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What is Vivad se Vishwas Scheme in the Income Tax Act? How Does Income Tax Dispute Settlement Work? (2020)

Editor, TRANSFIN.
Apr 27, 2020 8:08 AM 7 min read
Editorial

Income tax dispute resolution is a touchy subject. Crores of disputed money is currently logjammed in the system – capital that can be utilised in a much more efficient manner by citizens and the state alike. Furthermore, the stigma associated with tax raids and tax notices could possibly make taxpayers continue to withhold hidden assets. To address these concerns, the Government this year included the Direct Tax Vivad se Vishwas Scheme within the Income Tax Act 1961, to formalise and simplify the dispute resolution process, and over the long run to also decriminalise the Income Tax Act.

 

The Act seeks to encourage individuals to disclose all assets and pay their tax dues on time without fear of retribution by authorities.

 

In this article we will analyse the details of the Vivad se Vishwas Act, what it entails, who it benefits, and also take a look back at previous tax decriminalisation measures undertaken by different Governments.

 

 

What is the Direct Tax Vivad se Vishwas Act?

 

The Direct Tax Vivad se Vishwas Act proposes waiver of penalties or reduction in payment for dispute settlement if the taxpayer decides to settle and pay under the scheme before a stipulated deadline.

 

The Bill was introduced by Finance Minister Nirmala Sitharaman during her Budget Speech on February 1st 2020 and it gained the President’s assent to become an Act on March 17th. You can read the full text of the Act here.

 

The initial deadline to avail full waiver on interest and penalties under this scheme was March 31st, post which taxpayers would have had to cough up 10% extra on the disputed tax if they still wanted to avail the scheme. But in light of the nationwide coronavirus lockdown, which began on March 25th, this deadline was later extended to June 30th and then further extended to December 31st.

 

What is Vivad se Vishwas Act for Income Tax Dispute Resolution? What are Its Benefits?
To address these concerns, the Government this year had passed the Direct Tax Vivad se Vishwas Act to formalise and simplify the income tax dispute resolution process. The Act seeks to encourage individuals to disclose all assets and pay their tax dues on time without fear of retribution by authorities under the Income Tax Act 1961.

 

Why is Direct Tax Vivad se Vishwas Act important?

 

As of November 30th 2019, there were 483,000 income tax cases pending before appellate authorities. The disputed tax amount is more than ₹9trn ($118bn), which is nearly a year’s direct tax collection for the Government and equivalent to 5% of the country’s GDP.

 

It is therefore no surprise that the Government is eager to get these cases resolved at the earliest. Not only will it simplify income taxation and ease the pressure on appellate tribunals, but it will also release much-needed tax revenue and increase liquidity in the system.

 

Under the Vivad se Vishwas Act, the Government apparently expects to resolve 90% of income tax disputes. Let us take a look at how exactly this scheme works, who can avail it, and who cannot.

 

What is “Disputed Tax”?

 

Disputed tax is determined under the Income Tax Act 1961. It is the tax amount that is disputed by the Assessee or the Declarant, as the case may be.

 

Let us illustrate this with an example. Say, as per your Return of Income you are liable to pay ₹1L ($1,312) as tax. But the Assessment Officer’s order stipulates that tax payable is ₹1.5L ($1,968). The additional ₹50,000 ($656) is now the disputed tax amount.

 

Similarly, the disputed tax amount can also relate to the interest or penalty involved.

 

What is the Amount to Be Paid?

 

What is the amount to be paid under the Vivad se Vishwas Scheme?
What is the amount to be paid under the Vivad se Vishwas Scheme?

 *The June 30th deadline has now being further extended to December 31st.

 

Who can Avail the Vivad se Vishwas Act?

 

The Vivad se Vishwas Act is applicable in the following cases:

  • In appeals filed by taxpayers or the Government still pending with the Commissioner (Appeals), Income Tax Appellate Tribunal, High Court or Supreme Court as January 31st 2020.
  • It is applicable irrespective of whether tax demand in such cases is pending or has been paid.That is, if you dispute the tax demand and have already paid the entire amount in taxes, you can still claim a refund under Vivad se Vishwas.
  • Orders for which time for filing appeal has not expired as at January 31st 2020.
  • Cases pending before Dispute Resolution Panel (DRP) and cases where DRP issued direction on or before January 31st 2020 but order has not yet been passed.

