The Direct Tax Vivad Se Vishwas Scheme (VVS) Bill was passed in Lok Sabha on March 4, 2020. The Bill seeks to settle direct tax disputes locked up at various stages of litigation. The scheme will remain open till June 30 with ‘early bird’ offers available till March 31. The scheme appears to be hurriedly put together to bridge the tax collections deficit for this fiscal. The design and the early signs of its implementation don’t inspire confidence. It might lead to more long-term, systemic challenges.
India has over 4.83 lacs direct tax disputes amounting to Rs 9.32 lac crores. Perspective: this is almost the total annual direct tax collections of India (pegged at Rs 11.8 lac crores for FY 20). The taxpayers are harried with demands, penalties and interest while the cases go on for anywhere between 12-18 years. It is also a significant drain on time and resources of the IT department. The IT department wins only about 25% of these cases (by volumes) at the courts or at appellate tribunals. This isn’t a surprise. Over the years, the tax officers have been burdened with overambitious tax targets that are not in sync with our economic growth or our tax base. Tax officers end up making arbitrary demands to meet their numbers. It’s all about incentives, after all. Most of these go into litigation and eventually get dismissed. Meanwhile, our tax to GDP ratio remains low at 10-11 percent and our tax regime is a big reason why we are seen as a difficult place to do business. Nobody wins.
A dispute resolution scheme is therefore welcome. The government launched an indirect tax dispute resolution scheme (Sab ka Vishwas, 2019) between Sep – Dec 2019. The response was good. About 38 per cent of cases (8-10 percent in value terms) were resolved. The government may end up collecting about Rs 30,000 crores from this scheme. However, it will be extremely fortunate to get such a response to the VVS scheme. Why?
Firstly, the scheme doesn’t provide relief on the dispute amount. The taxpayer has to pay 100 per cent of dispute amount. They will only have penalties and interest waived off. In cases where the IT department has lost in the first round of litigation and gone in for an appeal, the relief provided is 50 per cent. For disputes that involve only interest and penalties, the taxpayer has to pay 25% of the disputed amount in the event they have filed the appeal. The Sab ka Vishwas scheme worked since it had relief between 50-70 per cent of the disputed amount itself. It should have served as a good lesson to design this scheme.
Secondly, the disputes have built up primarily on account of superfluous tax demands from the corporate taxpayers. Interestingly, a large number of the demands and disputes are from Central PSUs. For instance, LIC has about Rs 65,000 crores tax demand in dispute. Obviously, the companies have contested, and the department has mostly lost these cases. It is difficult to see how the companies will agree to settle these cases paying 100 per cent of the disputed amount. They simply don’t agree to the logic of the demand. It will be a slippery slope once they agree to settle. There’s no guarantee a demand on similar grounds won’t be placed in subsequent years. It would have been useful to provide some assurance through a moratorium on similar demands for some period of time.
Thirdly, the time window provided for the scheme is very small. Most companies will have to raise funds to pay these taxes. A lot of them are in sectors like real estate, infrastructure or manufacturing where they don’t have available funds to pay a large amount of tax. Those who have the funds will battle it out in courts. The deferred tax liabilities that sit on the asset side of the balance sheet will also have to be written off once the amount is paid. Shareholders and boards will need to call for meetings and discuss this before a considered decision on participating in the scheme can be taken. There isn’t adequate time for any of these.
Lastly, the early signs of the implementation approach are worrying. IT officers have been given targets of 100 per cent collections of the dispute amounts with not-so-veiled suggestions on how poor performance will impact their annual assessment. It is difficult to reconcile the voluntary nature of the scheme with such targets to officers. It will lead to another round of phone calls, demands and strong ‘persuasion’ from the department. There are already media reports about PSUs being asked to ‘voluntarily’ participate in the scheme. PSUs are scrambling to arrange for capital in a market where liquidity is tight. We are now in the robbing Peter to pay Paul zone.
We need a one-time clean-up of the clogged direct tax dispute pipeline. But this can’t be done in a hurry to bridge a short-term collection deficit. A good scheme designed to do this should give adequate time to companies to raise funds to pay the disputed amounts, provide assurance or a moratorium from future demands on similar grounds and give a relief on the disputed amount for it to appear attractive. The long-term solution to improve our tax to GDP ratio is to increase compliance, widen the base and grow the economy. Without these, merely having tax officers run with arbitrary collection targets will only make things worse.