India: Income Tax Dispute Resolution - Vivad Se Vishwas Scheme 2020 (Consolidated)

In line with the announcement by the Government while presenting the Union Budget 2020, with an aim to reduce tax disputes, the Direct Tax Vivad Se Vishwas Act, 2020 ('VSV Scheme' or the 'Scheme') has been enacted on 17 March 2020. While, the scheme originally provided a short window for taxpayers to settle their tax disputes by partly paying their tax arrears, in the wake of the COVID-19 pandemic, the deadline was extended to 30 June 2020. Recently, while announcing second set of stimulus package to counter challenges posed by COVID-19, the Government has further extended the deadline to 31 December 2020.

In order to administer the scheme, The Direct Tax Vivad Se Vishwas Rules¹, 2020 has been notified on 18 March 2020 with requisite Forms and procedural aspects. Further, to address queries of stakeholders and provide guidance about the law, the Central Board of Direct Taxes (CBDT) had issued FAQs in clarificatory Circular No. 7 of 2020 dated 4 March 2020 which was rescinded by another Circular No. 8 of 2020 dated 22 April 2020 addressing various FAQs.

We, at BDO in India, have analysed and summarised the key provisions of this new legislature:

What is the Scheme?

The Scheme provides an option for the taxpayers to settle their tax disputes under the Indian Income Tax Act, 1961 (IT Act) by paying a portion of tax arrears.

Which tax disputes are covered by the Scheme?

• The appeals (whether filed by the taxpayer or the Revenue Authority) pending as on 31 January 2020, before any of the following appellate forum:
  • Supreme Court; or
  • High Courts. It would include cases where the appeal is pending for admission; or
  • Income Tax Appellant Tribunals ('ITAT'); or
  • First Appellate Authority.
• Order has been passed by tax officer or appellate authorities or the High Court but the time limit for filing appeal has not expired as on 31 January 2020. It would also cover the orders where the appellate authority has set aside (except where the tax audit is cancelled with a direction that it be conducted afresh) to the file of tax officer for giving proper opportunity or to carry out fresh examination of the issue with specific direction;
• Cases pending before the Dispute Resolution Panel (DRP) as on 31 January 2020 or the DRP has issued direction(s) but the tax officer has not passed final order as on 31 January 2020;
• Revision petition filed before the Commissioner under section 264 of the IT Act is pending as on 31 January 2020;
• While the VsV Scheme is not available for disputes pending before the Authority of Advance Ruling ('AAR'), if the order passed by AAR has determined the total income of a tax year and writ against such order is pending before the High Court, the taxpayer can avail the VsV Scheme. However, if the AAR's order has not determined the total income, such cases would not be covered by the VsV Scheme as it would not be possible to calculate the disputed tax.

Which tax disputes are excluded from the Scheme?

• Disputes not covered above;
• Search cases where disputed tax amount exceeds INR 5 crore. The limit of INR 5 crore is per tax year;
• Cases where prosecution has been initiated;
• Cases involving undisclosed income from a source outside India or undisclosed asset located outside India;
• Cases of tax disputes pursuant to assessment or reassessment made on the basis of information received under tax treaties or information exchange agreements;

Who cannot take benefit under the Scheme?

• Persons against whom an order of detention has been made under the provisions of the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (certain exceptions prescribed);
• Persons prosecuted or convicted for any offence punishable under the provisions of 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;
• Persons against whom prosecution has been initiated by revenue authorities for any offence punishable under the provisions of the Indian Penal Code, or for the purpose of enforcement of any civil liability under any law;
• Persons notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

Which tax arrears can be settled under the Scheme?

The following tax arrears as determined under the provisions of the IT Act could be settled under the Scheme:

• The aggregate amount of
  • Disputed tax,
  • Interest chargeable or charged on such disputed tax and
  • Penalty leviable or levied on such disputed tax; or
• Disputed Interest; or
• Disputed Penalty; or
• Disputed Fee

How is the Disputed tax determined in certain circumstances?

