The Budget 2020 introduced Direct Tax Vivad Se Vishwas Scheme (‘Scheme’) in an attempt to release INR 9.32 trillion (as at 30 November 2019) blocked in approximately 4.83 Lakhs appeals pending at various appellate levels. In its original avatar, the Scheme had 31 March 2020 as the deadline to opt for the Scheme. The Government seemingly intended to achieve the twin objectives of reducing the existing litigation and, at the same time, achieve its revenue targets for the year 2019-20 that appeared to be a distant one amidst the economic slowdown (before COVID-19 outbreak).
It is evident from the fact that while Hon’ble FM referred to the Scheme in her Budget speech on 1 February 2020, the Scheme got introduced in Parliament on 5 February 2020 itself. The Scheme was fast-tracked all the way up to 17 March 2020 when it received President’s assent after passing through various stages, including approval by Cabinet and of both houses of Parliament, issuance of FAQs, etc. The Scheme intended to collect the maximum revenue by 31 March 2020 and accordingly provided for payment of an additional 10% of the tax amount in cases where the payment was made after 31 March 2020.
The COVID-19 outbreak seems to have derailed the above plans. On 24 March 2020, while Hon’ble Prime Minister announced a nationwide lockdown for three weeks, the date of payment under the Scheme was extended to from 31 March to 30 June via an Ordinance promulgated on 24 March 2020, thereby enabling the taxpayers to make the payment after 31 March without having to pay additional 10% of the amount. The objectives of this extension are obvious. While on the one hand, it allows more time for the taxpayer to avail the Scheme; it keeps alive the Government’s hope of achieving the twin objectives of the Scheme, i.e. reducing litigation and collecting the revenue locked up in that litigation.
Taxpayers’ Changing Priorities
Global lockdowns have severely affected the liquidity of businesses and created huge uncertainty. However, with lockdown-3 in place in India till 17 May 2020, the priorities of the taxpayers seem to have shifted to survival. With no change in costs, while simultaneously clocking nil or very little revenue coupled with a delay in debtors’ collection or writing them off, the question for businesses is no longer to excel but to survive. In such hazy times, everyone wants to conserve cash as with the pandemic, and the future holds nothing but uncertainty. Therefore, businesses, which would have otherwise intended to settle their pending litigation by doling out some cash, are now willing to go for the traditional appellate route due to liquidity crunches and the settlement of disputes under the Scheme has taken a back seat. Moreover, whether the Scheme will become a priority or not in the future is unclear amidst uncertainties hovering around sustainability or survival of the businesses.
The Government is deliberating steps to keep the Scheme afloat such as – a three months extension of the Scheme or giving an option to taxpayers for making payment in installments or staggering the payments further to the next financial year.
What more could be done
The above steps, contemplated by the Government, are most welcome and highly commendable. The Government may also consider the following points at the drawing board while amending the Scheme:
- Adjustment against income tax refunds: At present, the Government is considering to release income tax refunds due to the taxpayers. Alternatively, the Government may pass the refund orders for several years’ along with interest due on such refunds. Thereafter, such a refund amount, inclusive of the interest amount, may be adjusted against the amount payable under the Scheme, for the taxpayers willing to opt for the Scheme. This will save the taxpayers from making payment of interest under the installment or staggered payment system and aid the Government in clearing its tax collection dues. While processing the refund orders, income tax returns of the taxpayers may be accepted as it is without making any adjustments on legal issues, else, it may create another level of rectification/ litigation and defeat the overall purpose of reduction in litigation and releasing the blockage of funds.
- Lower Interest Rate: In order to keep the Scheme attractive, the Government may consider keeping the interest rate lower. Presently, most of the defaults under the income tax statute carry interest of 1% or 1.5% pm (under COVID-19 relaxations, such interest rates are now @ 0.75% pm). To make the Scheme more attractive, interest rates may be kept at 0.5% pm. Interest rates may also be introduced for the levy on a progressive basis, say, no interest, if paid by a particular deadline, very low-interest rate if paid after the period but paid before a particular date. Similarly, a higher interest rates, if paid, even after such particular date. This would act as an incentive for the taxpayers to keep their funds reserved for settlement under the Scheme in their budgets.
- Relaxing the provision for treating declaration as void in case of default in payment: One of the major concerns that prevent the taxpayers to opt for the Scheme, even if they are otherwise willing to, is the fear of facing the consequences in the event of default. Present Scheme provides for treating the declaration as void and all the consequences under income tax statute to follow, if the payment is not made within the time prescribed in the order. The Government may consider relaxing such provisions under the Scheme.
- Extension of Appeal Pending Date: Under the present Scheme, appeals pending as at 31 January 2020 are eligible for settlement. With the above-proposed changes, the ‘appeal pending threshold date’ may be extended to either 31 March 2020 or 30 June 2020. This will ensure wider coverage of the Scheme not only for the Government but also enable the taxpayer to focus on business, which is the need of the hour.
- Providing revenue linked tax reliefs sector-wise or business size: Government may consider simultaneously introducing a scheme to provide relief in taxes for FY 2020-21 or subsequent years so that the businesses and economy could be brought back on track. Such relief in taxes may be designed not just for various sectors but also based on the size of the businesses i.e. differently for big corporations/ MSMEs/ smaller businesses. At the same time, the Government may defer the applicability of MAT provisions for some time as well or consider shrinking its base as well as lowering the MAT rate. Such savings in taxes not only rotates the cash back into the economy but also enable taxpayers to close the past litigations (with such savings in taxes) and focus on future business opportunities, who are presently considering to opt for the classic litigation route.
In these tough times, the situation is not changing by the day, but by the hour. While the Government is proactively taking preventive as well as curative actions keeping the Scheme attractive enough, COVID-19 outbreak has created circumstances that Scheme has apparently lost its glamour for the taxpayers due to liquidity crunch and prevailing uncertainties. Unless some extraordinary relaxations are extended, the fate of scheme looks uncertain. Only time will tell whether Direct Tax Vivad Se Vishwas Scheme regains the center stage or remains in limbo as COVID-19 crisis looms.
Neeraj Sharma is Senior Executive Director at Nexdigm (SKP Consulting). Views expressed are the author’s personal.