommon. These include contract enforcement cases in particular.

The jump in the World Bank ranking has been due to many decisions the Government has taken over the last about four years. India has leaped 53 places in the taxation index and 33 spots in the insolvency parameter. The passage of the Insolvency and Bankruptcy Code has contributed to the achievement, just as more transparent tax laws and their easier implementation have. Similarly, the country scored high on protecting the interests of minority investors.

But a globalised business environment demands more, and the biggest factor that drives progress in such an environment is the sanctity of contracts. In itself, with deals being increasingly struck between Indian and foreign entities and between various Indian agencies and the Government, the area of contract enforcement has become more complicated than ever. The need to thus protect the contract system has also got more challenging. When a contract runs into trouble — and worse, litigation — every economic activity connected with it comes to a halt. We see this unwelcome phenomenon especially in the infrastructure sector.

And so, the ESI 2018 quotes a study to highlight that “a clear and certain legislative and executive regime backed by an efficient judiciary that fairly and punctually protects property rights, preserves sanctity of contracts, and enforces the rights and liabilities of parties in a prerequisite for business and commerce”. “Punctually” is the key word here.

ESI 2018 acknowledges steps the Government has taken to address some of the concerns, such as scrapping over 1,000 laws, rationalising tribunals that hear economic cases, amending The Arbitration and Conciliation Act of 2015 and reducing intra-governmental litigation. Yet, these have not been sufficient. Cases continue to mount in the Supreme Court, the High Courts, Economic tribunals and the tax departments. The survey’s analysis on the basis of available data presents disturbing facts.

The pendency of cases at the six most prominent appellate economic tribunals is at about 1.8 lakh. Worse, the unsolved cases have risen over time. Compared to 2012, there has been a 25 per cent increase in the number of unresolved cases. The average age of pendency at these six tribunals is 3.8 years. The survey observes, “It is noteworthy that in two cases — telecommunications and electricity — the explosion in pendency resulted from interventions by the Supreme Court.”

The economic survey points out that the establishment of tribunals did not significantly reduce the pendency of cases at High Courts. Indeed, those continued to increase. According to the National Judicial Data Grid, the total backlog in High Courts in 2017 was close to 3.5 million cases. The average pendency of economic-related cases was nearly 4.3 years for the five major High Courts. The average pendency of tax cases is even more: Nearly six years.

The survey adds that the reduction in pendency, if any in some places, was more due to “changes in the counting methodology of pending cases, or due to changes in pecuniary jurisdictions that led to a mass transfer of cases from the original side of the High Courts to District Courts”.

The hike in the number of pending cases that are economic in nature is also seen in the Supreme Court. ESI 2018 observes that one of the main reasons has been the liberal use of the Special Leave Petition mechanism. “Initially, invoked only in ‘exceptional circumstances’, SLPs are now an overwhelming feature of practice at the Supreme Court.” The survey has this to say on the issue: “The rate at which the Supreme Court admits special Leave Petitions under Article 136 of the Constitution increased from around 25 per cent in 2008 to nearly 40 per cent in 2016.” Of the total pendency before the apex court, nearly 85 per cent have to do with SLPs.

So, what happens when economic cases remain unresolved in courts for years together, though with some interim relief coming every now and then?

They create an environment of distrust, they delay projects, and they contribute to whopping increases in project costs. The sum total is negative for the business environment. ESI 2018 deals with the issue in some detail. In a study of six infrastructure ministry projects that have been currently stalled by the courts, it was discovered that the project costs of the stayed projects amounted to close to Rs 52,000 crore. “The Ministries of Power, Roads and Railways have been the hardest hit. Since project costs were predominantly debt-financed, it is likely that project costs have increased by close to 60 per cent given the average duration of stay.” and these are figures from only a few delayed projects.

A similarly dismal situation prevails in the direct tax litigations. What makes the situation almost ridiculous is that 68 per cent of pending cases before various courts and appellate tribunals are a claim amount of less than Rs 10 lakh. The indirect tax situation is not rosy either. Is it any wonder that the country’s Income Tax Department is the largest litigant! The department’s appeals, according to the survey, constitute about 85 per cent of the total number of appeals filed in the case of direct taxes.

A few things are, therefore, clear. The first is that the courts must devise methods which do not encourage needless litigation. The second is that the courts and the appellate tribunals must find ways to offer timely verdicts. The third is that the legal system must filter out obvious tactics of delays through adjournments by interested parties. The fourth is various arms of the Government must stop litigating at the drop of a hat. And the fifth is that the Centre must continue to identify and strike down archaic legislations that have hampered economic activity over the decades.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)