Income tax disputes are quite common under the Indian income taxation law, and to some extent inevitable also, given the intricacies of business transactions, newer and innovative models of doing business and varied interpretation issues considering the complexity of the tax law. Over the years, several measures have been taken by the Central Board of Direct Taxes (CBDT) by issuing press releases on interpretation issues as well as proactively coming up with circulars/instructions making the tax administration's view clear, to avoid possible litigation due to interpretation issues. The Ministry of Finance has also come up with the Advance Pricing Agreement (APA) process with a view to provide certainty to MNCs doing business in India. The APA programme has been a runaway success in avoiding and settling vicious transfer pricing disputes. The government has also substantially increased the tax limit for filing appeals by the tax officer before appellate authorities such as Income-tax Appellate Tribunal, High Court and Supreme Court, which has also resulted in reduction of disputes/litigations.
The Hon'ble Finance Minister in her Budget 2020 speech has stated that as on November 2019, there were as many as 4.83 lakh cases pending in dispute at various appellate forums, pertaining to Direct Tax alone, with disputed tax arrears of around 9.32 lakh crores, which is equivalent to almost a year's direct tax revenue collection for the country. These tax disputes take lot of efforts, resources and monetary funds both on the taxpayers' end as well as on the Income Tax Department's end. With the intent to provide for a resolution of pending income tax disputes, the Hon'ble Finance Minister in Budget 2020 announced the Vivad se Vishwas Scheme 2020 (From Disputes to Trust) relating to direct tax cases. The scheme is said to be on lines similar to Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (Indirect Tax Dispute Resolution Scheme) which was announced in Budget 2019, to settle disputes relating to Indirect Taxes, wherein the government is said to have been able to settle as many as 1.89 lakh cases and has been successful in achieving the intended results.
The Direct Tax Vivad se Vishwas Bill, 2020
The prominent features of the Vivad Se Vishwas Scheme are briefly discussed as under:
• The scheme is open to all assessees, with pending litigation as on January 31, 2020, at various appellate forums namely the Commissioner of Income Tax (Appeals) (CIT-(Appeals)), Income Tax Appellate Tribunal (ITAT), High Court and Supreme Court.
• The tax so payable under this scheme is divided in two categories and with two different due dates, as under:
||Nature of tax arrears in dispute as on January 31, 2020
||Amount payable under the scheme on or before March 31,
||Amount payable under the scheme on or after April 1, 2020 but on
or before the specified date
Where the tax arrear is the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax and the penalty leviable or levied on such disputed
Amount of disputed tax*
Amount of disputed tax plus additional 10% thereof
The additional 10% will be restricted to the amount of interest and penalty.
||Where the tax arrear relates to
disputed interest or disputed penalty or disputed fee.
||25% disputed interest/penalty/ fee**
||30% disputed interest/penalty/ fee
* Disputed tax in relation to an assessment year will be calculated as mentioned below:
Formula (A-B) + (C-D) where:
- A = Amount of tax on the total income assessed as per income tax provisions (General provisions) other than under Section 115JB or 115JC of the Income tax Act, 1961 (the Act).
- B = Amount of tax chargeable on the total income assessed as per general provision reduced by amount of income in respect of which appeal has been filed by the appellant (i.e. the person or the income-tax authority or both, who has filed appeal before the appellate forum and such appeal is pending on 31 January 2020).
- C = Amount of tax on the total income assessed under Section 115JB or 115JC.
- D = Amount of tax chargeable on the total income assessed under Section 115JB or 115JC, reduced by amount of income in respect of which appeal has been filed by the appellant.
• Amount of income under appeal which is considered under section 115JB or section 115JC as well as under general provisions, not to be reduced from total income assessed while determining the amount under item D above.
• The item (C â€“ D) above to be ignored where the provisions under section 115JB or section 115JC are not applicable.
• Where amount of income under appeal results in reduction of loss declared in the return or converting that loss into income, the amount of tax to be determined in the item (A-B) above shall be amount of tax on the income under appeal, had such income been the total income.
• The key procedural aspects of VVS are summarised as under:
✓ Any assessee opting for VVS needs to file a declaration in the prescribed form before the Designated Authority (DA) mentioning the details of disputes that needs to be settled and the DA, within 15 days of receipt of such declaration, will pass an order determining the amount payable by the assessee and issue a certificate.
