‘Vivad Se Vishwas’ Direct Tax Scheme: Will Taxpayers Grab It?

It’s a no-brainer that many taxpayers will grab the direct tax scheme with both hands.

The Vivad se Vishwas Scheme, announced during the Union Budget 2020, at any other point of time, would have been a well-meaning scheme. It aims to resolve more than 483,000 tax disputes stuck in appeals amounting to Rs 9.32 lakh crore.

It offers a one-time waiver of penalty and interest if the disputed tax is paid before 31 March. There will be an additional 10 percent charge if the payment is made between 31 March and 30 June. The fact that it has been introduced, ostensibly as a welfare measure for the taxpayer as well as to unclog the jammed judicial system – during the period when the tax revenues are in doldrums – clearly conveys the intention of the scheme – that the benefits that will accrue to the tax payer will be collateral to the main objective – which is to shore up the dwindling revenues.

Staying the Recovery of Tax Demand

The Scheme will certainly have takers even though the time for the paperwork involved and payment of disputed tax is very limited. There are certain provisions introduced in the recent Budget having a bearing on the issue which need to be highlighted.

The Budget has stipulated that the Income Tax Appellate Tribunal (ITAT) – the second- tier appellate body – can stay the recovery of tax demand for the first 180 days, only if the taxpayer pays 20 percent of the disputed tax payable. If the appeal is not disposed of within this period (it rarely is), then a further stay of recovery is only possible for 185 days more, if the taxpayer coughs up 20 percent more. If the appeal is still not decided by the end of 365 days (again unlikely), then the stay gets vacated and the taxpayer needs to rush to the High Court to get a stay which is normally granted. But it involves legal costs.

Till now, the ITAT had the complete freedom to decide, on the merits of each case, how much amount of disputed tax to stay. In some cases, it could be the entire amount depending on the facts and circumstances of the case. However, beyond 365 days, any stay granted would automatically lapse, and the only recourse to the taxpayer was knocking at the door of the High Court. The underlying reason for the automatic cancellation of the stay was to goad the ITAT to dispose of such cases within a year.

ITAT Is Over-Burdened With Cases

The fact is that the ITAT is over-burdened with cases. On top of that, the Tax Department can and does ask for frequent adjournments which are invariably granted (save an exception or two).

Few years back, an instruction by the Central Board of Direct Taxes was issued to the tax officers on 31.07.17 that 20 percent of the disputed demand (tax and interest) should be insisted upon from the taxpayer to stay the recovery of the balance disputed demand, which would remain effective till the disposal of the appeal by the Commissioner of Appeals – the first appellate stage.

So, the situation would now be that the taxpayer needs to pay 20 percent while the balance is stayed till the Commissioner of Appeals decides the appeal. If he loses the first round (the Commissioners are officers from the Tax Department and usually lean towards the Tax Department), he goes to the ITAT, which asks him to pay 20 percent of balance demand. If the appeal is not decided in 180 days, then he pays an additional 20 percent of balance demand. By the end of 180 days of filing the appeal, the dispute would have swallowed more than 50 percent of the disputed amount, even before the ITAT finally decides the appeal. Of course, if he wins, it will come back to him, but imagine the challenges he would face to pay the amount!

Does the Taxpayer Have a Strong Case?

Another thing. For every disallowance made in the tax assessment order, the tax officer initiates penalty for concealment of income / furnishing inaccurate particulars. Hearings take place. But that is normally just a formality. Similar automaticity is shown in its levy too. In the earlier days, such penalty would be imposed essentially where the taxpayer had intentionally concealed facts about income or investments. Intention to conceal was essential to impose penalty. If there was an issue which was purely legal in nature, penalty would not be levied on such an issue. Now, for every disallowance, whether on factual grounds or legal, penalty is initiated, and, in most cases, levied (equivalent to the tax amount and which can go up to thrice the amount).

The taxpayer may have a very strong case. He is certain that he will eventually win. But he can’t know for certain at which stage of the appeal pyramid that will happen. Will the Commissioner of Appeals be reasonable and dispense justice, or would he be done the right thing by the ITAT, or would the High Court accept his prayer, or will the Supreme Court finally put an end to his misery. The ‘process’ of fighting the tax department is itself a punishment. If and when he finally emerges victorious, the victory will be Pyrrhic. His valuable time, his limited resources, his valuable reputation would all have taken a beating. Is the lifelong battle worth it?

Many Taxpayers May Grab Vivad With Both Hands

Against this background, comes the Scheme. It’s a no-brainer that many taxpayers will grab it with both hands. He pays the disputed tax and gets a waiver of interest and penalty (imposed or imposable). He also gets an exemption from prosecution. However, it is likely to subscribed to by the small individual taxpayers and small to mid-sized businesses and professionals only. The large players will probably give it a miss, taking their chances in the appellate stage.

The reasons are several. They have deep pockets and can afford the high legal fees. The issues that normally come up in their cases are purely legal – whether a particular claim made, or a receipt not shown as income, or an exemption sought, is allowable or not.

