1.        Introduction

The Hon’ble Finance Minister of India, Ms. Nirmala Sitharaman introduced The Direct Tax Vivad Se Vishwas Bill, 2020 (‘Bill’ or ‘Scheme’) in the Lok Sabha on February 5, 2020, four days after indicating the aim of the Government of reducing direct tax litigation in the Budget Speech delivered on February 1, 2020. The Bill is meant for resolution of disputes related to direct taxes. The Bill is designed to have the dual benefit of ensuring generation of timely revenue for the Government and at the same time, arraying the time, energy and resources of taxpayers towards their business activities rather than indulging in years of tax litigation. The Bill will be enacted as law once it is approved by both Houses of the Indian Parliament and receives the assent of the President of India.

2.        Key Features of the Bill

2.1.     The Bill will be applicable to appeals filed by taxpayers or the Government which are pending as on January 31, 2020 before the Supreme Court of India or the High Courts or the Income Tax Appellate Tribunal (‘ITAT’) or the Commissioner (Appeals), regardless of whether the demand is outstanding or has been paid.

2.2.     Two kinds of tax arrears can be settled under the Scheme:

(a)      Disputed taxes (including interest and penalty) determined in relation to tax assessments or defaults in respect of tax deducted / collected at source; and

(b)      Other disputed amounts (not connected to disputed tax) namely disputed interest, disputed fees or disputed penalty.

2.3.     Scheme of payment:

(a)      Where the tax arrear is the aggregate amount of disputed tax, interest and penalty, a taxpayer would be required to pay only the amount of the disputed tax and will get complete waiver from interest and penalty provided the taxpayer pays by March 31, 2020. For payments made after March 31, 2020, the amount payable will be increased by 10% of the disputed tax (subject to a cap of the aggregate amount of interest and penalty chargeable thereon).

(b)      Where the tax arrear is disputed interest or disputed penalty or disputed fee (not connected to a disputed tax), the amount payable by the taxpayer will be 25% of the disputed amount, if the payment is made by March 31, 2020. For payments made after March 31, 2020, the amount payable will be increased to 30% of the disputed amount.

(c)     The amount paid or payable under the Scheme will be the final amount with respect to the relevant tax arrear, and there would be immunity from initiation of prosecution or penalty proceedings with respect to the same.

(d)      While the last date of the Scheme is yet to be notified, however, the Hon’ble Finance Minister had, in her Budget Speech, stated that the Scheme will remain open till June 30, 2020.

2.4.     The Scheme cannot be availed, inter alia, in the following cases:

(a)      Where the tax arrear relates to an assessment made pursuant to search and seizure;

(b)      Where any prosecution proceedings are pending against the taxpayer under the Income-tax Act, 1961, or other laws such as Indian Penal Code, 1860, Prevention of Corruption Act, 1988, Prevention of Money Laundering Act, 2002, Prohibition of Benami Property Transactions Act, 1988, etc.;

(c)       Where the tax arrear relates to undisclosed foreign sourced income or undisclosed foreign asset;

(d)      Where the tax arrear relates to an assessment made on the basis of information received under a tax treaty; and

(e)     Where an order of detention has been made against the taxpayer under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

2.5.     The Government will prescribe the necessary forms and manner for the taxpayers to make declarations and payments under the Bill, as well as for the tax authorities to issue the necessary orders thereunder.

3.         Remarks

The Scheme is a long-awaited measure to clear the backlog of pending tax disputes in the country in a cost and time efficient manner, and is also an opportunity for taxpayers to end vexatious litigation. That said, addressing some anomalies as highlighted below, may increase the efficacy of the Bill:

3.1.     The primary focus of the Scheme should have been to bring to book those taxpayers who are embroiled in fact-driven disputes, such as search and seizure matters, and issues relating to unexplained credits, penny stocks, etc. Those are the kinds of litigation that are extremely time-consuming but do not involve any issue requiring adjudication in the larger public interest. At the same time, taxpayers are generally able to succeed in these matters on technical grounds. However, search and seizure matters have been entirely excluded from the purview of the Bill which is inconsistent with the very intention of introducing this Scheme. If the intention of the Government is to penalize those taxpayers in whose case detection has occurred, like search cases, then an additional penalty may be provided for settlement thereof, but exclusion of these matters altogether is avoidable.

3.2.     For availing the Scheme with respect to appeals pending before the Supreme Court or the High Courts, it is a precondition for the litigant to first withdraw the appeal with the leave of the Court before approaching the designated authority under this Scheme. Similar pre-condition is imposed for proceedings for arbitration, conciliation or mediation or under bilateral investment treaties. There is no such prior withdrawal requirement for appeals pending at the Commissioner (Appeals) or ITAT level. The prior withdrawal requirement may put the litigant at a massive disadvantage if the resolution under the Scheme does not go through for any reason. While there is a deeming revival clause in the Bill, however, there may be practical challenges for the taxpayers in withdrawing their appeals even before knowing their fate under the Scheme, more so when the revival of matters is entirely subject to discretion of the Courts. The condition of prior withdrawal is onerous and would need to be carefully evaluated by the taxpayers.

3.3.     The formula prescribed for calculation of disputed tax covers the tax liability under both the normal provisions as well as minimum alternate tax provisions. Since in a particular year, the taxpayer would have either paid normal tax or minimum alternate tax, the final law would need to clarify how this would work (perhaps with examples) to avoid any risk of tax calculation related differences between the taxpayers and authorities under this Scheme. Further, while on a plain reading of the formula, it is apparent that taxpayers can apply this formula to all or selective issues pending in a particular appeal, however, the same may be expressly clarified for avoidance of any doubts.