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Need a tax litigation settlement scheme?
July, 08th 2014

In the Budget of 1998, then Finance Minister Yashwant Sinha, had introduced a Kar Vivad Samadhan Scheme (Tax Litigation Solution Scheme). It was a one-time solution for tackling several disputes that had accumulated over years. Something similar is being expected out of the new government this time around.

Says Suresh Surana, founder of tax consultancy firm RSM Astute Consulting, “It is estimated that Rs 4.36 lakh crore (corporate + personal income tax) is locked in income tax disputes (tax + interest) with over 250,000 pending cases. Taxpayers engage in prolonged litigation in order to avoid penal consequences resulting in frivolous litigation.” This is because penalty is levied subsequently.

He adds if there is a settlement system in place, which duly incentivises taxpayers, then they may come forward to pay up the dues. The government may look at waiving off the penalty or discounting the interest. Also, it should ensure there is no further litigation against such taxpayers. The Vodafone issue is a case in point. And according to recent reports the government may look at waiving off the interest and penalty for Vodafone as the amount involved is huge.

Surana says a litigation settlement scheme can address three issues — (i) raising one-time tax revenues (ii) improving the tax administration environment and (iii) de-clogging the overburdened litigation system.

Pranay Bhatia, partner, direct tax at BDO India LLP says, “World over there are many such schemes for taxpayers. India has just one option, the Settlement Commission. But that too comes with caveats like you can approach the Commission only once in a lifetime.” Also, it is not applicable once a matter is before appellate authorities. Even for matters pending before assessing authorities, it is restrictive due to the high threshold for tax payable — Rs 50 lakh for on income disclosed in searches and Rs 10 lakh in other cases. Hence, experts suggest the Litigation Settlement Scheme should have a lower threshold for outstanding tax and an upper cap for the number of times it can be approached. “And even if a higher threshold is kept, it should allow an individual to club all the cases against him and approach the Settlement System,” say Bhatia.

While Nishant Shah, partner at Economic Law Practice feels such a scheme will facilitate, he says there is need for paying attention to scheme administration. Because if it is too harsh then it will dissuade taxpayers to come forward and if it is not properly administered, will lead to undue advantage. Additionally, the incentives should be clear and not giving way to more interpretations. Earlier, the validity of amnesty schemes have been challenged as being discriminatory.

Typically, a faulty income tax filing is first taken to the Income Tax Commissioner. After the Commissioner’s orders, it may go to the Income Tax Appellate Tribunal (ITAT), then to High Court and then to the Supreme Court, if required. Such cases can take two to three years at the ITAT and another five to eight years at the high c. The government has brought out many amnesty schemes earlier like the voluntary disclosure schemes for both income tax and service tax. Here, undisclosed income can be declared for no or lower penalty and/or interest.

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