The distinctive feature of the new tax disclosure scheme, which Finance Minister Nirmala Sitharaman announced in her budget speech on February 1, is that it promises to wipe off the stigma that usually follows an I-T notice or raid. The legislation has been designed as a dispute resolution scheme rather than a pure amnesty tool, where concessions are usually linked to voluntary disclosure of hidden assets. The fine print of the legislation, however, will be known only after the law gets notified.
MC Joshi, former chairman, CBDT, “People who did sham transactions in penny stocks will use this new scheme. Many of the post-demonetisation cases, now at the appellate stage, may also get settled. Boards of major listed companies that are answerable to their shareholders may not join the bandwagon.
The Direct Tax Vivad Se Vishwas Bill 2020 was tabled in Lok Sabha in February and is likely to be passed after Parliament reconvenes on March 2. It targets to bring down the 4.83 lakh direct tax disputes pending in various appellate forums, including courts, involving Rs 9.32 lakh crore, which translates to about 5% of India’s gross domestic product (GDP).
Amount under dispute (in Rs crore) as on Sep 30, 2019
OVER 1 YEAR BUT LESS THAN 2 YEARS 638,432 (3.4% OF GDP)
OVER 2 YEARS BUT LESS THAN 5 YEARS 312,655 (1.6% OF GDP)
OVER 10 YEARS 14,180 -0.1% OF GDP
OVER 5 YEARS BUT LESS THAN 10 YEARS- 31,526 (0.2 PER CENT OF GDP)
Note: Nominal GDP 2018-19 Source: Standing committee on finance, demand for grants 2019-20, second report
The scheme also aims to mop up some tax revenue, as the government expects direct tax collection to fall short of the target of Rs 13.35 lakh crore for the current financial year.
The new scheme gives amnesty to those are who willing to settle their cases before March 31 by paying the I-T department’s tax claim. It also gives full waiver on interests and penalties. Those availing the scheme between April and June will have to cough up 10% extra on the disputed tax.
Tax experts and retired income-tax officials say none of the big corporate houses are likely to be attracted towards the scheme. So it remains a window to settle post-demonetisation I-T cases, disputes over penny stocks involving sham transactions and the cases connected to shell companies, just to name a few.
Sudhir Kapadia, national tax leader, EY “New Vivad Se Vishwas is a well-designed scheme with no stigma attached to those who are willing to settle cases. But it will make sense only for smaller companies and those individuals who are under scanner for depositing cash after demonetisation. Big corporates are unlikely to come forward”
“The boards of major listed companies, which are answerable to their shareholders, may not agree to the scheme,” says MC Joshi, former chairman of the Central Board of Direct Taxes (CBDT), hinting that the scheme is unlikely to be a runaway hit in mopping up substantial revenue. He points out that cases related to demonetisation, most of which are at the first stage of appeal at the Commissioner of Income Tax (Appeals), and penny stocks could be resolved through this scheme.
AFTER NOTE BAN Between November 2016, when demonetisation was announced, and March 2017, when the financial year ended – Source- Finance Ministry
900- No. of searches by I-T department
Rs 636- Cash seizure during the searches
Rs 6,745- Undisclosed amount detected during I-T department’s 8,239 surveys
17.92 LAKH- No. of queries sent via email, SMS, etc, to high-value depositors immediately after note ban
3.78LAKH- No of cases finally pursued by I-T officials; verification was closed for cases where deposits were disclosed under Pradhan Mantri Garib Kalyan Yojana
The CBDT is dealing with several cases related to tax evasion through bogus capital gains or loss claims in penny stock transactions.
Sudhir Kapadia, national tax leader at EY, says there has to be more sweeteners to position the Vivad Se Vishwas scheme as an attractive proposition. However, the scheme is well-designed to wipe away the stigma attached with I-T cases.
“But it will make sense only for smaller companies and individuals who are under the scanner for depositing cash after demonetisation,” he adds.
Kapadia has a reason to make this argument. Bigger companies usually have multiple cases with the I-T department at any given point. This scheme allows resolution only if a company is willing to settle all the cases relating to a period.
R Prasad, former chairman, CBDT, “To my mind, the depositors of big amount of cash after demonetisation are unlikely to settle their disputes unless they are on a weak ground. For example, some unscrupulous jewellers did wrongdoings on demonetisation days. But honest jewellers are also in trouble now.
For example, if a company is dealing with five claims by the I-T department, and its lawyers are almost certain of winning three cases, it is unlikely that the board will give a go-ahead to close all the cases and pay the taxes claimed. But under Vivad Se Vishwas, the company would have to settle all the five cases or none at all.
WHAT IS VIVAD SE VISHWAS?
*The Direct Tax Vivad Se Vishwas Bill 2020 was introduced in Lok Sabha in February after the scheme was announced in the Budget
*It seeks to resolve direct tax dispute cases pending before various appellate forums — commissioner (appeals), ITATs, high courts and the Supreme Court
*Those willing to settle the cases before March 31 may just need to pay the taxes and secure a full waiver on interests and penalties
*The scheme is supposed to remain open till June 30, but those availing it after March 31 need to pay extra
*The bill is likely to be passed in the first week of March when Parliament reconvenes
EY had recently written to the revenue department urging some flexibility in the scheme so that companies can settle at least some of the pending issues. It also requested the government to offer up to 50% benefit in the tax claims instead of 100%.