✓ On filing of declaration by the assessee, the appeals before CIT (Appeals) or ITAT will be deemed to be withdrawn. In cases of pending dispute at High Court or Supreme Court level, the assessee will have to withdraw the said appeals and furnish the proof along with the declaration to be filed with the DA.
✓ The assessee within 15 days from receipt of certificate, needs to pay the tax amount to designated authority and the DA will pass an order regarding payment of requisite tax.
• VVS provides that every order passed by the DA, determining the tax payable under the scheme will be conclusive and cannot be re-opened in any other proceedings.
• VVS also provides for a complete immunity from interest, penalty and offences under the Income-tax Act in respect of such tax arrears.
• However, VVS schemes will not apply in the following situations:
(a) Tax arrears in respect of :
- Search, seizure and related tax assessments (orders passed under section 153A or 153C)
- Years for which the prosecution has been instituted on the assessee on or before the date of filing the declaration
- Any undisclosed income from a source or an asset located outside India
- Cases where assessment has been made pursuant to information received under an agreement referred to in section 90 or 90A
- Appeal before CIT (Appeals) wherein notice of enhancement has been issued on or before January 31, 2020
(b) Any person on whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 on or before filing of declaration, subject to certain conditions.
(c) Any person in respect of whom prosecution for any offence punishable under the provisions of the Indian Penal Code, the Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Prevention of Corruption Act, 1988, the Prevention of Money Laundering Act, 2002, the Prohibition of Benami Property Transactions Act, 1988 or for the purpose of enforcement of any civil liability has been instituted on or before the filing of the declaration or such person has been convicted of any such offence punishable under any of these specified acts.
(d) Any person notified under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 on or before the filing of declaration.
The announcement of VVS is indeed a welcome move aimed at settling direct tax disputes/litigation. Certainly, this would help in reducing pending litigation and to some extent, the ease of doing business in India, so that assessees can focus their time, efforts and resources on business rather than fighting tax disputes.
The Sabka Vishwas Scheme (SVS) has been a huge success due to many lucrative factors and flexibility provided in that scheme, which if introduced in VVS, would help achieve intended results of settling tax disputes. Some of the distinguishing factors between the SVS and VVS are as under:
• SVS provided to settle disputes by paying 50% - 70% of disputed taxes whereas VVS requires the assessee to pay 100% of the tax disputed.
• SVS provided relief in respect of voluntary disclosure of taxes as well without any verification or scrutiny by tax officials and other flexibilities, which is not available in VVS.
• SVS provided sufficient time to assessee to evaluate the scheme and make informed decisions, whereas under VVS comparatively lesser time is available to evaluate and opt for the scheme.
There are some areas and issues on which early clarity from CBDT would be cheered by the taxpayers. Some of these issues are discussed below:
• If a transfer pricing dispute is settled under SVS, whether provisions of secondary adjustment would still be applicable or relaxed under SVS?
• In case entire taxes and interest have been paid by the assessee for the disputed appeal, whether refund of taxes paid in excess of 'disputed tax' payable under VVS would be granted to the assessee?
• In case of reduction of losses scenario settled under SVS, whether the losses adjusted by tax officer automatically recoup or be lost forever?
The government announced the VVS with a very noble intention to settle disputes and reduce the pendency of litigations. However, cases relating to objections filed before Dispute Resolution Panes (DRP) could have also been included in the scheme. Further certain tax disputes such as disputes arising out of search and seizure cases, disputes relating to undisclosed income from a source or an asset located outside India, etc. to which this scheme will not be applicable, could have been included for settlement albeit with some high payment option say 150 percent or 200 percent of disputed tax amount. This would have gone a long way to reduce litigation.
To conclude, the introduction of VVS is indeed a welcome move and hopefully, it will achieve intended outcomes. Overall, the government has made its intention quite clear that they do not want any disputes with taxpayers but desire to earn the trust of the taxpayers.
Information for the editor for reference purposes only
Kamlesh Chainani is Partner, Pinkesh Jain is Senior Manager and Shrikant Kalantri is Deputy Manager of Deloitte Haskins & Sells LLP.