Point Blank. Will a direct tax dispute resolution scheme help?

In an environment of slowing growth and the consequential fall in tax buoyancy, the Finance Minister will have to look to raise revenue from hitherto untapped or under-tapped sources, to meet the exigent demand for funds for capital expenditure. One such means to raise additional revenue that has been widely discussed of late is through a dispute resolution scheme for direct taxes.

This buzz follows the successful completion of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (SVLDRS), to settle pending cases of tax disputes in excise duty and service taxes; it ended on January 15 this year. The FM is also reported to have said the scheme would be replicated for income tax cases as well.

While the SVLDRS has met with good success in closing a large chunk of legacy disputes in indirect taxes, the task may be much more difficult with direct taxes. That said, it is a good idea to float a dispute resolution scheme to try and realise at least a part of the direct tax arrears that amounted to over ₹12 trillion towards the end of August 2019. Even if the amount raised through the scheme falls short of expectation, it will help ease the burden on various judicial courts where these cases are currently being litigated.

Sabka Vishwas success

The official numbers of the funds raised through the SVLDRS are not yet out. But media reports suggest that around 1,80,000 declarations were filed and the government has raised close to ₹15,000 crore through this scheme. Nearly 95 per cent cases in excise duty and service tax are reported to be closed, and litigation will continue in the remaining 5 per cent cases.

The number of cases that are closed is indeed very encouraging. According to a report of the Standing Committee on Finance, examining grants for the revenue department, collectible arrears in indirect taxes as on August 31, 2019 was ₹28,809 crore. Amount of arrears that were classified as ‘difficult to collect’ were worth ₹2,45,956 crore. If we account for the waiver given while settling the demands, the Sabka Vishwas scheme appears to have collected a large chunk of the collectible arrears in indirect taxes.

The Centre can draw various lessons from this scheme when it designs the contours of the scheme for direct tax. The SVLDRS was very broad-based, covering all kinds of tax disputes, including voluntary disclosures. The scheme gave complete waiver of interest and penalty dues; and more importantly, it gave immunity from future prosecution. It is probably due to this amnesty that around 27,000 declarations were voluntary submissions.

The amount of waiver offered was also substantial — in cases pending adjudication, appeal, investigation or audit, a relief of 70 per cent was offered if the tax demand was less than ₹50 lakh. If it was over ₹50 lakh, 50 per cent of the tax was waived. For arrears, the relief could go up to 60 per cent, depending on the demanded amount.

Inadequate recovery

If a dispute resolution scheme for direct cases is launched in FY21, how much can the Centre raise?

Going by the Standing Committee on Finance’s report, the sum that the Centre can raise in direct tax arrears may not be too material. According to the revenue department, direct tax demand that can be collected amounted to ₹12,452 crore on August 31, 2019. But demands that are difficult to recover amounted to a whopping ₹12,17,749 crore. This means that only 1 per cent of the unrealised direct tax revenue is recoverable. If adjusted for waivers on tax payable, the sum expected to be raised from a direct tax dispute resolution scheme could be less than ₹10,000 crore.

The reason behind bulk of direct tax revenue demands being unrealisable seems to be due to frivolous tax demands raised by the Revenue Department. The Standing Committee had hinted at many of these demands being unreasonable, pointing towards tax terrorism and had cautioned tax authorities to act with restraint in ‘search, seizure and surveys.’

It needs to be noted that the Department of Revenue has been under considerable pressure in recent past to show increase in revenue. As admitted by the Department, each assessing officer had been given the target of passing 20 quality assessment orders before March 31, 2019.

Besides these challenges, closing direct tax cases under litigation may be comparatively harder than service tax and excise duty cases. This is due to the fact that the latter taxes have been subsumed into the GST, and the businesses would want to close these legacy disputes. This is not the case with corporate or individual income tax disputes.

Scheme design

Despite the obvious pitfalls, there is no harm in launching a SVLDRS-kind of scheme is direct taxes too, at least to close the pending cases that are piling sky-high.

The legacy dispute resolution scheme for direct taxes can be designed along the lines of the SVLDRS. It needs to cover all kinds of pending demands — including show-cause notices, appeals, audit assessments — and there should also be an option for voluntary disclosure.

A hefty waiver on tax dues seems to be a good lure, as seen in the Sabka Vishwas scheme. Making the scheme web-based and user-friendly will also help. Taxpayers could be given the option to pay the dues over a period, in instalments.

While the larger entities may not take up the offer, as was the case with the SVLDRS, many individuals and corporates may choose to bury the hatchet with the taxman, if given a chance.

But before that is done, it will be good if the Revenue Department is told to go slow with raising unnecessary demands. Also, the tax department needs to show more haste in acting in search, seizure and surveys. The delay between the search operations and the procedural action could be giving entities the time to cover their tracks.

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