 

The appeal may be against disputed tax, interest or penalty. Meaning: the income tax dispute settlement scheme can be availed when the tax arrears (i.e. The disputed tax and/oranyinterest chargeable or charged on disputed tax and/or any penalty leviable or levied on the disputed tax) is a reason of dispute.

 

Who cannot Avail the Vivad se Vishwas Act?

 

As per the Act, its provisions will not apply in the following cases:

  • In respect of tax arrears relating to an assessment year
    • in respect of which an assessment has been made,
    • in respect  of  which  prosecution has been instituted on or before the date when the taxpayer files a declaration under the scheme.
  • If the disputed money relates to any undisclosed income from a source located outside India. Same goes for cases completed on the basis of information received from foreign jurisdiction.
  • If the person trying to avail the scheme has seen prosecution initiated against him/her under various laws and statutes.
  • Case where the tax arrears relate to an assessment made on the basis of search and seizure action by the Income Tax Department if the amount of disputed tax exceeds ₹5cr ($658,000) in that assessment year.

 

How does the Vivad se Vishwas Scheme work?

 

To avail the benefits under this Act, the taxpayer (or Declarant) will have to furnish certain documents and forms.

 

  • The Assessee (Declarant) shall furnish a declaration in Form 1 consisting details of eligibility, tax disputes, tax arrears etc.
  • In addition this Form 1, he/she will have to fill an undertaking in Form 2 regarding waiving his/her right to seek or pursue any remedy regarding the matter in the future.
  • The designated authority shall grant a certificate in Form 3 to Declarant within 15 days of receipt of the above Forms.
  • The Declarant shall pay the amount within 15 days from the date of receipt of Form 3 and shall intimate the authority of such payment in Form 4.
  • Thereupon, the designated authority shall pass an order in Form 5 stating that Declarant has paid the amount.

 

What is Vivad se Vishwas Act for Income Tax Dispute Resolution? What are Its Benefits?

 

Under the Vivad se Vishwas Act, the Government reportedly expects to resolve 90% of income tax disputes.

 

Tax Decriminalisation: Lessons from the Past

 

Vivad se Vishwas is not a one-off scheme. The Government had also taken steps to decriminalise parts of the Companies Act (you will soon read about income tax decriminalisation for companies here). It had also previously passed the “Sabka Vishwas Scheme”, which was a dispute resolution-cum-amnesty scheme for settling pending disputes of service tax and central excises.

 

Bringing black money and undisclosed assets to the surface has been a top priority for policymakers for a long time. One relatively successful measure was the Voluntary Disclosure of Income Scheme (VDIS) introduced in 1997. It laid the foundation for many such subsequent schemes.

 

Under the VDIS, any person hoarding undisclosed assets (gold, cash and real estate) would attract a tax of 30% and no penalty. In the year it was introduced, over 350,000 people availed the scheme and disclosed their income and assets. About ₹10,000cr ($1.3bn) was collected under VDIS.

 

But the scheme was closed on December 31st 1997 after the Supreme Court observed that it was unfair on honest taxpayers and such measures should be avoided.

 

Striking the right balance between providing a resolution for those with undisclosed assets (because flushing out black money is important) and not instituting a regime where tax offences are taken lightly or go unpunished (thereby creating moral hazard at the expense of honest taxpayers) is a tricky – and crucial – one to make. Such schemes will also need to encourage individuals and companies to come forth and disclose assets in large numbers, and convince them that Income Tax Department authorities won’t come after them for doing so.

 

Will the Direct Tax Vivad se Vishwas Act succeed in its goals and objectives? With the nation in lockdown, it may not be a top priority for policymakers at present. But once the COVID-19 crisis is over and the deadlines passed, numbers will start to roll in and a verdict can be passed. At a time when tax revenues are drying up, the fiscal deficit is widening and an economic catastrophe stares us in the face, simplifying and decriminalising taxation could go a long way in helping the Government and citizens.

 

FIN.

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