There are Court judgments they rely on supporting their stand. The tax department may either be in appeal in higher courts against those judgements or may even have some judgements in its favour. This is a legal battle on legal issues, and since the big companies have law – as they interpret it, or court judgements in their favour, they will be loath to give up their claim. Moreover, a high payout to the tax department, especially when their case is legally strong will not go down well with the shareholders and investors and other stakeholders. A small business can use the oft repeated justification that the payment was made ‘to buy peace’ but a public listed company, not so.

The Tax Department knows it, but they have a contingency in place.

The Public Sector Undertaking (PSU). The Institution For All Seasons

The PSU is supposed to be independent and have autonomy in decision-making. Alas, not so. Firstly, there is the overhang of the three Cs – C &AG (Comptroller & Auditor General) Audit, CBI (Central Bureau of Investigation) and CVO (Chief Vigilance Officer) – the eyes and ears of the Central Vigilance Commission. These Cs have the effect of emasculating the commercial decision making of the PSU. Any commercial decision, which could go sour later, has the potential of attracting these Cs. Secondly, there is the ministry representative on the board. He may be equal to others, but in reality, his influence is huge. Thirdly, the PSUs are treated as fiefdoms of the concerned ministry. That is why privatisation of PSUs has had a very poor track record in the country.

The fact is that thousands of crores of taxes which are disputed by the PSUs are locked up in appeal. The Courts don’t discriminate between the private and public sector and the PSUs also need to go through the long and arduous process of litigation.

The Commissioners of Appeal Are Delaying Decisions on Cases and Asking Taxpayers to Settle Under the Scheme

During my posting in Mumbai, I was handling the assessment of some PSU banks, the Nuclear Power Corporation of India, and the Deposit Insurance and Credit Guarantee Corporation of India. The contentious issues were purely legal in nature, arising out of differing interpretations of law.

The tax department has instructed the tax officers to ‘convince’ the taxpayers to opt for the scheme. On 13 February, a communication was issued to them that it was imperative that they make efforts in the right earnest for the success of the scheme and that their performance would be judged and posting determined based on the results. In another letter issued on 21 February, the target for assessment of the performance of the tax officers in respect of the scheme has been fixed at 100 percent, of the cases with disputed tax demand, which fulfil the eligibility condition under the scheme. The Commissioners of Appeal are delaying decisions on cases and asking taxpayers to settle under the scheme.

The PSUs are no exception, and meeting with their top brass have already started.

In Many Cases, PSUs May Have to Seek Borrowings to Pay Taxes

It’s not that PSU banks have not been ‘handled’ in the past. The Bombay Tax Department’s bread and butter essentially came from banks who pay most of the advance tax and are critical in Bombay Region’s budget target. During my stint in Mumbai, I recall that any less than expected tax payment would lead to panic with bells ringing as far as North Block. So, the banks had to be carefully nurtured. Any downward variation would entail discussions with their top brass, understanding the reasons, urging the bank to make up in the next quarter, and looking for systemic solutions at the tax department’s end – such as fast-tracking appeals so that stuck up tax demand could be recovered (provided the department won).

Not only that. In some years when there was a revenue shortfall in Mumbai, the banks would be ‘convinced’ to pay the entire disputed tax in March, even though the refunds due to them were much more. The refunds would be given in early April. This was a cash-flow issue. Money would eventually be returned.

But this time, the PSUs are not amused. Because now the money would be gone, never to come back. They feel that the taxes levied are unfair and that they don’t mind waiting for the outcome of these cases. Amounts are also sizeable which would hit the bottom line hugely. In many cases, the PSUs may have to seek borrowings to pay the taxes. LIC has reportedly Rs 50,000 crores involved in litigation. How will it pay it by 31 March? What will be impact on its proposed IPO? What will be the impact on its policyholders? If the money is obtained by off-loading equity shares, what will be the impact on the capital market and the companies concerned?

PSUs Have Often Come to the Aid of the Govt

There are many more examples. For SBI, the amount is reportedly Rs 30,000 crores. Realistically speaking, the PSUs have no choice. Although the government has clarified that they are not forcing, only facilitating and that people are being given a choice, a nod from the tax department is as good as a wink to the PSUs.

The PSUs have come to the aid of the government on other occasions too.

A similar thing happened in the case of disinvestment. ONGC was ‘forced’ to buy the government’s entire stake in HPCL. It was also ‘asked’ to buy back some of the government shares. HPCL remained a PSU though with a new owner – itself a PSU. This was not the route privatisation was expected to take. Private money has to come in. But since there was a disinvestment target shortfall, this was done.

Even with the scheme, the PSUs will once again bail out the government. If your right pocket gets depleted, and your extended hands do not receive the required amount of funds from the public, then the simplest thing is to pull out the money from your left pocket.

(Ajay Mankotia is a former IRS officer and a former Chief Vigilance Officer of a PSU, and presently runs a Tax and Legal Advisory. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)