*Tax is inclusive of surcharge and education cess

• The taxpayer can claim credit for taxes paid against the disputed tax before filing of the declaration.
• Where the deductor settles TDS appeals or withdraws arbitration (against order passed under section 201 of the IT Act) as deductor of TDS, the deductee can claim the credit of taxes in respect of which the deductor has availed of VsV Scheme. However, the credit will be allowed as on the date of settlement of dispute by the deductor. The deductee shall be liable to interest, as applicable. Further, the deductor shall be entitled to get consequential relief of allowable expenditure under section 40(a)(i)/(ia) of the IT Act in the year in which the tax was required to be deducted.
• In case of a converse situation (i.e. deductee settles his appeal and such appeal is with reference to tax audit of an income which was not subjected to TDS by the payer of such income and an order under section 201 of the IT Act has been passed against such deductor in default), the deductor in default would not be required to pay corresponding TDS amount. However, he would be required to pay the interest under section 201(1A) of the IT Act. If such levy of interest qualifies for VsV Scheme, the deductor can settle this dispute at 25% or 30% of the disputed interest, as the case may be.

How does the Scheme work?

• A taxpayer eligible and desirous to settle tax arrears under the Scheme, is required to file an online declaration in Form 1 before the Designated Authority (i.e. Commissioner of Income-tax). On receipt of the declaration, the Designated Authority to issue acknowledgement electronically.
• Upon filing of such declaration, the taxpayer should withdraw the relevant appeal filed before the appellate forum. If the same pertains to appeal filed by the Tax Department, the same shall be deemed to have been withdrawn.
• Within 15 days of receipt of the declaration, the Designated Authority shall compute tax arrears payable in the following manner and grant a certificate electronically vide Form 3 containing the particulars of the tax arrears and the amount payable.

• The taxpayer shall pay the amount within 15 days from the date of receipt of the certificate and intimate the details of such a payment to the Designated Authority.
• Once the taxpayer has paid the above tax arrears, the Designated Authority shall pass an order confirming the payment of tax arrears.
• No further tax, interest or penalty is payable by the taxpayer on the tax disputes so settled.
• However, if the taxpayer fails to pay the amount, the declaration filed under VsV Scheme will be void
• If any proceeding for arbitration, conciliation or mediation has been initiated by the Taxpayer, or any notice thereof has been given by the Taxpayer under any law or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, the Taxpayer shall furnish an undertaking withdrawing the claim in Form 2. The proof of such withdrawal shall be submitted along with the intimation of payment i.e. after issuance of certificate by the Designated Authority containing particulars of the tax arrears and the amount payable in Form 4, where the taxpayer has made a request for withdrawal and such a request is under process, proof of the request made needs to be submitted.
• Thereafter, the Designated authority shall pass an order in Form 5, stating that the taxpayer has paid the amount.
• On intimation of payment to the Designated Authority by the taxpayer pertaining to department appeal / write / SLP, the department to withdraw such appeal / writ / SLP
• No appellate forum or arbitrator, conciliator or mediator shall proceed to decide any issue relating to the tax arrears mentioned in the declaration in respect of which an order has been made by the Designated Authority or the payment of sum determined under that section.
• Every such order passed shall be conclusive and no matter covered by such order shall be reopened in any other proceedings under the IT Act or any other law. The Designated Authority shall be able to amend his order under section 5 to rectify any apparent errors.
• The Designated Authority shall not institute any proceeding in respect of an offence or impose or levy any penalty or charge any interest under the IT Act in respect of tax arrears. This shall be reiterated in order in Form 5.
• If the taxpayer is required to file its tax return under digital certificate, Form 1, Form 2 and Form 4 needs to be digitally signed. Where the taxpayer is not required to digitally sign the tax return, these forms need to be furnished through electronic verification code.