Last year, the government rolled out Sabka Vishwas, a scheme to settle pending disputes related to indirect taxes. That scheme, which offered complete waiver on interest and penalty and provided immunity from prosecution, was billed a success after the government managed to mop up Rs 39,000 crore. The scheme allowed cases to be settled after payment of 50% of the disputed amount, against 100% in the latest scheme.
Note: % of total appeals; CIT(A) is Commissioner of Income-Tax (Appeals); Income Tax Appellate Tribunal Source: Government’s response in Rajya Sabha; July 23, 2019.
In the direct tax segment, a voluntary income tax disclosure scheme of 1997 had earned the government Rs 9,729 crore. It was considered one of the most successful schemes.
The Vivad Se Vishwas direct tax scheme, on the other hand, gives a waiver to only interest and penalties, raising questions if it would be seen as being attractive enough. Understandably, the highest chunk of appeals in direct tax, almost 70% of the 4.83 lakh disputed cases, are at the first stage of appeal — the Commissioner of Income Tax (Appeals) — according to 2018-19 data released by the government last July in a response to a question in the Rajya Sabha.
Usually, it takes two to three years to resolve such a case. After a verdict, the affected party can appeal to the Income Tax Appellate Tribunal (ITAT) where 92,205 cases — roughly one out of five disputed cases — were pending till March 31, 2019. A litigation in ITAT may typically take a couple of more years. If a company or an individual is unhappy with the ITAT order, an appeal can be filed in a high court and subsequently in the Supreme Court.
Usually, I-T disputes involving individuals are resolved at the ITAT unless there is a dispute regarding the interpretation of the law. Besides, arguing a case in a high court or the Supreme Court is expensive. So cases reach this stage only if the stakes are high.
As on March 31, 2019, as many as 43,244 direct tax cases, or 8.9% of the total, were being heard by various high courts. As many as 6,188 cases were with the Supreme Court. In terms of tax demands under dispute, cases involving Rs 6.4 lakh crore, or 3.4% of GDP, have been under litigation for 1-2 years. Cases involving Rs 3.12 lakh crore, or 1.6% of GDP, have been under litigation for 2-5 years.
The CBDT has not disclosed how many tax disputes are rooted in demonetisation, when the government declared invalid all 500 and 1,000 rupee notes in circulation then. Citizens were given about two months to deposit these invalid currency notes in their bank accounts.
Immediately after the deadline ended, on December 31, 2016, the tax authority issued 17.92 lakh notices, some even in the form of SMSes, to those who were believed to have done some suspicious transactions right after demonetisation. Later, the CBDT narrowed their focus to 3.78 lakh cases — mostly involving deposits of Rs 5 lakh or above.
The government said the verification process would be closed for cases where deposits have been disclosed under the Pradhan Mantri Garib Kalyan Yojana 2016. The scheme gave amnesty to persons who declare unaccounted wealth and paid a fine of 50% of the undisclosed amount. This scheme fetched the government just Rs 4,900 crore.
The tax sleuths, in the meantime, stepped up pressure on some companies and individuals, especially jewellers and people with large real estate holdings. The I-T department conducted thousands of surveys and searches to locate black money.
Between November 2016 and March 2017, searches were conducted at 900 companies leading to cash seizure of Rs 636 crore. Additionally, Rs 6,745 crore of undisclosed amount was detected during the department’s 8,239 surveys, according to government data.
According to the I-T Act, sleuths can either survey or search a place for undisclosed wealth. In layman’s terms, these operations are usually called a raid.
By the beginning of 2019, the tax authority had realised that as many as 87,000 of their demonetisation-related notices were being ignored. The entities named in these notices hadn’t paid taxes or filed returns, says a tax official on condition of anonymity. Many jewellers had seen bumper sales in the days immediately after demonetisation as people rushed to buy gold, considered a safe haven investment.
The I-T department found that most of the jewellery sales during this period happened on November 6 and 7, a day before demonetisation was announced. This led tax officers to suspect that the jewellers prepared backdated invoices to cover up the purchases made after the note ban using black money.
The I-T department sent notices to these jewellers. However, these people moved the CIT (appeal), the officer adds. The CBDT even extended the deadline for assessing officers to close demonetisation cases to December 31, 2019.
Matter of Trust
The government now hopes that a large number of individuals who are contesting the post-demonetisation notices may choose vishwas (trust) over vivad (dispute). Tax experts say this assumption could be right.
But the I-T department must not expect a windfall collection. “To my mind, the depositors of big amounts of cash after demonetisation are unlikely to settle their disputes unless they are on a weak ground. Some unscrupulous jewellers might have conduced illegal trades after demonetisation. But honest jewellers are also haunted by a possible I-T nightmare,” says R Prasad, a former CBDT chairman.
The silver lining is that the scheme is designed as a dispute settlement mechanism and not one crafted to chase hoarders of black money. It remains to be seen if businessmen will trust the I-T department to settle their disputes.