Clarifications needed in Income tax Dispute Resolution Scheme, 2016
July, 14th 2016
Pending tax disputes have been one of the major concerns of the government in recent times. The pendency of cases before various benches of Income Tax Appellate Tribunals ('ITAT') across India had crossed one lakh by the end of 2014. The Hon'ble Finance Minister, in his budget speech this year, mentioned that more than three lakh income tax cases are pending before the Commissioner of Income Tax (Appeals) [first level appellate authority]. Pending tax litigations cost the taxpayer as well as the government in terms of resources and delay in the collection of revenue. Considering the huge pending disputes, the government has introduced the Income Tax Dispute Resolution Scheme, 2016.
This scheme provides a limited window of seven months (from June 1 to December 31, 2016) during which a taxpayer can approach the designated authority to settle its pending tax disputes. The scheme is broadly applicable for two kinds of cases viz. (a) any appeal pending before the first appellate authority as on February 29, 2016, and (b) appeal pending before any appellate authority, courts, international arbitration authority, etc., as on February 29, 2016 relating to a dispute pursuant to any retrospective amendment made in law.
The scheme specifies tax/ interest/ penalty payable in the following manner:
However, all taxpayers cannot opt for the scheme. Classes of taxpayers who cannot make declaration under this scheme have been prescribed. To opt for the scheme, a taxpayer is required to make a declaration in the specified form. Subsequently, the designated authority will communicate the tax/ interest/ penalty liability for which the taxpayer needs to make payment within 30 days. Post that the income tax department will complete the process by passing a formal order.
This scheme can be very effectively used by a section of taxpayers and has the potential to successfully reduce significant litigation. However, the scheme suffers from a number of ambiguities. This gives rise to confusion and possibly taxpayers' reluctance to opt for the scheme. Some of the ambiguities are:
a) Lack of clarity on refund: There is lack of clarity on getting tax refund after opting for the scheme. The taxes paid pursuant to declaration made under the scheme are non-refundable. This will be of concern to taxpayers who have already made tax/ interest/ penalty payment before filing the appeal. For example, under the scheme, 25% penalty is payable by the taxpayer. Suppose, the taxpayer has already paid the entire demand as per the penalty order. However, under the scheme, only 25% of penalty amount will be payable. Will the taxpayer be eligible to get the refund of the balance amount?
Impact on other assessment years: Taxpayers may opt for the scheme for one of the assessment years. There would be cases where the taxpayer has similar issues for past or future years. But, it may decide not to go for the scheme for other years. In this case, the taxpayers are concerned whether opting for the scheme for one of the years would have an adverse impact on similar appeals for other years.
c) Tax and interest payable in case of penalty appeals: A taxpayer may want to settle a penalty dispute pending before CIT (Appeals). In that case, it has to pay 25% of minimum penalty along with tax and interest finally payable. Use of the word finally gives rise to ambiguity and its relevance is unclear.
d) Effect of wrong declaration: The scheme provides that in case of false declaration, violation of the conditions of the scheme, etc., it shall be presumed that the declaration was never made and all the consequences under the Act, under which the proceedings were pending against the declarant, will be revived. The terms false declaration and violation of conditions are of very wide import and it is not clear in which situations the declaration would be considered wrong.
e) Consequences of non-payment of taxes within 30 days: As per the scheme, after communication of tax liability by the designated authority, the taxpayer is required to make payment within 30 days. Does the scheme fail if tax payment is not made within 30 days of receipt of intimation from the tax department or extension of time limit is possible?
f) Issues relating to retrospective amendment: On retrospective amendment cases as well, the scope and applicability of the scheme creates doubts. For example, literally, the scheme is applicable for settling disputes pending pursuant to retrospective amendment. However, it is unclear whether disputes pending pursuant to clarificatory amendments are also covered. Further, there could be issues on which disputes are pending prior to the retrospective amendment made in the law. I ..
Overall, the introduction of the scheme is a very positive step by the government towards creating a non-adversarial tax regime. Since, the dispute resolution window operates for a brief period of seven months, early action on part of the Central Board of Direct Taxes to clear the ambiguities will be critical to the success of the scheme.