What are the things to be kept in mind while making an application?

• The declaration form is to be filed tax year wise i.e. only one declaration for one tax year. For different tax years separate declarations have to be filed. Hence, the declarant needs to specify in the Form whether he wants to settle his appeal or department's appeal or both for a particular tax year.
• If both, the quantum appeal covering disputed tax and the appeal against penalty levied on such disputed tax for a tax year, are pending, the taxpayer is required to file a declaration form covering both disputed tax appeal and penalty appeal. However, he would be required to pay relevant percentage of disputed tax only. Further, it would not be possible for the taxpayer to apply for settlement of penalty appeal only when the appeal on disputed tax related to such penalty is still pending.
• Where only the notice for initiation of prosecution has been issued without prosecution being instituted, the taxpayer is eligible to file declaration under the VsV Scheme. However, where the prosecution has been instituted with respect to a tax year, the taxpayer is not eligible to file the declaration for that tax year under VsV Scheme unless the prosecution is compounded before filing the declaration.
• Where the rectification application is pending and such rectification may have an impact on the determination of disputed tax, the disputed tax would be calculated after giving effect to the rectification order passed, if any.
• If the substantive addition is eligible to be covered under VsV Scheme, then on settlement of the dispute related to substantive addition, the tax officer shall pass rectification order deleting the protective addition relating to the same issue in case of the taxpayer or in the case of another taxpayer.
• Where the time limit to file the appeal has not expired and the Appellate Authority (including Tribunal and High Court) has granted relief on some issues only, the taxpayer has an option to either settle only his deemed appeal or Revenue Authorities' deemed appeal or both. If the taxpayer decides to settle only his deemed appeal, then the Tax Officer would be free to file an appeal on the issues on which the taxpayer has got relief, as per the extant procedure laid down and directions issued by the CBDT
• If the taxpayer does not have a decision in his favour from SC on an issue, there is no dispute with respect to that issue and hence he need not settle that issue. If that issue is part of multiple issues, the disputed tax may be calculated on other issues considering nil tax on this issue.
• Under VsV Scheme, interest and penalty will be waived only in respect of the issue which is disputed in appeal and for which the declaration is filed. Hence, for the undisputed issue, the tax, interest and penalty shall be payable

What will happen to credit for Minimum Alternate Tax (MAT), and loss or depreciation carried forward?

Where the dispute pertains to either reduction of MAT credit or any loss or depreciation, the taxpayer has an option to either:

• include the amount of tax related to such tax credit or loss or depreciation in the amount of disputed tax; or
• carry forward the reduced tax credit or loss or depreciation. In such case, the taxpayer shall be liable to pay tax, including surcharge and cess, along with interest, if any, as a consequence of carrying forward the reduced tax credit or loss or unabsorbed depreciation in the subsequent years.

What will happen to recurring issues?

Declaration made under this Scheme shall not set any precedence for any proceedings and neither the Revenue Authority nor the taxpayer can claim in any other proceeding that they had conceded their tax position by settling the dispute.

In what circumstances the benefit under this Scheme could be withdrawn?

The proceedings / claims withdrawn shall be deemed to be revived in cases where:

• incorrect material particulars furnished in declaration;
• taxpayer violates any of the conditions referred in this Act;
• acts in manner not in accordance with the undertaking given by him. 

What is the last date for availing settling disputes under the Scheme?

The Finance Minister in the Budget speech announced that the scheme would remain open till 30 June 2020, however, the same is yet to be notified.

BDO Comments

While the CBDT has come out with clarifications / answers to the queries raised by stakeholders, more clarity is required on computation of tax arrears in certain cases of enhancements, pending rectifications, etc. A clarity on whether the declarant will be required to pay any tax at the time of foregoing the loss / MAT credit (and thereby could be liable in subsequent year(s)), would be helpful for taxpayers to decide whether to opt for the Scheme or not.

Footnote

Originally published 20 May 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.