Tax Audits in India - Emerging Trends to Consider

Tax Controversy & Dispute Resolution ()

Indian income tax audits can require significant time and financial resources.The Indian tax authorities have historically been aggressive when making assessments while also imposing burdensome penalties and interest with respect to any unpaid Indian income tax.The penalty regimes in India can be harsh and can result in amounts that are up to three times the original assessment–thereby directly affecting the taxpayer's bottom line.Numerous other challenges may arise, for example, audits can involve assertions by assessing officers that may not be consistent with international tax principles.In addition, the period of audit in India is prolonged.On average, a typical Indian tax audit may last up to 33 months, followed by appeal procedures and litigation.

How can multinational companies better manage these financial risks?A recommended best practice is to proactively prepare for an audit, even before one is initiated, by reviewing current business activities in light of emerging audit trends and consider pre-audit actions plans and strategies.Strategies to avoid a potential tax controversy include obtaining an advance ruling from the Authority for Advance Ruling (AAR), approaching the High Court directly under its writ jurisdiction, and various other alternate dispute resolution techniques.